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Volume 11 - Opinions of Counsel SBRPS No. 45

Opinions of Counsel index

Municipal corporation exemption (leased property) (nonprofit organization providing substance abuse and family counseling); Nonprofit organizations exemption (miscellaneous) (drug rehabilitation center) - Real Property Tax Law, §§ 406, 420-a:

County-owned land leased to a nonprofit organization, which constructs a building thereon to provide substance abuse and family counseling in conjunction with the State Office of Alcoholism and Substance Abuse, may qualify for the municipal corporations exemption. In addition, the separately assessed building may qualify for the nonprofit organizations exemption.

We have received an inquiry regarding both the municipal corporations exemption (Real Property Tax Law, § 406) and the nonprofit organizations exemption (RPTL, §§ 420-a, 420-b). A county is considering entering a 20-year ground lease of currently vacant land to a nonprofit organization that provides substance abuse and family counseling to patients in conjunction with the New York State Office of Alcoholism and Substance Abuse Services (hereafter OASAS). The lessee would build and own a facility on this site, apparently with financing from the New York State Dormitory Authority. Upon the termination of the ground lease, title to the building would be conveyed to the county. The annual rent to be paid by the lessee would be “nominal.” The question is whether the ground lease would have the effect of depriving the property of its current municipal corporations exemption.

RPTL, section 406(1), provides that “[r]eal property owned by a municipal corporation within its corporate limits held for a public use shall be exempt from taxation and exempt from special ad valorem levies and special assessments to the extent provided in section [490 of the RPTL]” (emphasis added). “The expression ‘public use’ as employed in the statute has never been defined with exactitude” (Herkimer County v. Village of Herkimer, 251 A.D. 126, 128, 295 N.Y.S. 629, 634 (4th Dept., 1937), aff’d, 279 N.Y. 560, 18 N.E.2d 854 (1939)). The standard for making such a determination as recognized in Herkimer County is that “the property should be occupied, employed, or availed of, by and for the benefit of the community at large, and implies a possession, occupation and enjoyment by the public, or by public agencies” (ibid.).

The judiciary in subsequent cases has applied the Herkimer County standard when considering the lease of municipally-owned real property to private organizations. The lease of hangars located on a portion of a county airport to private parties for their private use was held to not satisfy that standard (Town of Harrison v. County of Westchester, 13 N.Y.2d 258, 196 N.E.2d 240, 246 N.Y.S.2d 593 (1963)). {1}  In contrast, the lease of a sports arena (Dubbs v. Board of Assessment Review of the County of Nassau, 81 Misc.2d 591, 367 N.Y.S.2d 898 (Sup.Ct., Nassau Co., 1975) and of a sports stadium (County of Erie v. Kerr, 49 A.D.2d 174, 373 N.Y.S.2d 913 (4th Dept., 1975)) to business organizations seeking profits were found to be a “public use.” {2}  A qualifying purpose for such a lease, moreover, need not be limited to a use “primarily for the benefit of local inhabitants or for an exclusively municipal purpose” (dissenting opinion of Leon D. Lazar, J.S.C., at the Appellate Division, 69 A.D.2d 579, 601, 419 N.Y.S.2d 102, 116 (1979), which was adopted by the Court of Appeals in Fallica v. Town of Brookhaven, 52 N.Y.2d 794, 417 N.E.2d 1248, 436 N.Y.S.2d 707 (1980)).

The Legislature has found that “[t]he state of New York and its local governments have a responsibility in coordinating the delivery of alcoholism and substance abuse services, through the entire network of service providers” (Mental Hygiene Law, § 19.01). “[T]he commissioner [of OASAS] shall promote, establish, coordinate, and conduct programs . . . in the fields of alcoholism, alcohol abuse, substance abuse, substance dependence, and chemical dependence in cooperation with such other federal, state, local, and private agencies as are necessary” (Mental Hygiene Law, § 19.15(a) (emphasis added)). Such private agencies are subject to inspection and certification by OASAS. {3}

