250 Shoup Mill, L.L.C. v. Testa (Slip Opinion) , 147 Ohio St. 3d 98 ( 2016 )

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 250
Shoup Mill, L.L.C. v. Testa, Slip Opinion No. 2016-Ohio-5012.]
NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
formal errors in the opinion, in order that corrections may be made before
the opinion is published.
SLIP OPINION NO. 2016-OHIO-5012250 SHOUP MILL, L.L.C. , APPELLANT, v. TESTA, TAX COMMR., APPELLEE.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as 250 Shoup Mill, L.L.C. v. Testa, Slip Opinion No.
2016-Ohio-5012.]
Taxation―Real property―“Public schoolhouse” exemption―Former R.C.
5709.07(A)(1) ―Exclusive-charitable-use exemption―R.C. 5709.12(B) and
5709.121―Taxpayer-lessor cannot claim vicarious exemption based on
nature of activities of lessee community school―Record shows evidence of
view to profit in form of surpluses realized through leases―Denial of claims
for exemption affirmed.
(No. 2015-0340—Submitted April 19, 2016—Decided July 20, 2016.)
APPEAL from the Board of Tax Appeals, No. 2011-2226.
____________________
O’NEILL, J.
{¶ 1} The appellant property owner, 250 Shoup Mill, L.L.C. (“Shoup”),
applied to exempt real property used as a public “community school” for tax year
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2010. Shoup challenges a decision of the Board of Tax Appeals (“BTA”) that
affirmed the tax commissioner’s denial of exemption to the property that Shoup
leased to the community school. Shoup itself is wholly owned by a 501(c)(3)
nonprofit corporation whose members include the very community school to whom
the property is leased. Shoup argues that the nonprofit and charitable character of
the ownership arrangement decisively distinguishes this case from Anderson-
Maltbie v. Levin, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, and that
that arrangement should qualify the property for exemption under the public-
schoolhouse exemption in former R.C. 5709.07(A)(1). Shoup additionally claims
exemption for exclusive charitable use under R.C. 5709.12(B) and 5709.121.
{¶ 2} Both the tax commissioner and the BTA rejected the exemption
claims primarily on the grounds that the record showed a “view to profit” on the
part of the lessor. The gravamen of Shoup’s argument on appeal is based on the
financial arrangement involving Shoup, New Plan Learning, Inc., and the various
community schools supported by New Plan who have similar leases on other
properties. Under this arrangement, any excess of rental income is used to subsidize
the operations of those community schools. Thus, the argument goes, Shoup and
New Plan, the sole member of its L.L.C., are nonprofit entities that function as
nothing more than instrumentalities of the community schools that they serve.
Because the income realized by Shoup and New Plan consists of nothing but
payments from the very community schools on whose behalf those funds are
expended, or to whom they are later distributed, this scheme does not involve a
“view to profit.” Through its corporate affiliation and financial interconnection
with the community school, Shoup seeks to derive a tax benefit from the public
educational nature of its lessee.
{¶ 3} To accept this argument would require us to view the landlord as an
adjunct of the community-school tenant. The argument thereby runs into an
insuperable legal barrier: the case law that bars a claim of “vicarious exemption,”
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meaning that the property owner’s entitlement to the exemption must be judged by
its own activities, and not by the activities engaged in by the lessee of the property.
Under our case law, Shoup is a lessor and nothing more and must be judged on the
basis of that activity alone.
{¶ 4} Although Shoup contends that the surpluses realized through the
leases should not be viewed as profit and that no intent to profit has been shown,
the BTA, in light of the record that is now before us, found that a view to profit was
indeed in evidence. Because the findings of fact lie within the BTA’s discretion,
and because the record contains sufficient support for its view-to-profit finding, we
affirm the decision of the BTA.
