In In Re: Appeal of the Coatesville Area S.D., et al., Nos.1130 & 1161 C.D. 2018 (Pa. Commw. Ct. Aug. 19, 2022), the Commonwealth Court decided cross-appeals of a taxing school district and a property owner regarding the owner’s entitlement to an exemption from real estate taxes as an institution of purely public charity on a parcel containing a preserved historic building.
The parcel at issue contained a 120-year-old building that originally served as the corporate headquarters for a steel company, which was the first producer of boiler plate in the United States. The current owner, Huston Properties, Inc., is a 501(c)(2) non-profit corporation, wholly owned by a 501(c)(3) charitable trust, that was organized and operated “exclusively to hold property, collect income therefrom, and turn the entire income, less expenses, over to the . . . [t]rust . . . ,” which would receive all funds from the owner if it were liquidated. The owner had received the property — which was entered in the National Register of Historic Places and located in a locally recognized historic district — under a deed restriction that the property “be used as a site of an office building and otherwise only for purposes consistent with the preservation and conservation of said tract of land as a historic structure.” The owner had adhered to those restrictions. The owner’s expenses on the property consistently exceeded its income by a yearly average of $39,000, with rents from tenants not covering operating expenses, and therefore requiring subsidies from the trust. The tenants consisted of for-profit and non-profit entities (including a museum and a community band), with some of the non-profits paying only nominal or no rent. The nonprofits rented approximately 89% of the usable space in the building. All revenues received were used for the maintenance and preservation of the property.
The owner had applied for the purely public charity exemption to the assessment board, which granted a partial exemption of 72%. The school district and the city appealed to the trial court, challenging the partial exemption. A complicated series of appeals and remands followed, including an appeal on a procedural issue to the Pennsylvania Supreme Court, with the matter eventually returning to the Commonwealth Court on cross-appeals between the school district and the owner. There, the school district argued that the trial court erred in concluding that: (1) owner did not satisfy the requirements to be considered an institution of purely public charity set forth in Hospital Utilization Project v. Com., 487 A.2d 1306 (Pa. 1985) (“HUP”) and 10 P.S. § 375 (“Act 55”); (2) the property was precluded from a charitable tax exemption under the Consolidated County Assessment Law, 53 P.S. § 8812(b)(1)-(2); and (3) the record did not support a 72% partial exemption on the property. The owner merely argued that it was entitled to a full (100%) charitable exemption on the property.
The Commonwealth Court held that the owner satisfied all four of the disputed prongs of the overlapping HUP/Act 55 tests.
First, the Court concluded that the owner “advanced a charitable purpose.” The owner had preserved and maintained the building as a historic structure, which, contrary to the school district’s argument, is a purpose recognized as important and beneficial to the public and advances educational, moral, and social objective under the Environmental Rights Amendment (Pa. Const. art. I, § 27) (ERA) and the Pennsylvania History Code, 37 Pa.C.S. § 102. Furthermore, contrary to the school district’s argument, the owner’s purpose was not to generate income for the trust as an unrelated business entity, because the deed restrictions required the building to be used consistent with is preservation as a historic structure, and because the property was consistently operated at a loss, requiring subsidies from the trust.
Second, the Court concluded that the owner “[d]onated or renders gratuitously a substantial portion of its services,” by providing for the preservation of a historic structure at a consistent loss. Contrary to the school district’s argument, the Court concluded that nothing in Act 55 requires that goods and services be “tangible” to determine whether a substantial portion of them have been donated or gratuitously rendered.
Third, the Court concluded that the owner “benefitted a substantial and indefinite class of persons who are legitimate subjects of charity.” The property was accessible to members of the general public through a museum and a community band, and its historic and architectural features could be viewed and appreciated by the general public. Contrary to the school district’s argument, nothing required that the tenants be legitimate subjects of charity or that the entire property be open to entry by the public in order to qualify.
Fourth, and lastly, the Court concluded that the owner “relieved the government of some burden.” Relying on Unionville-Chadds Ford School District v. Chester County Board of Assessment Appeals, 714 A.2d 397 (Pa. 1998), the Court recognized that a government burden may be either “obligatory or discretionary in origin,” and that the Commonwealth had voluntarily assumed the burden of preserving historic structures, as evidenced by the rights to “preservation of the natural, scenic, historic and esthetic values of the environment” in the ERA and the legislative policies for mandating and funding historic preservation in the Pennsylvania History Code.
The Court also concluded that the property was not precluded from a charitable tax exemption under the Consolidated County Assessment Law. The property satisfied 53 P.S. § 8812(b)(1) — allowing exemption, except for property from which any income or revenue is derived other than from recipients of the bounty of the institution or charity — because the rent-paying tenants benefited from the owner’s preservation activities, in that the rents were insufficient to cover the costs to maintaining the property, which were subsidized by the trust. The property also satisfied 53 P.S. § 8812(b)(2) — requiring actual and regular use by the owner — because the record showed that the owner maintained its office in the building.
Finally, the Court concluded that the property should be 100% exempt because, just as in Alliance Home of Carlisle v. Board of Assessment Appeals, 919 A.2d 206 (Pa. 2007), the income-producing portion of the property subsidized the charitable component, in that the rents offset some of the expense of preserving the property and the property was operated at a deficit.
This Decision represents an example of the more liberal interpretation the Commonwealth Court has given to public charity exemption for so-called “cultural institutions” than the school districts have been willing to concede.
If you have any questions about this Decision or any state tax matter, please feel free to contact Adam Koelsch (717-237-5305) or any member of the McNees State and Local tax team.