It appears here that the nonprofit organization-lessee is a certified provider of alcoholism and/or substance abuse treatment services that treats patients pursuant to a coordinated program established by OASAS. So long as the lessee provides coordinated program services that are arguably “by and for the benefit of the community at large,” it would seem reasonable for the assessor to conclude that the land owned by the county continues to be eligible for the municipal corporations exemption as property “held for a public use.” {4}

As previously noted, here, the lessee intends to build and own the proposed facility. “[A] landlord and tenant may separate the ownership of land and building by agreement” (National Cold Storage Co., Inc. v. Boyland, 16 A.D.2d 267, 268, 227 N.Y.S.2d 147, 148 (1st Dept., 1962), aff’d, 12 N.Y.2d 808, 187 N.E.2d 129, 236 N.Y.S.2d 62 (1962)). In such a situation, the assessor may choose to separately assess the land and the building (see, Doughty v. Loomis, 9 A.D.2d 574, 189 N.Y.S.2d 413 (3d Dept., 1959), aff’d, 8 N.Y.2d 722, 167 N.E.2d 543, 201 N.Y.S.2d 100 (1960); see also, 1 Op.Counsel SBEA No. 95). We suggest that the assessor do so here, because, unlike the land on which it is to be located, the building’s entitlement to exemption would be controlled by a separate statute, that is, RPTL, section 420-a, which applies to nonprofit organizations.

The judicial departments are split as to whether real property owned by a nonprofit organization that treats persons suffering from alcoholism or substance abuse qualifies for exemption. The Second Department has held that such property does not qualify for exemption (Delancey Street Foundation, Inc. v. Board of Assessment Review and Assessors of Town of Southeast, 112 A.D.2d 132, 491 N.Y.S.2d 381 (2d Dept., 1985), but the Third Department thereafter rejected Delancey Street and held that such property is entitled to exemption (Dynamite Youth Center Foundation, Inc. v. Assessor of Town of Fallsburg, 207 A.D.2d 34, 620 N.Y.S.2d 566 (3d Dept., 1994). We believe that the Dynamite Youth Center decision is better reasoned, especially when applied to a drug rehabilitation center that offers “its facilities to people in need of assistance who would likely continue unaided were it not for the activities of the organization in question” (1 Op.Counsel SBEA No. 100; see also, 2 Op.Counsel SBEA No. 46). Nevertheless, resolution of the dichotomy between the two appellate panels must await future litigation.

May 2, 2003

{1}  The Court in the Town of Harrison case found that “[t]he hangars were not leased, nor are they utilized, for the purpose of providing storage or maintenance area for aircraft serving the general public or for any other purpose redounding to the benefit or advantage of the general public” (13 N.Y.2d at 263, 196 N.E.2d at 243, 246 N.Y.S.2d at 597). The decision did not adversely affect the exempt status of the remainder of the county airport which was operated for the county by a private lessee.

{2}  The court in Dubbs held that “the use of the Coliseum [the sports arena] by private promoters is not the reason for the existence of the Coliseum or the purpose behind the Coliseum but is simply incidental to or coincidental with the enjoyment and occupation of the Coliseum by the general public in attendance for whose benefit the events are shown” (81 Misc.2d at 600, 367 N.Y.S.2d at 906). Similarly, the court in Kerr found that the stadium was “being employed for the exact purpose for which it was contemplated, i.e., to provide the residents of Erie County the benefit of a first-class recreational, sports and cultural facility” (49 A.D.2d at 180, 373 N.Y.S.2d at 919).

{3}  OASAS “shall inspect and approve or disapprove the facilities of and the services provided by alcoholism programs, substance abuse programs, and chemical dependence programs, and any program or facility purporting to provide such services” (Mental Hygiene Law, § 19.21(a)). OASAS also “shall establish reasonable standards for all providers of alcoholism, substance abuse, and chemical dependence services which are certified by such office” (Mental Hygiene Law, § 19.21(d)).

{4}  The coordinated program aspect of the services to be provided by the lessee distinguishes its proposed activities from private medical practices for personal gain which, we concluded in 7 Op.Counsel SBEA No. 3, do not qualify for the municipal corporations exemption despite their location in a portion of a county-owned hospital.