Courts Clarify that HUP/Act 55 Analysis Applies at Institutional Level— Not Parcel Level; Real Estate Held in Separate Entity Is Also Exempt In two recent significant victories for the charitable and higher education communities in Pennsylvania, the Pennsylvania Supreme Court and Commonwealth Court issued rulings clarifying the proper construction and application of HUP/Act 55—which applies to tax exemptions for institutions of purely public charity.1 Some local taxing authorities in Pennsylvania have attempted to challenge the tax exemption of certain student housing and other facilities by arguing that courts considering charitable exemption claims must apply the five-part test set forth in HUP and Act 55 to the parcel for which the exemption is sought. The question created by the taxing authorities’ efforts, i.e., at what level to apply the HUP/Act 55 test—the institutional level, the parcel level, or both—has been a growing cause for concern among charitable institutions in Pennsylvania.
In two recent Pennsylvania appellate court decisions that are very favorable to charitable institutions throughout the Commonwealth, the Pennsylvania Supreme and Commonwealth Courts rejected the approach advocated by the taxing authorities and clarified that the HUP/Act 55 test applies at the institutional level— not the parcel level. Then, once an institution has satisfied the HUP/Act 55 test— demonstrating that it is an institution of purely public charity—the relevant inquiry with respect to the parcel itself is limited to whether the property is actually and regularly used for the institution’s charitable purposes. Further, the Commonwealth Court concluded that the exception is not defeated simply because the university facilities are held in a separate corporation—which is sometimes necessary for financing, liability or other reasons. Under these circumstances, the same analysis applies—is the taxpayer an institution of purely public charity and is the property used for the purposes of the institution.
In Lock Haven University Foundation v. Clinton County Bd. of Assessment Appeals, __ A.2d __, 2007 WL 685463 (Pa. Cmwlth. 2007),2 the Commonwealth Court examined whether certain real property of the Lock Haven University Foundation (the “Foundation”), an entity organized essentially to approve and coordinate all fundraising activities carried out on behalf of Lock Haven University (the “University”), was entitled to a property tax exemption for its student housing complex (known as “Evergreen Commons”). The trial court concluded (as the taxing authority conceded) that the Foundation was an institution of purely public charity, but denied the Foundation an exemption for Evergreen Commons on the ground that Evergreen Commons was not itself a purely public charity—i.e., the parcel itself did not meet the fivepart HUP/Act 55 test. The Commonwealth Court reversed the trial court’s decision and held that the Foundation was entitled to the exemption for the Evergreen Commons property. The court held that the trial court erred in examining Evergreen Commons in isolation from the Foundation as a whole. The Commonwealth Court explained that the proper legal analysis required the threshold determination of whether the Foundation as a whole satisfied the HUP/Act 55 criteria. The Commonwealth Court then examined Evergreen Commons only to determine whether it was necessary to and actually used for the Foundation’s principal purposes. The Lock Haven decision also is significant because the student housing complex at issue was not held by the University itself, but rather by a corporation separate and distinct from the University—but this structure did not defeat exemption.
Shortly after the Commonwealth Court issued its decision in Lock Haven, the Pennsylvania Supreme Court confirmed the application of the HUP/Act 55 test at the institutional level—not the parcel level—in its decision in Alliance Home of Carlisle v. Bd. of Assessment Appeals, No. 208 MAP 2004 (Pa. April 17, 2007), reversing the Commonwealth Court’s decision in Alliance Home of Carlisle v. Bd. of Assessment Appeals, 852 A.2d 428 (Pa. Cmwlth. 2004). In Alliance Home, the taxpayer institution owned and operated a licensed continuing care retirement community that included a skilled nursing facility, an assisted living facility, and an independent living apartment facility. The property owner had previously been determined to be an institution of purely public charity and both its skilled nursing facility and its assisted living facility had been deemed exempt from real estate taxation. Even though all facilities within the continuing care retirement community were owned by the same corporation, the Commonwealth Court majority viewed the independent living facility in isolation from the rest of the corporate community, and held that it did not qualify as an institution of purely public charity and was not entitled to exemption. The Pennsylvania Supreme Court reversed and held that requiring the parcel of land for which an exemption is sought to “independently satisf[y] the HUP/Act 55 test” is an “analysis [that] cannot be squared with the constitutional language or the parcel review language in Act 55, which tracks the constitutional standard.” Alliance Home, 208 MAP 2004, Slip Op. at 28-29 (Pa. April 17, 2007). The Supreme Court also explained: “The constitutional test respecting parcel review, then, is not the HUP/Act 55 test, which is designed to identify qualifying institutions, but a test focusing on the actual and regular use that the qualifying institution makes of its property and the relationship of that use to the institution’s purposes.” Slip. Op. at 29. Finding that the independent living facility was actually and regularly used for the purposes of the institution, the Pennsylvania Supreme Court concluded that the facility was entitled to an exemption.
Lock Haven and Alliance Home are important precedential decisions that guide the charitable community in Pennsylvania in two notable respects. First, the decisions make clear that the five-part tests under HUP and Act 55 apply at the institutional level, not the parcel level. Second, Lock Haven is significant in that it allows flexibility for charitable organizations that choose to hold real estate in a separate corporation—which is increasingly common in larger institutions, whether for financing, liability, or other reasons. As long as the taxpayer institution can establish that it is an institution of purely public charity and that the parcel on which the exemption is sought is actually and regularly used for the purposes of the institution, such a structure, in and of itself, will not defeat exemption.