Where's the Charity?
Maine exemption law needs standards
(from Maine Townsman, February 2001)
by Anne Gregory, Assessor, Town of Falmouth
To get around a provision in Maine law that requires a tax exempt charitable property to be used solely for charitable purpose, the Maine Medical Center divided a building it owned in Falmouth into 12 condominium units. An assessment dispute regarding seven of those units went before the State Board of Property Tax Review last summer.
Last fall, the State Board ruled that three of the five medical office condominium units in Falmouth were taxable. Maine Medical Center owned one of the units and the other four were owned by MMC Realty. The State Board reasoned that the real estate holding company was not a charity. For technical reasons, the Board did not rule on two of the units: one because its owner was MMC and the value was less than $1 million (the threshold for a State Board review); the other because of a leasing arrangement between the realty company and MMC (hospitals have a special exemption for property they lease, an exemption that even governments do not enjoy).
The town's victory was short-lived, however, because MaineHealth, Maine Medical Center's parent company, intends to convey the units owned by MMC Realty to Maine Medical Center.
So, did Falmouth really win? To coin a familiar phrase, "It all depends how you define "win". The town won three out of five appeals. It won $65,000, in tax dollars (covering three tax years). Falmouth won because the Board ruled than an institution's real estate holding company is not a charity.
In my opinion, the biggest win was the appeal process itself. It demonstrated that the State's exemption laws with broad and undefined language are problematic. They simply do not address the complex world of today's healthcare delivery system and the increasing number of nonprofits expecting property tax exemptions. The unprecedented growth in nonprofit exemptions and lack of measurable standards put the assessor in a difficult position. The choice is to go to court and spend scarce municipal funds or to simply grant the exemption request.
This choice flies in the face of the constitutional mandate that taxation is the rule, exemption the exception. All property owners share the burden of the municipal budget. Assessors clearly understand that each exemption shifts the burden of the annual municipal budget onto all the other taxpayers.
The 83-page written decision of Board Chairman Eric Wright is unusual in its length and complexity. His research and citing of case law throughout the United States is extensive. The Board grappled with issues of jurisdiction, burden of proof, condominium law, language in Title 36 MRSA § 652 and case law. Regarding condominium law, the town alleged that the creation of the condominium was simply an artifice to avoid taxation. MMC Realty never intended to sell any of the units. The Board disagreed. So, it was not a simple case.
HISTORY OF THE CASE
When I inspected the new $5 million, two story, brick building and met with a representative of MMC Realty in December of 1996, I had no idea I would end up at the State Board four years and four boxes of documents later. So, what happened?
As Chairman Wright states on the first page of his written decision, "As presented by the parties, ground zero of this appeal is City of Lewiston v. Marcotte Congregate Housing, 673 A.2d 209 (Me. 1996)". The Law Court's decision sustained the language in the exempt statutes that a property must be use solely for its charitable purposes. If any portion is leased or rented to others, the whole building is taxable. Typically, prior to Marcotte, assessors would assess only those portions of the building used to generate income.
I anticipated a discussion of the taxation issue during the inspection. I knew that several doctors had already moved into the building. In fact, two for-profit medical businesses moved in from other locations on Route One in Falmouth. In addition, I expected that Maine Medical Center would cooperate in our mutual goal of fair taxation. In retrospect, that sounds very naïve. However, I assumed that if they were doing charitable work in Falmouth, it would be easy to prove. And if they were not, they recognized the obligation to help support the cost of town government that depends on the property tax for its primary source of revenue. For Falmouth, approximately 77% of the annual budget is funded by the property tax.
During my meeting that day, I was shown a blueprint depicting 12 condominium units as the hospital's response to Marcotte. I accepted that the condominium conversion "solved" the Marcotte problem. I thought it was a good solution. However, I cautioned them that if I accepted the condominium conversion, I would then be obligated to determine the exempt status of each unit. Each unit would need to pass muster and document its charitable works.
Since the town was completing a revaluation for 1997, I was excited at the prospect of medical office sales. Only 14% of Falmouth's taxable value is commercial property, so sales are scarce. However, my excitement was short lived as MMC Realty sold only one unit to Maine Medical Center for zero consideration in order to activate the condominium status.
The condominium documents were sent to the town planner in March 1997, along with floor plans that showed the utility room as unit #6 and janitor's closet as unit #7.
Although April 1 is the deadline to apply tax exempt status, I received six exempt applications on June 2, 1997, with no supporting documentation. Needless to say, their failure to provide the appropriate documentation was frustrating and I became skeptical of their actions. So, after numerous meetings, letters, telephone calls and more insufficient documentation, I denied the 1997 applications as not timely filed.
The next year was not any better as I received one application for seven units without any supporting documentation. There were several people representing MMC. As a courtesy, I continued to make numerous requests for information and extend deadlines. When the August documents arrived containing a consolidated, incomplete financial statement, I formally denied their requests. MMC Realty filed their appeals for 1998, on March 30, 1999, the last day for appeals. After I denied their requests, they appealed to the Local Board of Assessment Review.
The Local Board met twice and granted the five exemption requests with a 4-1 vote. In a nutshell, the majority of the Board felt the "usefulness" of the units' location in Falmouth warranted an exempt status.
CASE GOES TO STATE BOARD
The Portland Press Herald carried a story stating that I was considering whether or not to appeal the Board's decision to the next level. To my surprise, the next Saturday morning, I received a call from the Town Council Chair expressing his support for my efforts and asking me to attend the council's workshop meeting the following Monday. He also asked me to obtain an estimate of the legal cost to appeal from the town's attorney, William Plouffe of Drummond, Woodsum & MacMahon. The council would have preferred a taxpaying owner on this prime commercial location. They voted unanimously to financially support the appeal.
