New Law Changes Property Tax Assessments on Leasehold Interests at Military Bases

by Franczek Radelet P.C.

The leasing of government-owned, tax-exempt property can raise many policy questions for local assessing officials.  Some of those questions are answered by specific provisions in the Property Tax Code.  Other questions have been answered by Illinois Courts.  Earlier this year a new law went into effect changing how property taxes on a very unique type of leasehold interest are calculated.  P.A. 98-494 changes the method for assessing leasehold interests in real estate on military bases.

P.A. 98-494 addresses the unique situation of a PPV lease.  A PPV (Public Private Venture) Lease is a method for providing housing to military personnel.  Under a PPV Lease, land at a military base, which is owned by the federal government and therefore exempt from property taxes, is leased to a private company that constructs, renovates, maintains and operates rental housing for military personnel.  Service members are given priority for housing, and the rent is generally commensurate with the military’s housing allowance.  Given such an arrangement, the question becomes whether such a lease should be subject to property taxes, and, if so, how the property taxes should be calculated. 

The Property Tax Code specifically addresses the leasing of some types of exempt property.  For example, the statute providing an exemption for property owned by the State of Illinois specifies that if State-owned property is leased it must be assessed and the party leasing the property must pay the property taxes.  In other instances, leasing property can result in the loss of a property exemption.  A property owned by a school district or a charity, for example, is entitled to an exemption so long as it is not “leased or otherwise used with a view to a profit.”  However, the provision granting an exemption to property owned by the United States simply states that “All property of the United States is exempt, except such property as the United States has permitted or may permit to be taxed.”

The Illinois Supreme and Appellate Courts have also spoken to assessments of leasehold interests in exempt property.  In two instances the question was the correct methodology for valuing the leasehold interests of airlines in portions of Chicago O’Hare International Airport.  In both People ex rel. Korzen v. American Airlines and United Airlines v. Pappas, the Supreme and Appellate Courts ruled that a leasehold interest in tax exempt real estate should be assessed based on the present value of the market-level lease payments over the unexpired term of the lease.   

P.A. 98-494 amends a section of the Property Tax Code that takes a completely unique approach to assessing leasehold interests.  This section of the Property Tax Code requires the assessment of a PPV Lease to be based on a percentage of total revenue.  Previously the assessment was based on total revenue less 42% of that revenue at every military base in the State.  As amended by P.A. 98-494, the assessment of a PPV Lease at a naval base will be based on total revenue less 62% of that revenue through January 1, 2016.  Property taxes on PPV Leases at all other military bases in the State will still be based on total revenue less 42% of that revenue.  As a result of P.A. 98-494, the holder of a PPV Lease at a naval base will have a lower property tax assessment.

P.A. 98-494 is a very narrow piece of legislation that will affect only a handful of school districts and other taxing agencies.  It is instructive, however, not only in how leasehold interests are taxed, but also in the intricacies of property tax policy.


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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