A Kentucky circuit court has held mere possession of a residential unit in a retirement community constitutes a taxable leasehold interest.[ The units at issue are part of the “Springhill Village Retirement Community”, located on real estate owned by the Grand Lodge of Kentucky, Free & Accepted Masons (the “Grand Lodge”) and leased to the Masonic Retirement Village of Taylor Mill, Inc. (“MRV”). MRV owns the improvements to the land, although Grand Lodge retains the right to purchase the improvements from MRV. Both the Grand Lodge and MRV are purely public charities exempt from taxation under Section 170 of the Kentucky Constitution.
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; 82% of this entrance fee is returned to the resident upon termination. Residents also are responsible for monthly maintenance fees.
Recognizing the Grand Lodge and MRV are tax-exempt entities, the property valuation administrator (“PVA”) assessed the residential units to the residents to whom the units had been leased. The PVA assessed the residents pursuant to KRS § 132.195, which provides that when any real or personal property exempt from taxation is leased to “a natural person, association, partnership or corporation in connection with a business conducted for profit”, the leasehold is subject to state and local taxation.
The Grand Lodge and individual residents of the community appealed the assessments to the Kentucky Board of Tax Appeals (the “KBTA”). The KBTA voided the assessments, holding that both Grand Lodge and MRV were tax-exempt charitable institutions and the use of the property in providing housing for the elderly was within the charitable purpose of MRV.
The Kenton Circuit Court reversed. The court found that by focusing on the use of the property, the KBTA failed to recognize “the separate interests of the residents as part of the ‘bundle of rights’ encompassed within the total legal interests in the real estate.” The court noted the residents pay an entrance fee for the right to exclusive occupancy and enjoyment of the residential units and also have a right to a refund of 82% of the entrance fee plus a percentage of any increase in value upon resale of the units by MRV. Thus, the court held the interests of the residents have value and, as such, are subject to property taxes.
The Grand Lodge and individual residents have appealed to the Kentucky Court of Appeals.