THE PUBLIC-SCHOOLHOUSE AND EXCLUSIVE-CHARITABLE-USE EXEMPTIONS
{¶ 5} The first statute at issue here is former R.C. 5709.07(A)(1), which
provided as follows:
(A) The following property shall be exempt from taxation:
(1) Public schoolhouses, the books and furniture in them,
and the ground attached to them necessary for the proper occupancy,
use, and enjoyment of the schoolhouses, and not leased or otherwise
used with a view to profit.
2006 Am.Sub.S.B. No. 66, 151 Ohio Laws, Part II, 2868, and Part III, 4397.
“Public schoolhouses” was undefined.
{¶ 6} In 2011, the General Assembly amended the exemption extensively.
Am.Sub.H.B. No. 153, 129th General Assembly. The amendment (1) eliminated
the phrase “public schoolhouses,” opting instead for language exempting “[r]eal
property used by a school for primary or secondary education purposes,” R.C.
5709.07(A)(1), (2) defined “school” as a public or nonpublic school and explicitly
included community schools in the definition of “public school,” R.C.
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5709.07(A)(1)(a) and (b), and (3) eliminated the reference to a “view to profit.”
But the new language was not in effect for tax year 2010, which is the tax year
before the court in this appeal.
{¶ 7} Shoup also claims entitlement to the expanded scope of exemption for
exclusive charitable use of the property under R.C. 5709.12(B) and 5709.121.
Whereas R.C. 5709.12(B) provides exemption for property “belonging to
institutions that is used exclusively for charitable purposes,” R.C. 5709.121(A)
provides a broader scope of exemption when the property owner qualifies as a
charitable or educational institution.
FACTUAL BACKGROUND
The property’s ownership and use
{¶ 8} The property at issue is a 41,000-square-foot building located on a
3.7-acre parcel, which was acquired and renovated for use as the Horizon Science
Academy-Dayton High School, Inc., an Ohio community (i.e., charter) school.
Under a routine arrangement for the Horizon schools, the property is owned by a
nonprofit L.L.C. named after the street address: 250 Shoup Mill, L.L.C., in this
instance. Shoup itself had a single member, New Plan, which itself is a nonprofit,
501(c)(3) qualified corporation. Shoup qualified as a “disregarded entity” for
purposes of federal taxation. See 26 C.F.R. 301.7701-2(c)(2). As a result, Shoup
did not separately obtain 501(c)(3) status or file separate IRS returns from the sole
member, New Plan; instead, Shoup’s activity as lessor appeared on the Form 990
tax returns for exempt organizations filed by New Plan as activity of New Plan
itself.
{¶ 9} The community school itself is also a nonprofit 501(c)(3) entity. It,
along with the other community schools who are tenants of L.L.C.s similar to
Shoup, control New Plan as its directors. Thus, the community school/tenants and
their landlords are part of a nonprofit, 501(c)(3) “loop” whereby the landlords
provide real estate services on behalf of the community schools. Those services
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include identifying sites for the community schools, qualifying and arranging for
construction or renovation loans for the projected schools, and collecting rent in
amounts sufficient to make loan payments.
{¶ 10} New Plan’s president explained the arrangement as follows:
We are forming a new charter school. A charter school gets
their authorization from the sponsor authorizer. This is a brand new
entity. It does not have any track record, no financial history, no
operating history, and no money. They go out on the field and they
need this facility.
***
If they go and talk to the banks, lenders, financial
institutions, they ask for three years’ of tax returns. They ask for a
down payment. The school doesn’t have neither [sic].
***
* * * They need somebody to help them out. New Plan
Learning is an organization. It is controlled by―the charter school
tenants comes [sic] into play here.
