Are Non-Profits' Real Estate Tax Exemptions
At Risk?
Due to the recent recession and
decline in state and city revenue, states and municipalities are
searching for new sources of tax revenue. One of the areas eyed by state and local officials is the
real estate tax exemption enjoyed by many non profit organizations.
While some
municipalities are not advocating a revocation of the exemption,
they are looking at creative ways to supplement their revenue stream
with “user fees” for municipal services or capping the amount of the
exemption. Others are taking a harder look at the enforcement and procedural mechanisms in
place for granting and maintaining the exemption.
In
New York City
the exemption from real estate taxes costs the City tens, if not
hundreds, of millions of dollars each year in lost revenue. The City’s churches, hospitals, universities, and museums,
most of which are tax-exempt organizations, do not pay real estate
taxes while sitting on some of the most valuable land in the
country. Most
non-profits that own property in the City are entitled to a real
estate tax exemption. But what if the non-profit leases some or all of its space to
another non-profit? Or to a for profit company?
The New York City
Department of Finance administers the granting and maintenance of
the NYC real estate tax exemption. Non-profits that rent space from for profit real estate
companies are not entitled to a real estate tax exemption. An organization that owns real estate within the City must
apply to the Department of Finance for the exemption. There is no deadline for submitting an application, as
applications are accepted on a rolling basis. In completing the
application, the organization must submit a number of documents,
including detailed financial and property information, whether the
organization will be using the property or leasing it to others, the
financing of the property and much more.
Non-profits that
own property and choose to lease out part or all of it to a
for-profit company are not entitled to claim the exemption with
respect to that portion of the space occupied by the for profit
company. In high tax areas, such as New York
City, this could make leasing space to a for
profit company uneconomical. If the non-profit leases space to another non-profit
organization, the ability of the owning entity to retain the benefit
of the tax exemption depends upon the amount of “profit” the owning
entity makes from the rental. The “profit” can be calculated in a number of ways and should
be thoughtfully considered before entering into a lease that could
result in the reduction or forfeiture of a valuable tax exemption.
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