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Property Tax Update for Wisconsin Senior Housing

The 2009-2011 Wisconsin budget (Act 28) incorporates a specific change to how the state defines property tax exemption for non-profit senior housing projects.  Up to this point, the existing statutory law was vague and providers were left to contend with a precedent set by an even more vague Supreme Court decision (Columbus Park) and patchwork legislation authored to counteract or more appropriately, counter-balance the Columbus Park decision.  Below is a brief summary of the recent history of non-profit senior housing and property tax issues.

  • Prior to Columbus Park: Wisconsin Statutes 70.11 created a category of exemption for benevolent homes for aged.  The exemption category as poorly defined as it was, fundamentally allowed 501(c)3 providers to argue that their federal exemption and the use of the property for “benevolent” purposes met the definition, provided that the exemption was sought for 10 acres or less.  Limited challenges were made by Assessors to this definition or to the broad interpretation used by non-profit senior housing providers.  Perhaps the statutory challenges most noted up and until Columbus Park occurred in the City of Milwaukee. 
    • In the City of Milwaukee v. The Milwaukee Protestant Home, the City argued that a planned expansion of the Protestant Home funded entirely by new, non-refundable endowments from residents who would still be required to pay monthly rental fees and required to financially qualify, was not justifiably exempt. The basis of the City’s argument was that the new facility was too luxurious, catered only to the wealthy, pre-screened residents to limit the needy, did not provide medical care on-site, and used a health screening to eliminate residency to anyone in need of care.  The Court decided in favor of Milwaukee Protestant Home stating, among other things less relevant to the core exemption issue, that Benevolent does not mean “charity” and as such, a Home can be benevolent and charge fees.  Effectively, the Court said that benevolence can and does in this case mean, allowing people of moderate means to live out their final years, even if the same is not considered charitable.  The Court also said that a new, free-standing housing project must be viewed along-side or as an integral part of the entire sponsoring organization, not in a “vacuum”.
    • In the City of Milwaukee v. Friendship Village of Milwaukee, the city argued that a planned expansion called Freedom Village, built with “refundable” resident endowments and where residents would continue to pay a monthly rental charge, was not justifiably tax-exempt.  As in the case of Milwaukee Protestant Home, Freedom residents were pre-screened as to ability to pay, one resident in a couple needed to be 55 or older, and each resident had to able to live independently (a medical screen).  Residents were provided with a $50 per day credit if skilled care was later required and, as part of their contracts, could opt to convert at a later date, to residency at Friendship Village thereby waiving their refund from Freedom in exchange for residency and care provided at Friendship.  As in the Protestant Home case, the City offered all of the same arguments (too exclusive, no on-site medical care, excluded the needy, etc.) and the facility did not permit residents to live-out the remainder of their years as was the case with the Protestant Home.  The Court reaffirmed the Protestant Home decision stating that benevolent did not mean free and that the Freedom contract provision allowing residents to convert to occupancy at Friendship Village with no additional charge when care was needed, provided the means for residents to “live out their years”.
  • Columbus Park and After: With the Columbus Park decision, the courts began to slowly redefine the interpretation of Wisconsin Statute Chapter 70 as well as to abandon the basis used to uphold the exemptions found in the Protestant Home and Friendship Village cases.
    • In the Columbus Park Housing Association v. City of Kenosha, the Wisconsin Supreme Court ruled that non-profit associations renting housing units to low-income elderly were not exempt from property tax as specified in Chapter 70 (WI State Statutes) unless the tenants themselves could or would be exempt from taxes had they owned the units.  Essentially, the Court said that the only way a non-profit that was renting units to low-income seniors could be exempt was if the seniors themselves were exempt non-profits.  This decision became widely known as creating or establishing the “rent use clause”.  In effect, the Court decided that the only permitted use for rent proceeds derived from low-income projects was property maintenance and debt retirement.  Prior to this point, it was widely accepted and essentially reaffirmed by the Protestant Home and Friendship Village cases that a benevolent association could use rent proceeds for any purpose that furthered or was in concert with, the reason or justification for federal tax exemption and the mission of the benevolent association (e.g., subsidizing other programs within the association).  In 2004, Governor Doyle signed Wisconsin Act 195 which was created to reverse the Columbus Park decision.  This Act prohibited local assessors from collecting property taxes from non-profit providers of low-income housing.  The Act however, did not address with clarity, the “rent-use” dilemma.
    • In Attic Angel Prairie Point v. City of Madison,  a Dane County judge ruled that senior housing was not necessarily a benevolent activity unto itself.  The entrance fees at the time ranged from $230K to $450K and were structured on a life-lease arrangement.  Under this arrangement, residents received 90% of the fee as a refund when they left or vacated their unit.  The contract also provided for a “priority” admission to other Attic Angel care facilities but no guarantee of admission.  While Attic Angel argued the fundamentals found in the Protestant Home and Friendship Village cases (benevolent association status, life lease arrangements, etc.), the Court found that the only use or purpose for Prairie Point was to provide housing to middle and upper income individuals, absent any health care guarantees or provision on-site and in a manner highly similar to other taxable housing developments. Because the case was decided within a Circuit Court, no value of precedent could be used in other cases, a basic ruling on the exemption issue had occurred sufficient enough to garner attention within the non-profit community and across state-wide municipalities, namely with assessors.

With the passage of Wisconsin Act 28 (the Budget bill), new provisions are now in-place beginning January 0f 2010 that establish the basis for property tax exemption for benevolent homes for the aged.  The law clarifies the exemption test and creates presumed categories of exemption for CBRFs, SNFs, Hospice (those that operate places of residence) and RCACs as defined under Chapter 50 of the Statutes.  The Act also expanded the number of acres that could be exempt from property tax from 10 to 30.

With respect to residential units or senior housing units, the Act provides that a benevolent association may exempt those units with fair market values less than or equal to, 130% of the average equalized value of residential units in the county where the project is located.  The Act also provides specific exemptions for low-income senior housing provided by non-profit, benevolent associations and removes the requirement that the rent be used specifically for debt repayment or property maintenance.  This same provision regarding “rent use” applies to other categories of senior housing as well.

Where I expect the issues to arise with respect to the new provisions in Act 28 are around the determination of fair-market value and the potential carve-out of certain units in a project having values in excess of 130% of the equalized value while others do not.  In effect, some units may be determined as taxable while others qualify for tax-exemption.  How an allocation of property tax to the taxable portions is determined will no doubt raise a series of court challenges.  Similarly, as the units themselves are typically within a larger complex, often with extensive and at times, quite opulent common space, determining fair market value of the unit will be an interesting exercise.  Truth be told, fair market value for the unit is not by assessment definition, the price charged for the unit.  Fair market value would require a determination of value based on an assessment and/or appraisal methodology and I anticipate wide interpretations coming forth across the various county assessors throughout the State. 

In summary, while Wisconsin Act 28 goes quite a ways in clarifying the issue of property tax exemption for benevolent homes for the aging and senior housing projects, the “waters” remain somewhat murky.  It will be interesting to watch how the process unfolds and where the lines are drawn (likely via the courts) on the open issues of fair-market values and how taxes end up allocated on units within a project that don’t meet the 130% equalized value threshold.

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February 20, 2010 - Posted by | Policy and Politics - Wisconsin, Senior Housing | , , , , , ,

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