Hospitals Beware: Settlement of Morristown Hospital Exemption Case May Result in Municipalities Seeking Real Estate Tax Payments on Formerly Exempt Hospital PropertiesNovember 19, 2015
Hospitals Beware: Settlement of Morristown Hospital Exemption Case May Result in Municipalities Seeking Real Estate Tax Payments on FORMERLY EXEMPT Hospital Properties
Over the last week you have undoubtedly read about the recent case decision and settlement involving Morristown Medical Center’s real estate tax exempt status. Judge Bianco of the Tax Court of New Jersey held with limited exceptions that the entirety of Morristown Hospital was not exempt from real estate taxation. The tax court decision and settlement of the Morristown case should serve as a warning to hospitals throughout the State that municipalities will in all likelihood be seeking similar type payments by way of real estate taxes or in lieu payments. In fact, at this week’s League of Municipalities Conference, taxation of exempt properties were a hot topic of discussion among New Jersey’s Township leaders.
What does all of this mean for the hospitals of New Jersey? Hospitals should pay particularly close attention to their assessment before the upcoming December 1st filing deadline for added/omitted appeals and the regular April 1st tax appeal filing deadline (or May 1st in revalued/reassessed municipalities) and any requests for information received from the municipality. Brach Eichler is uniquely situated in cases like this with a strong health care law background and real estate tax appeals department who has been following the latest developments in this case from the beginning.
For profit physicians have access to and profited from the use of nearly the entirety of the hospital. Since the Court was not provided any way to distinguish where nonprofit activities were carried out by the hospital and for profit activities were carried out by private physicians, with few exceptions (such as the auditorium, fitness center and visitors garage), the hospital is used for profit and real estate tax exemption was denied for the hospital property;
The Court also found that there was no meaningful separation between for profit and not for profit subsidiaries of Atlantic Health Systems. The hospital entangled its operations in a significant manner with for profit subsidiaries of Atlantic Health allowing the hospital property to be used for profit and thus hospital was not eligible for exemption;
The hospital failed to meet the burden of establishing that executive compensation was reasonable; and
Contracts entered into by the hospital and its employed physicians indicated a profit making purpose as they included incentive components which resulted in profit splits between the hospital and physicians.
While the Judge ruled that the Hospital was no longer exempt from real estate tax, he reserved on the issue of valuation pending a further trial. In a recent development last week, the town of Morristown and Morristown Medical Center settled the pending litigation. In general, the settlement provides for an initial payment of $10,000,000 for back taxes along with another $5,500,000 in penalties and interest payable over ten years. These payments settle the pending tax appeals. In addition the hospital will pay another $1,050,000 per year over the next ten years in prospective real estate tax payments.
The agreement further provided that the property will be taxed an assessed value of $40,000,000 to arrive at the tax payments. The taxable portion of the property amounts to approximately 440,000 square feet and includes: space leased private physicians and doctors groups, privately operated restaurants and cafes, gift shops, space used by doctors/groups to deliver emergency room, radiology, anesthesiology and pathology services, and garage space.
The winds of change are upon us and hospitals should be proactive in understanding the implications of this decision. If we can be of assistance in reviewing and responding to any tax assessment changes or overtures by municipal officials, please do not hesitate to contact us.