{¶ 11} In seeking out facilities for a projected community school, New Plan
would arrange for loans and supervise construction. It would enter into a lease
under which the rent was computed to cover the real estate costs, particularly of
paying the loan with a surplus amount, the debt coverage ratio, demanded by the
lender. The rent was set at the minimum possible amount. If a tenant school ran
into financial difficulty, New Plan deferred rent payments. No tenant was ever
notified of past-due rent, hit with a late charge, or evicted for nonpayment. The
contrary is true: New Plan would provide affirmative assistance during a troubled
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period. New Plan would defer rent or even write it off; in one instance, New Plan
made a cash donation to help with financial difficulties.
{¶ 12} The lease between Shoup and Horizon Science Academy-Dayton
High School, Inc., has a ten-year term with options for three five-year renewals. It
provides for a base rent of $33,806.25 per month, with a 3 percent escalation per
year. It has typical commercial lease terms such as fees for late payments and
payment-default provisions.
{¶ 13} The record contains financial statements as well. The “gross rental
income” of New Plan (from all six properties leased to community schools) for
fiscal 2011 was $2,921,965. The tax commissioner asserts a surplus of $150,412
for Shoup for 2011, but a review of the financial statement indicates that the number
is a sum of certain expense amounts, not a net surplus figure.
{¶ 14} The balance sheet indicates a modest surplus overall. The
revenue/expense statement for fiscal year 2010 showed an upward “change in net
assets” of $168,119, while the 2011 statement showed an upward change of
$342,402. Those numbers relate to all of New Plan’s holdings of community-
school properties, a total of six properties with a total land value in 2011 of
$3,100,288 and a total building value of $19,004,889. The financial statements
show modest salary expenses for New Plan’s employees: a total for fiscal 2010 of
$64,980 and for 2011 of $114,432. For tax year 2011 (New Plan’s fiscal year
2012), the Form 990 tax return shows that New Plan’s president’s salary was
$80,833.
Tax commissioner proceedings
{¶ 15} Shoup filed its application for exemption on December 10, 2010,
seeking exemption with regard to school use beginning August 31, 2009. The
application cited R.C. 5709.121 as the proposed basis for exemption, but the tax
commissioner’s final determination considered not only a charitable-use exemption
but also a public-schoolhouse exemption under former R.C. 5709.07(A)(1). As for
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the charitable-use exemption, the commissioner rejected the claim based on his
finding that the property was used “with a view to profit through leasing at a
substantial rent,” and the property owner could not itself be deemed a “charitable
institution” for purposes of applying R.C. 5709.121. By the same token, Shoup
could not qualify the property for exemption as a public schoolhouse under former
R.C. 5709.07(A)(1) because, under the holding of Anderson/Maltbie, the fact that
Shoup, “though nominally nonprofit, is primarily acting as a landlord collecting
substantial market-rate rent” defeated the claim for exemption.
The BTA proceedings
{¶ 16} Shoup appealed to the BTA. The BTA held a hearing in conjunction
with two other hearings in related cases involving properties leased to Horizon
community schools. At the hearing, Shoup presented the testimony of New Plan’s
president along with numerous exhibits.
{¶ 17} In its January 27, 2015 decision, the BTA agreed with the
commissioner and rejected the charitable and public-schoolhouse claims of
exemption. The BTA first rejected the claim of charitable exemption, finding that
leasing to a charitable institution did not constitute a charitable use by the property
owner. BTA No. 2011-2226, 2015 WL 731766, *2 (Jan. 27, 2015). Next, the BTA
rejected the claim that Shoup could qualify as an “educational institution” based on
the activities of the lessee, the community school that conducted its educational
activity on the property. Id.{¶ 18} Finally, the BTA sustained the tax commissioner’s rejection of the
public-schoolhouse exemption claim on the grounds that the schoolhouse property
was leased with a view to profit. Although the BTA acknowledged the testimony
of New Plan’s president that, in the BTA”s words, “the property is leased at a rate
expected to cover the mortgage payments, construction costs, soft costs, debt
service coverage ratio, and operating expenses,” the BTA nonetheless found that
New Plan “does profit from its leases.” Id. at *1, 3. The BTA stated that “[w]hile
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[New Plan] appears to use the profits to subsidize the operations of other tenant
charter schools, it is not the use of any profits that determines the exempt status of
the subject properties.” Id. at *3, citing Hubbard Press v. Tracy, 67 Ohio St.3d
564, 566, 621 N.E.2d 396 (1993). The board found it significant that “[i]t does not
appear that any excess revenues from a single charter school are held for the future
benefit of that certain school,” but rather that “excess revenues are distributed
among all of New Plan’s tenant schools,” with the result that the property’s use was
“with a view to profit.” Id. For these reasons, the BTA concurred in denying
exemption under former R.C. 5709.07(A)(1).
