Not-for-profit (NFP) organizations owning real property in New York City must meet certain ownership, purpose, and use requirements in order to qualify for real property tax exemption. NFP organizations often mistakenly believe that the mere issuance of a Favorable Determination Letter by the Internal Revenue Service and status as a Section 501(c)(3) tax exempt organization guarantees New York City real property tax exemption. While the federal tax exemption helps to establish that the organization was organized for nonprofit purposes, New York City's real property tax exemption requires additional substantiation of property ownership and use requirements.
New York City Requirements for Real Property Tax Exemption
NFP organizations must satisfy each of the following three requirements to qualify for New York City real property tax exemption:
- Ownership Requirement. Legal title for the real property must be in the name of the NFP organization.
- Purpose Requirement. The NFP organization must be organized or operated for one or more of the following purposes:
- charitable, educational, hospital, religious, or moral/mental improvement of men, women, or children
- benevolent, bible, enforcement of law relating to children and animals, historical, infirmary, library, missionary, patriotic, public playground, scientific, and conduct of supervised youth sports
- parsonage or manse
- Use Requirement. The real property must be used exclusively for one or more of the required exempt purposes. Courts have held that "exclusively" means "primarily."
Leased Property, Partial Exemptions, Vacant Property, and Residential Uses
A NFP organization owning real property in excess of its current needs may lease all or part of the property to another NFP organization. In order to qualify for the New York City real property tax exemption, the terms of the lease must satisfy certain requirements. Specifically, (i) the lessor NFP organization must meet the ownership and purpose requirements, (ii) the lessee NFP organization must meet the purpose and use requirements, and (iii) rental payments must not exceed the carrying costs (i.e., maintenance, depreciation charges, and mortgage interest) of the property. In other words, the lessor NFP organization cannot profit from the lease.
Real property used partly for an exempt purpose and partly for a non-qualifying purpose, however, may qualify for a partial exemption regarding the area used for an exempt purpose. The scope of the partial exemption may be determined on a square footage basis, with the value of the non-exempt portion determined by an applicable valuation method (e.g., income capitalization approach to value New York City commercial property).
Vacant land and buildings owned by NFP organizations may qualify for the New York City real property tax exemption, if the construction of buildings or improvements appropriate to the NFP's purpose is in progress or is contemplated in good faith. Good faith contemplation is established from minutes of director meetings, architect's and engineer's plans, municipal permits, and financial preparation (e.g., construction reserve, loan arrangements, and fundraising). Regular qualifying use of vacant land or use of vacant buildings for storage in anticipation of qualifying construction may qualify for the tax exemption. If the contemplated construction or improvement of a building would violate existing zoning laws, the tax exemption may be unavailable.
Although not expressly included in the litany of exempt purposes, residential real property owned and used as accessory to a NFP organization's purpose may qualify for tax exemption. For example, the following uses may qualify: housing for students and faculty of a NFP educational institution, low-cost hotel for enlisted personnel on leave, and housing for doctors and trained staff of a NFP hospital.
NFP Organizations Should Monitor and Possibly Appeal the Assessed Value of Exempt Property
The Department of Finance annually reassesses each New York City commercial property, including tax-exempt properties owned by NFP organizations. NFP organizations should monitor tax notices related to its exempt property and consider initiating annual tax appeal proceedings (also known as tax certiorari) to correct the property's assessed value, even though the NFP organization is exempt from real estate tax. Specialty property (e.g., a church or special use facility) may be difficult to value and the tax assessor may base the assessment on incomparable properties, which can result in overassessment. Although the overassessment of exempt property may seem innocuous, if an exemption is wholly or partially lost, the tax bill will be based on the assessment. Moreover, if the NFP organization eventually sells the property to a nonexempt organization, the sales price may be adversely affected by the purchaser's anticipated tax burden, which can be unduly high due to the NFP organization's failure to appeal the assessed value.