Upscale Retirement Complex Denied Religious and Charitable Property Tax Exemptions

by Franczek Radelet P.C.
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[author: Ares Dalianis and Scott Metcalf]

The Second District Appellate Court recently upheld the Department of Revenue’s denial of a property tax exemption for the Village at Victory Lakes in Lindenhurst, Illinois, which is a continuing care retirement community (commonly known as a CCRC) operated through a series of corporations by the Franciscan Sisters of Chicago. The Court’s opinion in Franciscan Communities v. Hamer addresses both religious and charitable exemptions, ultimately concluding neither is applicable because the property is used with a view to profit. The decision is of interest to schools for a number of reasons, most notably for the increasing popularity of CCRCs with ownership structures seeking property tax exemptions and because the same limitation concerning use of a property with a view to profit is placed on school exemptions.

For the tax year at issue, the Village at Victory Lakes provided senior citizens with independent living apartments, garden homes, assisted living units, and a skilled nursing center in addition to amenities such as a bank, beauty salon, and café. Residents were required to pay a refundable entrance fee plus a monthly service fee. The gross revenue from residents was $17.4 million, while operating earnings before income tax, depreciation, and amortization were $1.5 million. While there was free care available to those who applied, not every application for free care was approved, and in the event of bankruptcy or nonpayment residents could be evicted from their units.

The first interesting aspect of the Court’s opinion involves the application of the precedents established by the Illinois Supreme Court’s decision in Provena Covenant Medical Center v. Department of Revenue. As reported in several FR Alerts, the Provena decision resulted in the removal of an exemption for a hospital facility in Urbana, Illinois. It also provided the motivation behind the enactment of P.A. 97-688 (new Section 15-86 of the Property Tax Code), which creates a new property tax exemption specially designed for hospitals. This newly enacted statutory exemption for hospitals does not address CCRCs, so the Court applied the precedent established in Provena.

Additionally, the Court found that the only controlling precedent from Provena involves religious exemptions since there was no majority opinion in Provena concerning charitable exemptions. The precedent involving religious exemptions is that regardless of the religious motivations behind the use of a property, an applicant must demonstrate that the actual day-to-day use of the property is for religious purposes. Since there was no majority opinion in Provena concerning charitable exemptions, the analysis remains a six step process. Based on the facts in the record, the Court concluded that the Village at Victory Lakes was purchased and operated with a view to profit.

This decision is important for Illinois school districts for at least two reasons. First, school exemptions are also conditioned on the property not being used with a view to profit. Accordingly, when a school district leases its facilities, it must be mindful to structure the arrangement so that this standard is met. A failure to demonstrate that the arrangement is not ‘with a view to a profit’ will lead to the assessment and taxation of the school district’s property. Second, with the increasing popularity of CCRC-type developments, many of which are owned by religious orders, school districts will be faced with large, high-value properties seeking to come off the tax rolls, thus shifting the overall tax burden to homeowners and the commercial and industrial tax base. Ultimately, the Franciscan Communities decision is another reminder from the courts that regardless who the property owner is or how good the intentions of the property owner may be, no exemption will be granted to religious, charitable, or school property that is used with a view to profit.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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