That wasn't the end of the encouraging news. During the next few weeks, I received letters and telephone calls of support from citizens throughout the greater Portland area. In my 17 years as an assessor, I have never experienced such words of support and encouragement.
During the State Board hearing it became apparent that the financial information I was seeking was, in fact, available. The town hired Mark Filler, CPA, to review financial statements and IRS 990 forms that included expense and salary information. The complexity and magnitude of the whole MaineHealth corporation was astonishing. We are a long way from the hospitals of the 19th Century. MaineHealth representatives testified that they provide healthcare, train doctors and conduct medical research. They were adamant that the three-pronged approach to healthcare qualified their healthcare organization to a charitable exemption from property taxes.
One of the condo units is occupied with the Learning Center. One MMC official testified that he was pleased that the public (about 40 individuals per month) used the space to educate themselves about their particular illness. He was surprised by the thirst for healthcare information. I stated that during my years as a municipal assessor, I was very aware that there is a thirst for property tax relief, too.
During William Plouffe's questioning, I testified about the difficulty in obtaining information; why I did not simply accept the hospital's arguments and what I concluded after reading the detail of the court cases MMC's attorney selected to support his position. In my opinion, none of the recent Law Court decisions mirrored this situation. As we went through the chronology of events, our mantra was, "Where's the Charity at 5 Bucknam Road?"
NO FURTHER APPEAL
Finally, the case that started during the 1997 revaluation ended during the 2000 update when I took the MMC condominium complex off the town's tax rolls. After consulting with the town attorney, the town council and I agreed that it would be not be in the town's best interest to appeal the State Board's decision.
But the issue will not go away. The most important questions remain unanswered: (1) how much charity must an institution dispense to be eligible for property tax exemption; (2) how does Maine's exemption statutes begin to address the complex health care delivery system of this century; and (3) how can a nonprofit corporation with 23 subsidiaries, affiliates and joint venture arrangements be treated in the same way as the hospital of the 19th Century, when the original charitable statutes were enacted?
After we received the Board's written decision, the town attorney and I met with the council to discuss the decision and our options. Do we appeal the other two units to Superior Court? Attorney Plouffe told the council, "Even if we prevail after expending more time and money, the hospital and nonprofit lobbies will go to the Legislature for remedy. So, that's where the final solution must be."
THE PUBLIC POLICY ISSUES
During the past three years, state newspapers carried articles, editorials, and letters to the editor regarding Falmouth's appeal. In one article, William Caron, CEO of MaineHealth, states that hospitals are being pinched by government reimbursement limits for Medicare patients. . In another article, Vincent Conti, president and CEO of Maine Medical Center, states that few would dispute that a strong hospital is as important to our way of life as quality schools, libraries and museums.
The property tax is pinching owners, too. If Medicare reimbursement limits are the problem, then that's where the solution lies.
I agree that hospitals are important to our quality of life. But we are not talking about a hospital where patients stay overnight, are operated on and go to the emergency room. Today's "hospitals" are involved in joint ventures, converting-profit businesses, expanding and advertising to get a greater market share of customers. At the same time, they are ignoring their impact on small communities with a high property tax burden.
If you doubt these changes are occurring or that hospitals are competitive, think back to last year's dual between Maine Medical Center and Central Maine Medical Center over a cardiac unit in Lewiston.
This new 21st Century healthcare delivery system is not one that has proven it deserves property owners' continued support. If their primary purpose is no longer providing charity, then open up the books and let the public decide if a new exemption entitled "healthcare facilities" is the answer to the current dilemma. This would remove charity as the criteria. MaineHealth is a healthcare delivery company that, according to the records of the hearing, devotes less than 2% of its gross revenue to people needing its charity.
This past summer, I met with almost 400 taxpayers during revaluation hearings. Many, many people supported the town's appeal. One lady on a fixed income said, "I need some charity, too."
A complaint that property taxpayers often make to local officials is, "Why should we help pay for schools when we don't have children in the system?" I respond that all of us need educated service providers. I hope the lab technician reading my test results had the best possible education. So, in my opinion, any business, nonprofit or taxable that utilizes the benefits of a publicly-funded educational system must support it.
MEASURABLE STANDARDS FOR EXEMPTIONS
Again this year, Maine Municipal Association is supporting legislation that would provide reasonable standards for charitable and benevolent exemptions. The proposed legislation is based on standards that apply throughout the State of Pennsylvania. MMA's legislative initiative, sponsored by Rep. Walter Gooley of Farmington, would create measurable standards that institutions would have to meet in order to be exempt from local property taxes.
|At a Glance ….|
|1/96 MMC Realty buys 13-acre site for $955,955.
12/96 Assessor inspects new $5 million building.
3/97 Building converted to 12 condominium units.
6/97 Assessor receives exempt applications for 6 units.
10/97 Assessor denies applications as not timely filed.
3/98 Assessor receives 1998 exempt applications.
9/98 Assessor denies all applications for insufficient evidence of charity.
3/99 MMC Realty appeals 1998 decision.
4/99 MMC Realty reconfigures units to create add'l unit #13.
5/99 Assessor denies 1998 appeals for insufficient evidence of charity.
6/99 MMC appeals to local Board of Assessment Review.
9/99 Local Board hears appeal.
10/99 Local Board grants appeal.
4/00 MMC Realty reconfigures units to create add'l unit #14.
5/00 Assessor appeals Local Board's decision to State Board.
6/00 State Board hears appeal for three days.
9/00 Attorneys give oral arguments.
9/00 Board deliberates and votes to grant 3 and deny 2 appeals.