A nonprofit that partnered with a university to construct, lease and operate student housing is not tax-exempt because it does not qualify as a purely public charity, a Monroe County Court of Common Pleas judge has ruled.
Judge Arthur L. Zulick ruled in East Stroudsburg Area School District v. Monroe County Board of Assessment Appeals that University Properties Inc. did not meet the nearly 30-year-old criteria to determine whether an entity qualified as a “purely public charity” under the Pennsylvania Constitution.
Although the company donated to East Stroudsburg University and provided free housing and stipends to the resident advisers and staff in the housing facilities, the company, according to Zulick, failed to meet the requirements for donating a substantial portion of its services because there was no indication that the resident advisers were students with financial difficulties.
“There is no question that it is a nonprofit institution and that it assists [East Stroudsburg University] in its mission to provide modern, comfortable facilities to its students. It is also making charitable donations of surplus revenue to [East Stroudsburg University],” Zulick said. “However, it is itself not a charitable institution as far as its paying customers, [university] students, are concerned.”
According to Zulick, University Properties was formed to help the university finance building the housing facilities, which are on state-owned property. University Properties, which leased the facilities, received its income from renting the properties to students. Although University Properties provided housing subsidies to students when overcrowding required them to move into its more expensive facilities, students did not did not receive reductions for financial needs.
The Monroe County Board of Assessment Appeals granted University Properties tax exemption under the Consolidated County Assessment Law, 53 Pa.C.S.A. Section 8812.
On appeal, the school district conceded that University Properties met four out of the five criteria the state Supreme Court outlined in its 1985 decision in Hospital Utilization Project v. Commonwealth, which include advancing a charitable purpose, benefiting a class of legitimate charity subjects, relieving government of some of its burdens and operating free from private profit motive. However, the district argued the company failed to meet the requirement that the entity donate a substantial portion of its services.
The district focused on the fact that the company does not offer financial aid to students, that the students must pay market-value rent and that rent in the facility, which was made up of suites, was more expensive than the general university housing.
University Property argued that the free housing and stipend it provided to resident advisers helped the university to attract and retain qualified personnel. It further noted that its donations to the university included $325,000 in 2012 and $450,000 in 2013, and that, when its financial obligations for the construction project are repaid, its lease will end and the university will take control of the property.
According to Zulick, an entity first must prove that it is a “purely public charity” under the Pennsylvania Constitution and the Institutions of Purely Public Charity Act before it can be considered for tax-exemption status under Section 8812.
The standard, he said, has changed since the state Supreme Court’s 1936 ruling in YMCA of Germantown v. Philadelphia, which held that a purely public charity could not charge anything for its services. Since then, the high court found that a school using tuition money to provide 10 percent of its student body with full scholarships and a nonprofit organization that provided reports to hospitals for the cost that it took to create them could not be considered purely public charities.
In 2010, the Commonwealth Court, in CHF-Kutztown v. Berks County Board of Assessment Appeals, said a student residence that was paid housing was not a purely public charity even though a portion of its surplus revenues was donated to the university.
University Properties argued, however, that the stipends and free rooms it provides amount to about $288,000 annually.
Zulick rejected the argument, saying that all revenues that subsidize charitable benefits were supplied by full-rent-paying students.
“The difficulty with this suggestion is that the policy does not benefit any students who are unable to pay the rents,” Zulick said. “The stipend and room offered to the advisers is a part of the management expense of operating the facility. No one is donating money to [University Properties] to engage it to provide free rooms to its advisers. All the revenues to provide this benefit are coming from students paying full rent.”
Attorney Christopher S. Brown, who represented the school district, said he agreed with the opinion.
University Properties’ attorney, Brian L. Nagle, did not return a call for comment.
(Copies of the 21-page opinion in East Stroudsburg Area School District v. Monroe County Board of Assessment Appeals, PICS No. 14-0306, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •