Here, the subject property is owned by Rossman & Associates, Inc., and is occupied and used by 1st Kids. Rossman & Associates owns multiple buildings in the complex. And although the ALJ mistakenly prevented Ms. Meighen’s cross examination on the scope of Mr. Rossman’s commercial property holdings and the Petitioner’s business interests in the hearing, it is clear from his testimony that commercial leasing is the Petitioner’s business. The Petitioner’s lessee, 1st Kids, is an Indiana not-for-profit corporation established in 2002 to satisfy the educational and medical needs of developmentally challenged children. The parties do not appear to dispute that 1st Kids’ occupation and use of the property is for an exempt purpose. The question therefore is whether the Petitioner’s ownership of the real property is also for an exempt purpose.
The
Indiana Supreme Court addressed a similar situation in its decision in Hamilton
County Property Tax Assessment Board of Appeals v. Oaken Bucket Partners, LLC, 938
N.E.2d 654 (Ind. 2010). In that case, the Supreme Court determined that a
for-profit leasing company leasing space to a not-for-profit church, did not
own the property for an exempt purpose even if it leased the space for
below-market rent. Id. The Court held that “absent evidence that an
owner of leased property possesses an exempt purpose separate and distinct from
the exempt purpose of its lessee, the owner holds the property for its own
benefit, not that of the public, and thus its property is not entitled to the
statutory exemption.” 938 N.E.2d at 659.
The
Petitioner’s counsel argued that the decision in Oaken Bucket should not
apply to these appeals because the Petitioner filed its petitions before the
Supreme Court decided the Oaken Bucket case. Ms. Tiller, however,
presented no support for her argument that the decision should only apply
prospectively. As the Respondent’s counsel correctly noted, limiting a decision
to prospective application is unusual. To the extent that the Board need
address such an undeveloped argument, the Board finds that the Supreme Court
did not establish a new principle of law in the Oaken Bucket case, and
therefore the precedent established by the Supreme Court in Oaken Bucket applies
to all pending cases. See e.g. Metropolitan School District of Pike Township
v. Department of Local Government Finance, 962 N.E.2d 705 (Ind. Tax Ct.
2011) (“when a judicial opinion rendered in a civil case makes a pronouncement
of the law, that pronouncement has not only prospective effect, but also
retrospective effect. This is so because, in theory, the law has not been
changed; the last judicial decision is said to have enunciated the law as it
has always existed”) (emphasis in original).
Alternatively, the Petitioner’s counsel contends that the
facts at bar are distinguishable from the facts in the Oaken Bucket case.
According to Mr. Rossman, the parties disputed whether the property owner
leased the subject property at below market rent in the Oaken Bucket case,
but here, the Petitioner argues, its lease-rate for 1st Kids is clearly “below market.” However, the evidence shows
that 1st Kids has the highest base rent of any
of the tenants for which a lease was offered. Even if the lease rate paid by 1st Kids is below what other tenants are paying for office space
at the property after the Petitioner’s expenses for CAM, taxes, utilities and
insurance are deducted, the space 1st Kids
is renting is several times larger than the spaces rented by other tenants for
whom leases were provided. And 1st
Kids has leased the
subject property for nine years. The Petitioner faces less risk from having a
single, long-standing tenant occupy a space than from having to lease the same
space to several tenants that may move out in short order – which could justify
charging the lower lease rate to 1st Kids
than to newer renters leasing smaller spaces. Thus, contrary to the
Petitioner’s argument, the evidence is not clear that the Petitioner’s rent is
“below market rates.” Furthermore, Mr. Rossman admitted that the Petitioner
clears at least $6.11 per square foot on the offices and, during the period at
issue in this appeal, earned even more on the lease. Therefore, the Petitioner is increasing its equity position
in the property through the rent paid by 1st Kids.
More importantly, the Supreme Court in Oaken Bucket specifically found
that leasing property below market rent alone was not enough to justify an exemption.
938 N.E.2d at 658.
The
Petitioner also contends that 1st
Kids, unlike the lessee
in Oaken Bucket, operates through a Limited Gross Lease, which provides
that the Petitioner must pay for the taxes, CAM, utilities, and insurance on
the space leased by 1st Kids. And, in fact, the church at
issue in Oaken Bucket had a triple net lease – which means that the
non-profit lessee was responsible for the taxes on the property. But that does
not help the Petitioner's case, because in Oaken Bucket the church would
have been the beneficiary of any exemption that was granted. Here, to the
contrary, the Petitioner is responsible for the property taxes on the subject
property under the terms of its lease with 1st Kids.
