Legislature Considers Tax Exemptions for Residential Housing

The "Columbus Park" bill that came out of the Legislative Council’s Special Committee on Tax Exemptions for Residential Property (Columbus Park) was introduced into the Assembly on July 21, 2005 as AB 573. It was referred to the Assembly Committee on Urban and Local Affairs, which held a public hearing in October. The bill revises and eliminates the exemption from property tax for certain property and use of income from certain tax-exempt leased property.

The Assembly Committee on Urban and Local Affairs held a public hearing for AB 573 in mid-October of 2005. On February 9, 2006, the committee recommended AB 573 for passage by a vote of 4-3 (with one member absent). Additionally, substitute amendments were introduced on January 5th and February 16th, although the committee recommended the bill without making any amendments.

The Wisconsin Jewish Conference has monitored the committee’s work closely because of its potential impact on non-profit housing for low-income residents (including units for people with disabilities and the elderly), some of which are operated by Jewish social service organizations. We believe the changes proposed in AB 573 will not cause the types of housing we are concerned with to be subject to the property tax.

Below is some background and a summary of the bill.

The Joint Legislative Council formed a study committee called the "Special Committee on Tax Exemptions for Residential Property (Columbus Park)." The committee was charged with studying issues surrounding the property tax exemption for property leased as residential housing, including: (1) the impact of the Wisconsin Supreme Court's decision in Columbus Park Housing v. City of Kenosha (2003) on the exemption; (2) the effect of the exemption on: municipalities, property taxpayers, residents of tax-exempt housing, the availability of financing for development of low-income housing, and benevolent activities of tax-exempt organizations; and (3) any other issues the committee considers relevant. The committee was directed to develop and recommend legislation relating to these issues as it finds appropriate.

The committee began its work in late September 2004 and held its final meeting on April 11, 2005. In June, the Joint Legislative Council voted to accept the committee's report and proposed legislation for introduction into the Legislature. This update gives some background on the issue, summarizes the committee's recommendation and includes a link at the bottom to the committee's webpage, which includes links to the report and proposed legislation. Much of the information below is excerpted from the report.

Background

Currently, there are numerous exemptions from the property tax for both real and personal property. The exemption that was the subject of study by the Special Committee generally exempts property owned and used exclusively by educational institutions, churches, and religious, educational or benevolent associations, including benevolent nursing homes and retirement homes for the aged, women's clubs, historical societies, and certain library associations and fraternal societies.

In 2003, a Wisconsin Supreme Court case and subsequent legislation changed the exemption, making in more confusing and potentially difficult for non-profit housing providers to qualify.

Prior to this upheaval, the law provided that if property that was exempt from the property tax was leased, the property retained its tax exemption only if three requirements were met:

• The lessee (the person to whom the property is leased) would be exempt from paying property tax if the lessee owned the property. [s.70.11 (intro.), Stats.] This requirement is commonly referred to as the "lessee identity" requirement.
• The lessor (the person who owns the property) uses all of the leasehold income for maintenance of the leased property or construction debt retirement of the leased property, or both. [s. 70.11 (intro.), Stats.] This requirement is commonly referred to as the "rent use" requirement.
• The lessee does not discriminate on the basis of race. [s. 70.11 (4), Stats.]

In 2003, the Wisconsin Supreme Court decided Columbus Park Housing Corporation v. City of Kenosha, 267 Wis. 2d 59, 671 N.W.2d 633 (2003) ("Columbus Park"). In that case, a dispute arose over whether the Columbus Park Housing Corporation (the Housing Corporation), was exempt from property taxes under Wisconsin law.

The City of Kenosha agreed that the Housing Corporation was a benevolent association within the meaning of the law, but argued that the statutes nevertheless required it to meet the rent use requirement and the lessee identity condition in order to maintain its tax exemption when it leased property to low-income families.

Apparently, until the City of Kenosha raised the issue, those requirements were generally not imposed upon tax-exempt property leased to an individual by a benevolent association and property taxes were not assessed against property utilized in that manner.

The Court held that the rent use and lessee identity conditions do apply to tax-exempt property leased to individuals. Specifically, the Court stated that property owned by the Housing Corporation was not entitled to the exemption because it did not meet the "lessee identity" requirement. In other words, because the low-income tenants would not be entitled to the exemption if they owned the property themselves, the property was not entitled to the exemption when it was leased to the tenants.

Although the Court also found that the rent use requirement applied to the property as well, it was not necessary for the Court to analyze whether the Housing Corporation met that requirement once it concluded that it failed to meet the lessee identity requirement.
In response to the Court's decision, the Legislature passed 2003 Act 195.

The 2003 legislation did the following:

• Exempted residential housing from the "lessee identity" requirement.
• Directed the Legislative Council staff to study the effect of Columbus Park on property tax exemptions for property that is leased, pursuant to s. 70.11 (intro.), 2001 Stats., and as affected by the bill. The bill required the Legislative Council staff to report its findings, conclusions, and recommendations to the Legislature no later than December 15, 2004.

2003 Act 195 did not amend the "rent use" requirement. Therefore, tax-exempt property that is leased as residential housing remains subject to the statutory requirement that all of the lease income must be used for "maintenance of the leased property, construction debt retirement of the leased property, or both." This requirement is difficult to meet, especially for housing operations that provide services to people with disabilities or the elderly in order to avoid unnecessary institutionalization and allow them to age in place.

It is in this context that the committee began its work. An important consideration underlying the committee's activity is the belief that there are many "high-end," luxury senior housing units that are operated by non-profits that should not be receiving the exemption because they are not really "benevolent" operations within the spirit of the statutory tax exemption. How to tax these types of facilities, while leaving the exemption in place for those truly worthy of an exemption, occupied much of the committee's time.

Recomendation

The legislation proposed by the committee, titled "WLC: 0186/2" and now embodied in AB 573, does all of the following:

• Revises the property tax exemption for residential property owned by a benevolent association by eliminating the general exemption for this type of property and, instead, specifying that the following types of residential property owned by a benevolent association are exempt from property taxes:
  1. Nursing homes.
  2. Community-based residential facilities.
  3. Adult family homes.
  4. Residential care apartment complexes.
  5. Domestic abuse shelters.
  6. Homeless shelters and transitional housing.
  7. Low-income housing.
  8. Alcohol and other drug abuse facilities.
  9. Housing for the disabled.
• Provides that all other residential property owned by a benevolent association is subject to the property tax.
• Provides that nonresidential property owned by a benevolent association remains exempt from property taxes as under current law.
• Revises the "rent use" provision in current law, which requires that to maintain its tax-exempt status, when tax-exempt property is leased, the lease income must be used for maintenance of the leased property, construction debt retirement, or both. The draft provides that for residential housing leased by a benevolent or religious association or a church, the lease income may be used to further the benevolent or religious activities of the association or church. This provision applies retroactively to property tax assessments as of January 1, 2003.

The bill draft, report and related documents are posted on the Special Committee's website.