Mid-Atlantic Health Law TOPICS

In a recent case, Maryland's intermediate appellate court held that when a charity ground-leases property to a for-profit entity that constructs a building and other improvements on the property, the property is still deemed to be owned by the charity. Therefore, the charity may apply for a charitable exemption for the property from real property taxes, which application may or may not be accepted depending upon how the property is used and by whom.

In Supervisor of Assessments of Baltimore County v. Greater Baltimore Medical Center, Inc., GBMC engaged in a lease-leaseback arrangement with a for-profit developer, BHI. The steps of the transaction were: (1) GBMC leased land on its campus to BHI, (2) BHI constructed a medical office building, garage and related facilities on the land, and (3) BHI leased the improvements back to GBMC.

After the improvements were completed, GBMC applied for a charitable property tax exemption. The qualification for that exemption generally requires that two tests be satisfied: (1) the property must be used for a charitable or educational purpose, and (2) the property must be owned by a charity. Although GBMC is a charity, its application was denied, apparently because GBMC was not the owner of the improvements.

A. The Decision

After several levels of appeals, Maryland's intermediate appellate court held that real property is taxable to its owner, and that "the record owner, as listed in the land records, is the owner of real property for tax assessments purposes."

Since GBMC was reflected in the land records as the record owner of the land, it was also deemed to be the owner of the improvements because "improvements affixed to the land are considered part of the real property and ownership of the improvements follows title to the land." Therefore, the court reasoned, for someone other than the record owner of the land to be considered the owner of the improvements, there "must be a recorded deed or other instrument of record showing a transfer of title to the improvements to another owner."

While several of the transactional documents stated that BHI was the owner of title to the improvements during the term of the ground lease, none of the recorded documents mentioned this. Therefore, the court held that, the documents were not sufficient to effect a transfer of title to the improvements to BHI because the relevant Maryland statute "requires all transfers in property ownership to be recorded."

Of course, GBMC will still have to demonstrate that the property is used for charitable purposes to obtain the sought after exemption from real property taxes.

B. Caveat

It should also be noted that the rules impacting transactions similar to this one for federal income tax purposes are different than the rules related to Maryland real property tax. Therefore, in structuring any such transaction, particular attention should be paid to both the federal income tax consequences as well as who will be deemed to be the owner of the improvements for Maryland real property tax purposes.