Therefore the only beneficiary of an exemption granted in this case would be
the Petitioner. And allowing Rossman & Associates a greater profit on its
lease to 1st Kids runs far afield of the purposes
for which property tax exemptions were created. See Miniature Enthusiasts, 671
N.E.2d at 220 (An exemption is justified because it helps accomplish some
public purpose).
In
addition, Mr. Rossman testified, the Petitioner reduced 1st Kids contractual rent twice when the state reduced its
funding. The Petitioner also modified the leased premises at no charge to 1st Kids when 1st
Kids expanded its
operations. But the Petitioner’s modification of the premises at no cost to 1st Kids fails to support the Petitioner’s request for an
exemption. The evidence shows that performing construction work at its own cost
was not unique to the 1st
Kids lease arrangement
with Rossman & Associates. In the First Amendment to the Krosaki Lease, the
tenant sought to rent additional space. The Petitioner estimated improvements
to the space to cost $5,200. However, the Petitioner only required the tenant
to reimburse $2,500, with the Petitioner assuming responsibility for the
remainder of the costs. Nor was the reduction of rent for 1st Kids unique to that property:
Ms.
Meighen: Do you ever
give rent concessions to anyone other than First Kids?
Mr.
Rossman: I do but
there’s usually something attached to it. In other words I just don’t give it
and not get anything back. For instance I would give a rent deduction if you
came, Marilyn, and said I’m going to renew my lease for another 5 years. I’d
give you a rent reduction or do a rent improvement; replace the carpet,
repaint, those kind of things ...
Thus, the
evidence suggests that providing construction services or a rent reduction is a
business decision to promote the expansion of a tenant’s leasehold or to
lengthen the term of a lease rather than a “charitable” act.
The Board
therefore finds that the Petitioner failed to establish that it owns the
subject property for a charitable purpose. See Oaken Bucket, 938 N.E.2d
at 658 - 659 (“At most what Oaken Bucket has proven is that it leased and
primarily used its property for religious and charitable purposes”).
The
Petitioner also contends that 1st
Kids is a
“quasi-governmental” agency and, as such, should receive the same immunity or
exemption from taxation as a governmental agency.3 Under
Indiana Code § 6-1.1-10-2, “property owned by this state, a state agency, or
the bureau of motor vehicles commission is exempt from property taxation.”
Similarly, Indiana Code § 6-1.1-10-4 holds that property owned by a political
subdivision is exempt from taxation and Indiana Code § 6-1.1-10-5 holds that
property owned by a city or town used to provide a municipal service is exempt.
1st Kids, however, is not a state agency.
It is not a municipality or a political subdivision. 1st Kids merely contracts with a state agency to perform certain
services. While 1st Kids serves an important function,
this does not entitle what is essentially an independent contractor to receive
the same benefits that accrue to governmental agencies. See Fourth Freedom
Forum, Inc. v. Elkhart County Property Tax Assessment Board of Appeals, Ind.
Bd. of Tax Rev., Petition Nos. 20-005-04-2-8-00001 et seq. (“In that
sense, the Forum is no different from other government contractors such as
road-construction companies or security providers. Few would argue that those
entities should receive exemptions.”)
To the extent
that the Petitioner could be seen as claiming that 1st Kids is exempt because it provides a governmental function,
the Petitioner failed to cite any statute that would grant an exemption to a
private entity assuming the function of operating and managing an early
education program for developmentally disabled children. Nor was the Board able
to find any such statute. The Legislature has made it clear through legislation
when private property should be exempt for serving a municipal purpose. For
example, Indiana Code § 8-10-1-27 and Indiana Code § 8-15-2-12 both provide for
property tax exemptions where a non-governmental entity has entered into a
public-private agreement, including leases, concerning ports and toll roads.
The Legislature has gone so far as to even exempt the property, revenues,
expenditures and transactions of the National Football League (NFL) and
National Collegiate Athletic Association (NCAA) relating to the Super Bowl and
the Men’s and Women’s Final Four events from all taxation. See Ind.
Code § 6-8-12-3(a) (“all property owned by an eligible entity, revenues of an
eligible entity, and expenditures and transactions of an eligible entity: (1)
in connection with an eligible event; and (2) resulting from holding an
eligible event in Indiana or making preparatory advance visits to Indiana in
connection with an eligible event; are exempt from taxation in Indiana for all
purposes”). Given the specificity of these exemption provisions, if the
legislature had intended to make the provision of early childhood education to
developmentally disabled children by a private entity through a state or
federal program exempt from property taxation, it would have promulgated a
statute codifying it.
The
Petitioner failed to present sufficient evidence proving that the subject
property is owned for a charitable purpose. Nor has the Petitioner sufficiently
shown that 1st Kids is a governmental agency that
entitles it to a “pass through” exemption. Therefore, the Board finds that the
Petitioner failed to prove that it is entitled to an exemption on the subject
property.