STANDARD OF REVIEW
{¶ 19} In reviewing a decision of the BTA, we do not sit as “a super BTA
or a trier of fact de novo.” EOP-BP Tower, L.L.C. v. Cuyahoga Cty. Bd. of Revision,
106 Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d 686, ¶ 17, citing Youngstown Sheet
& Tube Co. v. Mahoning Cty. Bd. of Revision, 66 Ohio St.2d 398, 400, 422 N.E.2d
846 (1981). “The BTA is responsible for determining factual issues and, if the
record contains reliable and probative support for [the BTA’s] determinations,” we
will affirm them. Am. Natl. Can Co. v. Tracy, 72 Ohio St.3d 150, 152, 648 N.E.2d
483 (1995).
A VIEW TO PROFIT DEFEATS A CLAIM OF EXEMPTION UNDER THE PUBLIC-
SCHOOLHOUSE AND CHARITABLE-USE PROVISIONS
{¶ 20} As a matter of law, the existence of a “view to profit” in leasing the
property to the community schools defeats Shoup’s claim for exemption under any
of its alternative theories. First, a “view to profit” in the lease defeats the public-
schoolhouse exemption under the express terms of former R.C. 5709.07(A)(1).
Anderson/Maltbie, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547. Second,
a “view to profit” in connection with the lease forecloses any claim that Shoup’s
property use can qualify as an exclusive charitable use directly under R.C.
5709.12(B). Benjamin Rose Inst. v. Myers, 92 Ohio St. 252, 110 N.E. 924 (1915),
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syllabus (real estate belonging to a charitable institution that is “rented for
commercial and residence purposes” is not exempt, although the income arising
from such use is devoted wholly to the purpose of the charity”); Northeast Ohio
Psych. Inst. v. Levin, 121 Ohio St.3d 292, 2009-Ohio-583, 903 N.E.2d 1188,
¶ 15-16. Third, if Shoup cannot demonstrate that its own use of the property as
lessor is charitable, it cannot qualify as a “charitable institution” under R.C.
5709.121 because the ownership and leasing of the property is Shoup’s only
activity. See Northeast Ohio Psych. at ¶ 14; Rural Health Collaborative of S. Ohio,
Inc. v. Testa, 145 Ohio St.3d 430, 2016-Ohio-508, 50 N.E.3d 486, ¶ 23 (“The
determination whether a property owner qualifies as a charitable institution under
R.C. 5709.121 requires examination of the ‘core activity’ of the institution and
determining whether that activity qualifies as charitable for property-tax
purposes”).
{¶ 21} In a case like the present one, we consider the BTA’s finding of a
view to profit “primarily a determination of fact that merits our deference.”
Cuyahoga Cty. v. Testa, 145 Ohio St.3d 157, 2016-Ohio-134, 47 N.E.3d 814, ¶ 32.
The BTA acknowledged the testimony of New Plan’s president that rent amounts
were calculated to cover expenses, but a cursory review of the financial statements
confirms that the rent at the Shoup Mill location, and presumably the other locations
as well, exceeded the monthly expenses associated with the property.
