By Erica Horn and Maddie Schueler
In Grand Lodge F & A.M. and Springhill Village Retirement Community v. Kenton County PVA and City of Taylor Mill, Case No. K12-S-69 (Ky. Bd. Tax App. Nov. 19, 2014), the Kentucky Board of Tax Appeals held mere possession of a residential unit in a retirement community was not a taxable leasehold interest. Taxation of the alleged leasehold interest was attempted by the taxing authorities because the underlying property was exempt under Section 170 of the Kentucky Constitution. Section 170 exempts “real property owned and occupied by . .. institutions of purely public charity.” The Grand Lodge of Kentucky, Free & Accepted Masons (the “Grand Lodge”) has been recognized as a purely public charity since at least 1970.
With the financial assistance of its subsidiary, the Masonic Homes of Kentucky, Inc. (the “Masonic Homes”), the Grand Lodge sponsors multiple residential communities for the elderly throughout Kentucky. In this case, the Grand Lodge purchased a tract of land in the City of Taylor Mill and leased the land to an affiliated, non-profit corporation – the Masonic Retirement Village of Taylor Mill, Inc. (“MRV”). MRV built and owns the “Springhill Retirement Community” in Taylor Mill. The lease between the Grand Lodge and MRV provides the Grand Lodge will lease the land to MRV for twenty years, with an option to renew the lease for an additional twenty years. The Grand Lodge reserves the right to purchase improvements to the land from MRV.
The Springhill Retirement Community contains a total of 48 residential units. Each resident enters into a “residential agreement” providing that the resident’s interest in the unit is not assignable or transferable, the resident does not obtain title to the unit, and the resident cannot mortgage or encumber the unit. The residential agreement can be terminated under the following circumstances: death, transfer to a nursing home, election of resident to terminate, a determination by MRV that the resident is incapable of continued occupancy, or a resident’s refusal to cooperate. Pursuant to the agreement, residents pay an entrance fee between $151,000 and $252,000; eighty-two percent of this entrance fee is returned to the resident upon termination. Residents also are responsible for monthly maintenance fees covering community services, maintenance of appliances, and general upkeep.
Recognizing that Grand Lodge and MRV are tax-exempt, purely public charities, the property valuation administrator (“PVA”) assessed the residential units to the residents pursuant to KRS § 132.195, which provides:
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When any real or personal property which is exempt from taxation is leased or possession is otherwise transferred to a natural person, association, partnership or corporation in connection with a business conducted for profit, the leasehold or other interest in the property shall be subject to state and local taxation at the rate applicable to real or personal property levied by each taxing jurisdiction.
The Grand Lodge and individual residents of the retirement community appealed these assessments to the Kentucky Board of Tax Appeals. Relying upon the statute, the PVA and the City of Taylor Mill argued possession of the units had been transferred to the residents who must pay property tax upon possession, since the residents themselves are not exempt from taxation.
The Board first considered whether the property was exempt from tax pursuant to Section 170. Noting no evidence had been presented that MRV was not a purely public charity, the Board framed the question before it as to whether MRV’s property was being employed for a purely charitable purpose. With respect to this question, the Board noted:
The provision of housing to the elderly is a charitable activity and this is the sole stated purpose of MRV as set forth in its articles of incorporation. While the resident entrance fee is significant, the entrance fee is below the cost that MRV expended to construct the unit and it is not intended to represent fair market value. In addition, the return of 82% of the fee upon termination serves, in effect, as a subsidy for the elderly person who is able to live for a lengthy time in the unit. MRV’s annual operating losses have ranged from approximately $23,000 to $187,000 and the charitable entity Masonic Homes makes substantial financial contributions to MRV each year to account for these losses. . . . This Board concludes MRV, which was previously determined to be a purely public charity by the PVA and the Department of Revenue … is using the property in question for a charitable purpose.
Additionally, the Board concluded the residents’ bare possession of the property without any ability to sublet or encumber that property did not qualify as a taxable “interest in the property” under KRS § 132.195. The Board cited to Arcadia Realty Foundation, Inc. v. Hoenig, 336 S.W.2d 571 (1959), for the proposition that one who “exercises complete domination and control over the real estate and receives all present benefits of ownership” is the practical owner of the property within the meaning of Section 170. The Board noted that, under the residential agreements, the residents could not exercise complete domination or control over the units; therefore, they were not the practical owners of the property. Furthermore, the Board stated that a privately owned leasehold interest in property owned by a tax-exempt entity is subject to tax if it has a fair cash value. Since the residents had no right to transfer their units, the Board found that there was no fair market value to be assessed.
Therefore, the Board held the units in the Springhill Retirement Community were exempt from taxation under Section 170 of the Kentucky Constitution and the assessments issued for these units for the 2012, 2013, and 2014 tax years were void.