By Brian Morrissey, Ragsdale Beals Seigler Patterson & Gray LLP
How municipalities and counties tax medical real estate can vary depending on ownership patterns, location, and a property’s impact on the local economy. Much, however, depends on each fiscal entity’s goals and degree of interest in attracting hospitals, establishing medical centers, expanding commercial areas, or encouraging excellent healthcare locally.
A typical approach to achieving some or all of these goals is for the local government to control ownership. This can be done through outright ownership, where facilities are leased. Governments can also create an economic zone and issue bonds to finance the development of the region. Each of these methods poses problems of property taxation.
In a direct ownership scenario, the government owner is tax exempt. However, the operating and management company that leases the property is subject to tax for its continued operation. This operating business has untaxed intangible value, but will also have on-site assets such as medical equipment that may be taxed under standard code approaches at fair market value. They may also be taxed under a modified fair market value, which is a common incentive designed to entice medical companies to invest.
If the local government chooses a development bond approach, it will create a development district entity to issue the bonds, with the proceeds from the sale of the bonds paying for the construction of the hospital or other facility. A private entity would lease the facilities at the price of the bonds, with the lease payments used to retire the bonds. The provisions of the leases would establish agreed upon assessments for property tax purposes. These valuations can be fixed or adjusted over time. Once the bonds are repaid, the terms of the lease can be extended or changed.
After using one of these favorable property tax techniques to establish a footprint for a district, development, or health care area, the government agency can expand its impact by offering lower taxes in the area. These adjustments would favor medical facilities that support nearby hospitals or medical practices.
For example, a community could use tax breaks to encourage the construction of medical office buildings. If the economic district includes other buildings that would benefit the healthcare industry, it may offer similar tax incentives to encourage the development and use of these facilities. Likewise, such incentives can be used for stand-alone facilities within the economic district.
For governments that do not envision a medical district but want to foster broader access to health care providers, tax policy can create special tax methods without uniformity restrictions. This would encourage small medical investments throughout the community. Examples would include free-standing treatment facilities such as “doc in a box” walk-in clinics, urgent care facilities, and small medical office buildings.
Tax exemption strategies
In Georgia, hospitals can be held in several ways to avoid taxation. First, the government can own the hospital and lease it to a not-for-profit manager or operator. As long as the tenant remains a non-profit organization, the property is tax exempt. If the lease is transferred to a for-profit entity, the tax exemption disappears and the managing or operating entity becomes liable for property tax.
Second, the local government can create an economic development zone using bonds. In all leases created by the bond issuer, property tax liability may be dealt with by contract. This can range from zero liability to points on a sliding scale, and will generally correlate with the phasing out of liability.
Another scenario involves an exempt property that is then acquired by a for-profit operator. In Michigan and Georgia, such a transfer will negate the tax exemption, subjecting the facility to full taxation at its fair market value. There remains the question of a retrocession of operations to an association, which will or will not restore the tax exemption. In Minnesota and Kansas, the property is owned by the government, but the facility must be operated as a nonprofit organization.
In some jurisdictions, hospitals may be a taxing authority. In Texas and Iowa, rural hospital districts may collect a component of the property tax mileage rate. The hospital district then uses this portion of the mileage rate to pay for some of its operating expenses. This allows rural hospitals to maintain operations by spreading the costs across the community, rather than to system users. In recent years, states have tended to reduce property taxes globally, which has reduced revenues for rural health systems in states that allow hospitals to participate in taxation.
Personal property, which is movable property such as medical equipment, can be handled in different ways. If the operation is non-profit, personal taxes are exempt. Liability is more complicated if the owner of the personal property is a for-profit entity operating in exempt property; in such cases, personal tax rates apply.
On the other hand, a non-profit organization can operate in a taxable medical office building, in which case personal property is still exempt. In fact, a building can have multiple tenants, some of which are non-profit and some of which are for-profit. In such a scenario, each business should be reviewed to determine if any personal tax exemptions apply.
Brian Morrissey is a partner at the Atlanta law firm Ragsdale Beals Seigler Patterson & Gray LLP, a Georgia member of the American Property Tax Counsel (APTC), the national membership for property tax attorneys.