{¶ 22} Specifically, the financial statements in the record reveal that Shoup
Mill was the payor on a 25-year note for a principal amount of $3,375,000 and that
the monthly rent for the Shoup property started at $33,806.25 and amounted during
fiscal year 2011 to $34,651.42 per month. For fiscal year 2011, the monthly
mortgage-loan payment was $22,979. Even if we assume a debt-service coverage
requirement imposed by the lender of 1.2 percent, the total mortgage-loan-related
expense per month is no more than 80 percent of the rent amount. Although New
Plan incurred additional expenses, the allocation of such expenses to the Shoup Mill
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property on a monthly basis adds at most a few thousand dollars to the expense side
of the ledger; the rent amount still substantially exceeds those expenses. Moreover,
the financial statements indicate a steady increase in “net assets” from year to year
for New Plan.
{¶ 23} It is well settled that in the context of a claim for charitable
exemption, profit is defined as the excess of price over cost. Am. Soc. for Metals
v. Limbach, 59 Ohio St.3d 38, 40, 569 N.E.2d 1065 (1991); see also Seven Hills
Schools v. Kinney, 28 Ohio St.3d 186, 187-188, 503 N.E.2d 163 (1986), quoting
Webster’s New International Dictionary 1976 (2d Ed.1960) (profit is the “ ‘excess
of income over expenditure, as in a business or any of its departments, during a
given period of time’ ”). This case law plainly construes as “profit” the revenue
generated by a nonprofit entity from one activity in order to fund another, distinctly
charitable, activity.
{¶ 24} Given that it was Shoup’s burden to prove its entitlement to an
exemption, Newman v. Levin, 120 Ohio St.3d 127, 2008-Ohio-5202, 896 N.E.2d
995, ¶ 30, the BTA was justified in requiring Shoup to show with specificity that
the rent did not typically generate a surplus over expenses. And it was neither
unreasonable nor unlawful for the BTA to find a view to profit under these
circumstances.
{¶ 25} A finding of a view to profit in this case is consistent with this court’s
decision in Anderson/Maltbie, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d
547. “If the lease is intended to generate profit for the lessor, the property does not
qualify for exemption; similarly, the property does not qualify for exemption if the
lessee’s use is intended to generate profit.” Id. at ¶ 33. It follows that in applying
the public-schoolhouse exemption, the BTA properly looked at whether the lessor
conducted its operations with a view to profit as a separate issue from whether the
community school itself did so.
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{¶ 26} Our analysis receives support from the case law that bars a claim of
“vicarious exemption,” meaning that the applicant for exemption must prove that
its own activities qualify as exempt; it may not rely upon the activities of its
customers or, as here, its lessees. See OCLC Online Computer Library Ctr., Inc. v.
Kinney, 11 Ohio St.3d 198, 200-201, 464 N.E.2d 572 (1984), citing Joint Hosp.
Servs. v. Lindley, 52 Ohio St.2d 153, 370 N.E.2d 474 (1977).
{¶ 27} In OCLC, the applicant sought to exempt its real estate, relying in
part upon the assertion that its fee-paying customers were public libraries that
benefited from the purchase of its services, which in turn benefited the general
public. We rejected the argument on the grounds that it “simply constitutes an
attempt by OCLC to obtain a vicarious charitable exemption by virtue of the
activities of its customers.” Id. at 200.
{¶ 28} In Joint Hosp. Servs., we addressed a claim for a sales-tax charitable
exemption in which several nonprofit hospitals pooled their resources to create a
separate nonprofit entity that provided laundry and linen service for the hospitals
and several other nonprofit charitable organizations, such as nursing homes. The
jointly controlled entity sought exemption for its own purchases on the theory that
it qualified as a nonprofit operated exclusively for charitable purposes on account
of “its relationship to the health care functions of the institutions it serves,” that
relationship being “so immediate, intertwined and necessary, that it effectively
engages in the alleviation of illness, disease, or injury.” 52 Ohio St.2d at 155, 370
N.E.2d 474. We rejected the claim, holding that “[a]ppellant’s own functions fail
the [charitable purpose] test” inasmuch as the “laundry and linen service in itself
neither improves health through alleviating illness, disease or injury, nor constitutes
managing a home for the aged.” Id.{¶ 29} The resemblance of Joint Hosp. Servs. to Shoup’s claim is
indisputable; here, the community schools in some sense pool their resources so
that excess revenues may be used by New Plan to subsidize all of its tenant schools.
