In search of tax revenue, towns seek to tighten screws on health-care providers

Property-tax exemptions of nonprofit health-care providers are under fire from cities and towns across New Hampshire.

In an effort to add property valued at millions of dollars to their tax rolls, municipalities are questioning whether the services provided by these entities qualify for a charitable organization property-tax exemption.

The New Hampshire Supreme Court recently weighed in on the issue, providing guidance on the conditions under which charitable organizations are entitled to property-tax exemptions.

In ElderTrust of Florida Inc. v. Town of Epsom, the court considered a challenge to a request for a property-tax exemption by ElderTrust for Epsom Manor, a skilled nursing facility, and Heartland Place, an assisted living facility, both located in Epsom.

Under New Hampshire law, the state provides an exemption for the property of a charitable organization if that property is used by the organization for the charitable purposes for which the organization was established, and if the organization’s income and profit is used solely for those charitable purposes.

The town denied ElderTrust’s request for an exemption, and ElderTrust appealed that decision to the Superior Court, which found that ElderTrust had been wrongfully denied the exemption.

The New Hampshire Supreme Court agreed, though the justices found that this was a “particularly close case.” But the court allowed the exemption because ElderTrust met all of the following four factors: it was established and administered for a charitable purpose; it had an obligation to perform that charitable purpose for the public; the ElderTrust property was owned, occupied and used directly by it for that charitable purpose; and its income and profits were used solely for that charitable purpose.

In reaching their conclusion, the justices reviewed ElderTrust’s articles of incorporation to determine whether it met the first prong of the four part test.

ElderTrust’s articles of incorporation required it to be operated exclusively for charitable purposes and to acquire, own, maintain and operate hospitals, nursing homes and related health-care facilities, including retirement housing for elderly persons.

Despite the town’s argument that this was “not sufficiently indicative of a charitable purpose,” the court found that the articles of incorporation provided sufficient proof that ElderTrust was created to perform a service of public good.

In evaluating whether ElderTrust occupied and used the property to fulfill its charitable purpose, the court ruled that ElderTrust would have to provide more than just housing to the elderly to be eligible for the tax exemption. The court concluded that ElderTrust met this requirement because it provided nursing services and administered medicine at both the skilled nursing and the assisted living facilities.

The fact that ElderTrust charged fees for some of these services did not preclude a tax exemption because the fees were necessary to ElderTrust’s ability to accomplish its charitable purpose.

The court said it was swayed by the fact that the facilities operated at a loss and that the fees charged did not equal or exceed the costs of the services provided.

ElderTrust also met the second and fourth factors of the test, though the court commented that these factors were a much closer call.

The Court held that the second factor, which requires the organization to have an enforceable obligation to fulfill a charitable purpose, was met because ElderTrust’s articles of incorporation required it be operated “exclusively” for charitable purposes, thereby limiting ElderTrust’s discretion in whether to provide services to the public.

Although the town argued that ElderTrust’s articles did not create an enforceable charitable obligation because they did not specifically reference elderly persons with low and moderate income, the court concluded that service to the needy was not necessary in order to qualify for the property-tax exemption.

ElderTrust also met the fourth prong of the test because it did not provide any pecuniary benefit to its members or use any income or profit for other than a charitable purpose.

The court struggled with this factor, though, because ElderTrust paid large portions of its income to two for-profit corporations, NHI, which held the mortgage on the Epsom properties, and NHC, the company that managed the properties.

The town argued that ElderTrust violated the fourth factor because two ElderTrust board members held stock in NHC and/or NHI. The court stated that it was concerned about the “overlapping interests” between the non-profit and for-profit entities involved in this case, but ultimately concluded that ElderTrust had not violated the statute and thus was entitled to the property-tax exemption.

Interestingly, the court called on the Legislature to modify the statute if it did not agree with the result of the case, a tacit acknowledgment to the political aspects of this issue.

Municipalities, which are hard-pressed for revenues, may view the ElderTrust case as an invitation to challenge property-tax exemptions granted to nonprofit heath-care facilities and other charitable organizations, particularly where the facts present a “close call.”

Indeed, an editorial published Dec. 6, 2006, in Foster’s Daily Democrat, shortly before release of the ElderTrust opinion called for a review of the property-tax exemptions granted to Wentworth-Douglass Hospital, Frisbie Memorial Hospital and Exeter Hospital. The editorial noted the growth in for-profit facilities, such as doctors’ offices and rehabilitation centers, could create questions about whether those properties continue to be entitled to a tax exemption.

The Rochester Planning Board raised this very question in regard to an expansion of Frisbee Memorial Hospital which included the purchase of a property previously on the tax rolls.

The ElderTrust case provides a clear test to apply in determining whether property-tax exemptions are available to charitable organizations. Given the pressure on municipalities to increase their revenue streams and the projected growth in the health-care industry, it is likely that these issues will continue to be debated. The devil, as always, will be in the details. nhbr

Coleen Penacho, an attorney in the health care practice group at the law firm of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1246 or

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