Feldman Law Office recently represented a charitable organization in a property tax abatement case regarding a senior living facility in Massachusetts.

This was an appeal of a denial by the board of assessors of a Massachusetts municipality of an application for a tax abatement regarding a living facility containing low income elderly housing. The facility had HUD Section 202 financing (Supported Housing for the Very Low Income Elderly Program).

The municipality denied the application for an abatement claiming that our client was not entitled to tax exempt status under Massachusetts General Laws, Chapter 59, Section 5, Clause Third (SClause Third ). The municipality argued that, because the property was leased to individual tenants, the charitable organization did not occupy the premises.

Clause Third, states that the following property shall be exempt from taxation:

S[R]eal estate owned by or held in trust for a charitable organization and occupied by it or its officers for the purposes for which it is organized. 

The test for qualification of tax exempt status under Clause Third is two fold. First, an organization must prove that it is a charitable organization, and demonstrate that its operations are for the benefit of the community at large, i.e., it must pass the Scommunity benefit test.  Second, an organization must prove that it occupies the property, i.e., it must pass the Soccupancy test. 

Our client was exempt from Federal income taxation under Section 501(c)(3) of the Internal Revenue Code. In addition to being exempt from Federal income taxation as a charitable organization, our client needed to demonstrate the organization provide a public benefit to a broad, rather than a limited, segment of the population.

As the Supreme Judicial Court has stated:

SAn organization Roperated primarily for the benefit of a limited class of persons,” such that Rthe public at large benefit[s] only incidentally from [its] activities is not charitable.” 

Western Mass. Lifecare Corp. v. Assessors of Springfield, 434 Mass. 96, 104 (2001). In Western Mass., the Court acknowledged that there was no Sprecise number  of persons who must be served to meet this test. The Court went on to state that, however large or small the group of persons might be, membership in the class must be Sfluid  and must be Sdrawn from a large segment of society or all walks of life.  Id.

The standards enunciated by the Supreme Judicial Court in Western Mass. have come to be known as the Scommunity benefit test,  which essentially requires a determination of the breadth of the population which receives services from the institution or facility in question. In the case of our client, residents at the facility were drawn from numerous communities in the greater metropolitan area. The public demand for the facility by a wide range of low income senior citizens met the longstanding measure of Scommunity benefit. 

Having succeeded in proving that our client was a charitable organization, the remaining challenge before us was proving that our client occupied the property.

Massachusetts case law has both limited and expanded the tax exempt status of charitable organizations whose property is occupied by individual residents. In Charlesbank Homes v. Boston, 218 Mass. 14 (1914), the Appeals Court ruled that an apartment building owned by a charitable organization was not exempt from property taxes under Clause Third because the occupants of the building were tenants, and their rights to the premises as tenants were exclusive of the property owner so long as they paid their rent and were not in violation of their lease agreements. In Charlesbank, the Court determined that the residents had such an interest in their individual apartments that they were Sstrictly tenants  and were themselves the occupants of the facility, not the admittedly non-profit corporation. In John Bertram House of Swampscott, Inc. v. Swampscott Assessors (ATB 2006), the Appellate Tax Board held that residents had a Sprotected right to live in their own units  and therefore Soccupied  the premises. Consequently, the ATB held that the owner did not occupy the premises.

Ninety-five years after Charlesbank, the Appeals Court exercised a more liberal approach regarding the issue of residential use of a property owned by a charitable organization. In Mary Ann Morse Healthcare Corp. v. Board of Assessors of Framingham, 74 Mass. App. Ct. 701 (2009), the Court reversed a denial of a petition for an abatement by the Appellate Tax Board.

In the Morse case, the owner provided extensive services to the residents of an assisted living facility who suffered from Alzheimer”s disease and dementia. Common areas of the building were continually used by the owner”s staff. However, the ATB looked to the statutory rights of the residents and determined that they had rights under Massachusetts law entitling them to rights as tenants, precluding the owner from claiming occupancy as well.

In its assisted living facility, the owner in the Morse case was required to comply with Massachusetts General Laws, Chapter 19D (SChapter 19D ). Chapter 19D, Section 9, entitled SResident Rights,  provides that Severy resident of an assisted living residence shall have a right to privacy within the resident”s unit, subject to rules of the assisted living residence reasonably designed to promote the health, safety and welfare of residents… to not be evicted from the assisted living residence except in accordance with the provisions of landlord-tenant law as established by…  Chapter 186 or Chapter 239.

Chapter 186 is entitled SEstates for Years and At Will  and sets forth in twenty-one (21) sections various rights and obligations of landlords and tenants for estates for years, estates at will, and estates at sufferance. Chapter 239 is entitled SSummary Process for Possession  and, in Section 1, for example, refers to summary process actions where the possession of the tenant becomes unlawful for various reasons and the landlord is entitled to recover possession through a summary process action in court.

Notwithstanding all of the tenant-like protections of the residents in the Morse case, the Appeals Court reversed the ATB and found that the facility was entitled to a charitable tax exemption. The Appeals Court analyzed the entitlement on the basis of the community benefit test and the occupancy test.

In reversing the Appellate Tax Board”s decision, the Appeals Court ruled that SMorse”s indisputable performance of a traditional pubic charitable function  entitled it to qualification for tax exemption under the community benefit test.

In considering the occupancy test, the Appeals Court questioned the ATB”s conclusion that the individual residents occupied the premises and that the owning entity could not have been the occupant for purposes of Clause Third. In reaching its conclusion, the ATB relied heavily on Chapter 19D which it characterized as providing residents the legal status of tenants. In addition, the ATB pointed to various provisions in the residency agreement, specifically the privacy rights conferred on the residents, the expectation that residents would carry their own insurance, and the residents” entitlement to have their recommendations and grievances addressed by Morse.

The Appeals Court held that the owner satisfied the occupancy test because of the owner”s shared rights to the premises with the residents, and that Soccupancy need not be exclusive, and that the occupancy test for property tax exemption is nowhere so described. 

As was the situation in Morse, residents of our client”s facility did not have exclusive occupancy. The residents entered into leases which required our client to commence judicial proceedings to evict a resident, much the same as for the Chapter 19D protections for residents in Morse. However, our client”s representatives were allowed to enter the residents” apartments under various circumstances, such as for repairs to the apartment and to monitor the health of a resident. The staff of the facility was continually present and the occupancy by the residents was not exclusive.

Since the Morse decision, the ATB has granted a full exemption to other HUD low income elderly housing projects. In October 2011, the ATB granted a full exemption in The Congregation of Sisters of St. Joseph of Springfield, Inc. v. Board of Assessors of the City of Holyoke. The circumstances in Holyoke constitute a fact pattern quite similar to our client”s circumstances. The essence of the Holyoke case is that occupancy by a charitable organization does not have to be exclusive of tenancies of residents.

Our firm took the position that the fact that residents had rights as tenants was not decisive in determining occupancy under Massachusetts General Laws, Chapter 59, Section 5, Clause Third, and that the property could be occupied by both a non-profit entity and residents. Our client settled the case with the municipality prior to a trial with the ATB.