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Under OCLC and Joint Hosp. Servs., however, Shoup cannot qualify as charitable
based on New Plan’s activities, and under Anderson/Maltbie, Shoup cannot qualify
for public-schoolhouse exemption so long as it is operated with a view to profit.
{¶ 30} Shoup also argues that any surpluses attained through the leases do
not establish the Shoup Mill property as being held with a “view to profit,” because
the rent is held to a minimum level. But as discussed, the BTA plainly exercised
its discretion as the finder of fact and found Shoup’s proof insufficient.
{¶ 31} Nor can Shoup salvage its claim by drawing the distinction between
an “intent to profit” on the one hand and surpluses that occur “unexpectedly and
fortuitously” on the other hand. Despite Shoup’s statements disclaiming an intent
to profit, the BTA is entitled to draw reasonable inferences from the evidence
before it, and we will reverse its findings of fact “only when there is a total absence
of evidence to support a particular finding.” HealthSouth Corp. v. Testa, 132 Ohio
St.3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 14. As we have noted, the record
before us contains evidence of a view to profit. Shoup lays great store by New
Plan’s ability and willingness to grant rent deferral or rent forgiveness to the
community schools, but in the end its ability to do so depends upon the very excess
of revenue over expense that, as profit, disqualifies it from exemption.
{¶ 32} The same body of case law leads us to reject the claim that Shoup
may qualify as an “educational institution” for purposes of availing itself of the
expanded scope of charitable-use exemption under R.C. 5709.121. Quite simply,
Shoup itself is a lessor and does not engage in educational activity. The prohibition
of “vicarious exemptions” bars Shoup from relying on the activities of its lessee as
a basis for claiming an exemption of its own.
{¶ 33} Finally, the ownership of the property will vest, after the acquisition
and renovation loans are paid off, the mortgages released, and the leases have
expired, in New Plan and Shoup, its L.L.C., rather than in the community school
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itself. This fact also supports the BTA’s finding of a view to profit in the lease
transaction.
CONCLUSION
{¶ 34} For the foregoing reasons, we affirm the decision of the BTA.
Decision affirmed.
O’CONNOR, C.J., and PFEIFER and LANZINGER, JJ., concur.
O’DONNELL, J., dissents in an opinion.
KENNEDY, J., dissents in an opinion that O’DONNELL and FRENCH, JJ., join.
_________________
O’DONNELL, J., dissenting.
{¶ 35} Respectfully, I dissent.
{¶ 36} I would reverse the decision of the Board of Tax Appeals because it
errantly denied the public schoolhouse exemption because the property was not
leased with a view to profit.
_________________
KENNEDY, J., dissenting.
{¶ 37} I respectfully dissent. Our case law and the record in this matter
support a finding that the lease of the property by 250 Shoup Mill, L.L.C., to a
community school is not intended to generate a profit and, therefore, is not
inconsistent with the public-schoolhouse exemption as discussed by this court in
Anderson/Maltbie Partnership v. Levin, 127 Ohio St.3d 178, 2010-Ohio-4904, 937
N.E.2d 547. Therefore, the Board of Tax Appeals erred in affirming the denial of
exemption under the public-schoolhouse exemption, former R.C. 5709.07(A)(1).
2005 Am.Sub.H.B. No. 66, 151 Ohio Laws, Part II, 2868, and Part III, 4397.
Moreover, the majority is improperly extending case law regarding the so-called
“vicarious exemption” in the realm of charitable use to the public-schoolhouse
exemption without support in our precedents. Accordingly, I would conclude that
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the property is entitled to exemption under the public-schoolhouse exemption under
former R.C. 5709.07(A)(1) and reverse.
