New York State Court of Appeals Denies Property Tax Exemption to Non-Profit that did not Use Property for Exempt Purpose

In a heavily fact-specific case, the New York Court of Appeals denied the Real Property Tax Law (“RPTL”) Section 420-a exemption to a non-profit entity that leased its property to a for-profit entity. Brookdale Physicians’ Dialysis Assoc., Inc. v. Dep’t of Fin. of City of New York, 2024 NY Slip Op 01583, WL 1199333 (Mar. 21, 2024). While there are instances where certain uses that are incidental to the exempt organization could result in the grant of the exemption, here the court found that no such incidental purpose existed. The use of the property by the tenant had no connection with the owner’s exempt purposes, and the owner did not use the property itself for any such purpose.   

The RPTL § 420-a Exemption

RPTL Section 420-a is a mandatory class of property tax exemptions for properties that are owned by qualifying non-profit organizations, used for their exempt purposes, and from which no profit is made. RPTL §§ 420-a(1)(a), (b). Specifically, as relevant to the case, the statute provides:

Real property owned by a corporation or association organized or conducted exclusively for . . . charitable [or] hospital . . . purposes, or for two or more such purposes, and used exclusively for carrying out thereupon . . . such purposes either by the owning corporation or association. . . or by another such corporation or association. . . shall be exempt from taxation as provided in this section.

RPTL § 420-a(1)(a) (ellipses, brackets, and emphasis added).

The courts have interpreted the term “exclusively,” as used in the statute, to mean “principally” or “primarily.” Uses that were incidental to the main use and exempt purpose would not bar the grant of the exemption if the statutory test was otherwise satisfied. See Matter of Greater Jamaica Dev. Corp. v. New York City Tax Comm’n., 25 N.Y.3d 614, 623 (2015).      

Factual Background in Brookdale

Brookdale came about when the New York City Department of Finance (“DOF”) revoked the exemption for a building owned by Samuel and Bertha Schulman Institute for Nursing and Rehabilitation Fund Inc. (“Schulman”).  Schulman is a non-profit entity whose mission is to fundraise in support of the Schulman and Schachne Institute for Nursing and Rehabilitation Inc. and Brookdale Hospital Medical Center. Schulman leased out the first floor and basement of a building it owned to Brookdale Ph­­­ysicians’ Dialysis Associates (“Brookdale Dialysis”). Brookdale Dialysis is a for-profit corporation whose employees are exclusively healthcare workers from Brookdale Hospital. Brookdale Dialysis provides dialysis services to the community for a fee.

From 2001 to 2013, the property was exempt under the statute. After twelve years of providing Schulman with a tax exemption under RPTL Section 420-a, the DOF retroactively revoked the exemption because Brookdale was a for-profit organization. Schulman then brought suit challenging the revocation.

The trial court found that DOF had not examined the property’s use thoroughly enough before revoking the exemption and annulled the determination, thus reinstating the property tax exemption. DOF appealed and the appellate court affirmed, holding that the services provided by Brookdale Dialysis were “reasonably incident” to Schulman’s exempt purpose of funding and supporting healthcare affiliates.

The DOF appealed to the New York Court of Appeals, which reversed. The court structured its analysis around the general construction that while tax exemption statutes should be construed strictly against the taxpayer, where the taxing jurisdiction revokes a previously-granted exemption, it bears the burden of proving that the property was subject to taxation.

The crux of the court’s analysis was that Schulman was a fundraising organization and the exempt use had to be for that purpose. Schulman leased the property to a for-profit entity which used it solely for pecuniary gain, which is expressly prohibited under the statute.  Schulman argued that the property is exempt because Brookdale Dialysis provides medical services that are vital and necessary to Schulman’s charitable mission. But the court found that this was a misinterpretation of the statute because the exemption is for Schulman’s property, and Schulman itself was not providing healthcare services directly and did not use the leased portion of the building for fundraising.

Hodgson Russ Insights

Brookdale confirms three key aspects concerning the RPTL § 420-a exemption.   First, the analysis is often fact-intensive, particularly when the property is owned by one entity but used by another. In these instances, ownership by a non-profit entity is not enough; both the ownership and use elements of the statute must be met. The taxing jurisdiction and, if litigation ensues, the courts will look closely at the use of the property and whether it is related to the exempt purposes of the owner. The Court of Appeals in Brookdale closely analyzed Schulman’s exempt purpose, which was to raise funds, not provide dialysis services or medical services at all.  As the court observed, had Schulman engaged in such fundraising on the property, such a use would have been exempt under the statute. But it was insufficient for purposes of retaining its exemption that Schulman used the proceeds for support of healthcare. Since Schulman and Brookdale Dialysis had two very different purposes, it was for this reason the Court of Appeals reversed, finding the property taxable.

Second, in circumstances where there is a claimed incidental use by another entity that nevertheless fulfills the owner’s exempt purpose (unlike in Brookdale), property owners need to be prepared for the possibility that a taxing jurisdiction may grant the exemption initially, but later seek to revoke it just as in Brookdale. This could be due to a change in the assessor’s office or the elected composition of the jurisdiction. It is therefore crucial to evaluate the exemption and application submitted initially to limit such a risk later. It is similarly important to have appropriate lease language that satisfies the statute when two or more entities are involved.

Finally, because Brookdale was decided based on the facts, it is not intended to overrule the other cases interpreting RPTL § 420-a. There remain circumstances where the exemption may be available to properties owned by non-profit entities and leased to or used by for-profit entities or private citizens where such a use is incidental to the purpose of the non-profit owner. As discussed by the Court of Appeals as examples: Matter of St. Luke’s Hosp. v. Boyland, 12 N.Y.2d 135 (1962) (non-profit hospital’s lease of private apartments to hospital staff and family held exempt as “reasonably incident” to the hospital’s exempt purposes) and Matter of Pace Coll. v. Boyland, 4 N.Y.2d 528, 530 (1958) (cafeteria space for college held exempt where college had an agreement with for-profit restaurant company to operate college cafeteria and maintained supervision and control over the cafeteria operations). These situations being fact specific require careful analysis. The exemption is not a one size fits all.

If you have any questions about the non-profit property tax exemption under RPTL § 420-a, the application process to obtain the exemption, or potential litigation concerning the denial of the exemption, please contact Dan Spitzer (716.848.1420), Amy D’Ambrogio (585.613.3955), Henry Zomerfeld (716.848.1370), or another member of our Tax Assessment Practice. If you received this alert from a third party or from visiting our website and would like to be added to our tax-exempt entities or tax assessment mailing lists, or any other of our mailing lists, please sign up here. 

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