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An institution holding itself out as a purely public charity confronts both constitutional and statutory obstacles when it comes to reaping real property tax exemption benefits. When do the services offered by a nursing facility go from being pro bono publico to profit-minded and uncharitable ones? Is it permissible for a foundation to generate a few extra dollars through a dormitory for the benefit of its university students and still maintain an exemption status? Both the Menno Haven and Lock Haven decisions, Commonwealth Court cases decided in December 2006 and March 2007, respectively, are illustrative of just how onerous the burden of proving the right to an exemption can seem. One of the stated objectives of Pennsylvania’s Public Charity Act is to “reduce confusion” in determining eligibility for tax-exempt status “by providing standards to be applied uniformly in all proceedings throughout the commonwealth.” Our General Assembly wisely concluded that charitable funds were better spent for the public good than on litigation over whether an entity qualifies for exemption benefits. Yet such a thoughtful and meticulous enactment wasn’t enough to stem the tide of vigorous legal challenges presented by discontented organizations, especially ones that have grown accustomed to their exemption status. By way of example, the Menno Haven case involved two continuing care retirement communities. Both are operated in Franklin County and offer three distinct levels of care: skilled, assisted and independent. The skilled facilities are the subject of the instant litigation; litigation involving the others is currently pending. Since their inception decades ago, the skilled facilities have enjoyed an exemption. Much to the chagrin of Menno Haven Inc., however, a 2001 exemption application for its assisted and independent centers resulted in the loss of that benefit. An appeal to the Franklin County Common Pleas Court ensued, with the local taxing board being affirmed. Ascertaining whether an entity is a “purely public charity” under the Pennsylvania Constitution is the first step in the entitlement analysis. And the seminal decision in Hospital Utilization Project (HUP) provides the guidepost. The HUP test maps out the following five criteria: advancing a charitable purpose; donating a substantial potion of its services; benefiting an indefinite class of persons; relieving government of some of its burden; and operating without private profit motive. The Franklin County court determined that the second and third prongs had not been satisfied by Menno Haven. As to the second criterion, HUP mandates a “totality of the circumstances” approach in ferreting out whether a “substantial” portion of the services has been donated. In total, the facts surrounding Menno Haven’s business model proved damning at best: a large up-front fee, care for in-house Medicaid eligible patients out of obligation and acceptance of a slight contingency of day-one-eligible outsiders. The third prong proved just as formidable. Menno Haven could be said to cater primarily to the “well-to-do” elderly, not exactly the epitome of good will. The Menno Haven court never even had to get to an analysis under the charity act – Menno Haven clearly did not qualify as a “purely public charity” and that was that. The Lock Haven decision, on the other hand, provides a noteworthy contrast to Menno Haven. In 2005, the chief assessor for Clinton County issued a notice of a modified assessed valuation to Lock Haven University. It seemed that the school’s dormitory, Evergreen Commons, should no longer find safe harbor in the university’s 501(c)(3) articles of incorporation. Instead, the commons should endure the sting of a $2.1 million bump. A bump worthy of litigation ensued, unsurprisingly, with Lock Haven strenuously maintaining that its housing facilities qualified, both constitutionally and under the act. The board of assessment appeals openly acknowledged that the university (technically, the foundation) is a “purely public charity.” And the lower court conceded that the foundation’s activities on behalf of the university were charitable as well. However, the board’s beef was with the commons, physically located on an adjacent parcel. As ammunition, the board offered up the Alliance Home decision. There, the Commonwealth Court rejected another care organization’s plea for an exemption for nearly 100 independent living units. As in Menno Haven, profit-oriented endeavors do not necessarily reap the benefits of tax-exempt ones merely by virtue of their physical proximity. They too must satisfy the appropriate criteria. Nevertheless, the Lock Haven court distinguished Alliance Home from the case at bar, opting for what it deemed the “whole-institution” approach. Importantly, this very method is a topic of contention in Alliance Home and one that spawned vigorous dissent. Simply put, the charity act requires a holistic view of the entity. For instance, an unincorporated branch of a Jewish community center, one actually and regularly used to advance the center’s charitable purposes, should not strip the entity of its “purely public charity” status. So, too, should the commons be viewed through this whole-institution lens. If the facts were with Lock Haven, a reversal would be appropriate. The rents acquired through the commons are earmarked for repayment of the underlying bond and other expenses of the facility. Currently there is no profit. Assuming the existence of excess income, such monies would be allocated solely for the benefit of the programs and purposes of the university. The commons is not being used to compete with private enterprise, such as a hotel, for instance. The revenues are derived from the recipients of the charity (the students) and the foundation is the rightful owner of the commons. Indicia that the dorm advanced the foundation’s overall purpose abounded. One thing is clear from both the Menno Haven and Lock Haven decisions – the “nonprofit” nomenclature will not suffice to simply excuse an entity from real property taxes. The applicant or appellant, whichever the case may be, may be called upon to prove compliance with the very stringent standards in place in our commonwealth. And for some, this is exactly as it should be. As for the Lock Havens of the world, however, the time of the taxing boards might be better served carrying out the vision of the lawmakers instead of distracting the educators from fulfilling an objective so critical to the future of our country. HARPER J. DIMMERMAN representsclients in real estate matters and is the principal of his firm and president ofDST Land Transfer, Inc., a title insurance company licensed in Pennsylvania and New Jersey. He may be reached at [email protected] or 215-545-0600. He is co-chairman of the Philadelphia Bar Association’s solo and small firm committee and an executive committee member of the law practice management committee and YLD.

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