{¶ 38} In reviewing a BTA decision, this court considers whether the
decision was “reasonable and lawful.” R.C. 5717.04. Under this standard, we
acknowledge that “ ‘[t]he BTA is responsible for determining factual issues and, if
the record contains reliable and probative support for these BTA determinations,’
” we will affirm them. (Brackets sic.) Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-
Ohio-5856, 856 N.E.2d 954, ¶ 14, quoting Am. Natl. Can Co. v. Tracy, 72 Ohio
St.3d 150, 152, 648 N.E.2d 483 (1995). On the other hand, we “ ‘will not hesitate
to reverse a BTA decision that is based on an incorrect legal conclusion.’ ” Id.,quoting Gahanna-Jefferson Local School Dist. Bd. of Edn. v. Zaino, 93 Ohio St.3d
231, 232, 754 N.E.2d 789 (2001).
{¶ 39} Contrary to the majority’s assertion, the BTA’s decision was not
“reasonable and lawful.” While findings of fact lie within the BTA’s discretion,
we are not to blindly rubberstamp them. Instead, we are to ensure that the record
contains reliable and probative support for the BTA determinations. Here, the
record does not support the BTA’s factual findings, and its determination was based
on an incorrect legal conclusion.
{¶ 40} In Anderson/Maltbie, we stated that “property ‘appropriated to the
support of education for the benefit of the public without any view to profit’
qualifies for [the public-schoolhouse] exemption.” 127 Ohio St.3d 178, 2010-
Ohio-4904, 937 N.E.2d 547, at ¶ 30, quoting Gerke v. Purcell, 25 Ohio St. 229, 247
(1874). When the property at issue is subject to a commercial for-profit lease,
whether the exemption applies despite the restriction that the property may not be
used with a view to profit requires examination of both lessor and lessee. Id. at
¶ 33. “If the lease is intended to generate profit for the lessor, the property does not
qualify for exemption; similarly, the property does not qualify if the lessee’s use is
intended to generate profit.” Id.
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{¶ 41} Accordingly, in the current matter, the focus is on whether Shoup
Mill intended for the lease to generate a profit. The record reveals that it did not,
and the fact-finding and legal determinations reaching the contrary conclusion are
unreasonable and unlawful.
{¶ 42} First, the tax commissioner’s finding that Shoup Mill was collecting
substantial market-rate rent is devoid of any evidentiary basis. In fact, the president
of New Plan Learning, Inc. (“New Plan”) answered “no” when asked whether New
Plan or Shoup Mill had “scrutinized the market” to determine the rent. Instead, he
testified that “we are driven by the school’s needs and what the lender is offering.”
{¶ 43} Second, the BTA’s finding that the mere existence of a surplus
establishes the intent to realize a profit is a legal error. While the record does
support that some net surplus was realized during a couple of years for which
documentation was supplied, such surpluses qualify as de minimus; even the
majority recognizes it as a “modest surplus.” Majority opinion at ¶ 14.
{¶ 44} In concluding that the mere fact that any profit is realized qualifies
as an intent to generate a profit, the majority disregards our case law in which we
have recognized that when the overriding purpose of a property is charitable or
public, minor surpluses do not defeat the exemption for charitable and/or public
use, particularly when those surpluses merely help finance the very activity that is
public or charitable in character. See Cincinnati v. Testa, 143 Ohio St.3d 371, 2015-
Ohio-1775, 38 N.E.3d 847, ¶ 24 (minor surplus in fund for city golf course “does
not constitute ‘profit’ that would violate the limitation of R.C. 5709.121(A)(2)”);
South-Western City Schools Bd. of Edn. v. Kinney, 24 Ohio St.3d 184, 186, 494
N.E.2d 1109 (1986) (renting of apartment on public golf course, operation of pro
shop, and operation of snack shop did not violate “view to profit” limitation); Girl
Scouts-Great Trail Council v. Levin, 113 Ohio St.3d 24, 2007-Ohio-972, 862
N.E.2d 493, ¶ 17-18 (store in Girl Scout headquarters selling scout-related items at
slight profit did not violate “view to profit” criterion).
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{¶ 45} Instructive here is the discussion in Girl Scouts of Bowers v Akron
City Hosp., 16 Ohio St.2d 94, 243 N.E.2d 95 (1968), in support of its holding that
the mere generation of a profit does not necessarily defeat the claim of exemption.
In Bowers, a nonprofit charitable hospital owned an adjacent parking lot that
charged a fee to help defray the cost of maintaining it; the court held that the
generation of a profit by the lot “does not remove it from the statutory category of
exempt property” because “the evidence shows that the parking lot is an essential
and integral part of the hospital’s function and not property used mainly for income
purposes.” Bowers at 96.
{¶ 46} Likewise, the real property acquisition, financing, construction, and
management functions that New Plan and its subsidiaries perform for the
community schools constitute an “essential and integral part” of the community
schools’ own operations; accordingly, the surpluses generated through rental
income do not violate the “view to profit” criterion for the same reason that similar
income did not in the earlier cases. After all, fiscal prudence dictates that New Plan
must maintain its own solvency in order to perform its function of developing and
managing the real estate assets on behalf of its director/clients.
{¶ 47} Moreover, the majority’s reliance on “case law that bars a claim of
‘vicarious exemption’ ” to support the denial of the public-schoolhouse exemption
is inappropriate. An examination of the majority’s supporting authority reveals that
the claims for exemption in those cases were not made under former R.C. 5709.07.
In OCLC Online Computer Library Ctr., Inc. v. Kinney, 11 Ohio St.3d 198, 199,
464 N.E.2d 572 (1984), the taxpayer abandoned its claim for exemption under R.C.
5709.07 and contested only the BTA’s rejection of its claim under R.C. 5709.12.
And in Joint Hosp. Servs., Inc. v. Lindley, 52 Ohio St.2d 153, 370 N.E.2d 474(1977), the claim for exemption was made under R.C. 5739.02(B)(12). Both of
these cases involved exemptions for charitable institutions, not public
schoolhouses, and both involved taxpayers who sought exemptions based upon the
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charitable status of their customers. We rejected the claims, finding that the
taxpayers were not entitled to a vicarious charitable exemption. In neither OCLC
nor Joint Hosp. Servs. did the taxpayer itself qualify as a charitable organization.
See OCLC at 201; Joint Hosp. Servs. at 155.
{¶ 48} In contrast, former R.C. 5709.07(A)(1) limited the schoolhouse
exemption to property “necessary for the proper occupancy, use, and enjoyment of
the schoolhouses, and not leased or otherwise used with a view to profit.” There is
no “used exclusively” language. Instead, the property may not be “used with a view
to a profit.” In a lease situation such as the one at bar, we are required to examine
whether “the lease is intended to generate profit for the lessor.” Anderson/Maltbie,
127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, ¶ 33. Accordingly, since
the focus is on the intention of the lessor, who is the one claiming the exemption,
there is no basis for extending the “vicarious exemption” analysis to the public-
schoolhouse claim in this case.
{¶ 49} Therefore, I would reverse the BTA’s decision and grant the public-
schoolhouse exemption. Accordingly, I respectfully dissent.
O’DONNELL and FRENCH, JJ., concur in the foregoing opinion.
_________________
Eastman & Smith, Ltd., M. Charles Collins, and Graham A. Blume, for
appellant.
Michael DeWine, Attorney General, and Melissa Baldwin and Sophia
Hussain, Assistant Attorneys General, for appellee.
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