Property Tax Exemption for Federally-Qualified Health Centers

As most of you know, the Michigan Supreme Court recently held (see Wexford Medical Group v Cadillac, 474 Mich 192; 713 N.W.2d. 734 (2006) that when determining whether a medical facility is exempt from property tax assessment pursuant to the charitable exemption provided by MCL 211.7o, the assessor must look at that institution’s activities as whole to determine whether it offers charity or performs charitable work, but that no minimum standards or thresholds of charity need be established before an exemption can be granted. Although the exemption for medical facilities was broadened by the Wexford decision, it was still clear that where an exempt facility was leasing some or all of its real or personal property to a for-profit individual or entity, that portion of the real or personal property was taxable.

However, what many of you may not know is that effective beginning in 2005, a new exemption provision was enacted into law which exempts “federally-qualified health centers” (see MCL 211.7jj). Specifically, MCL 211.7jj provides that the real and personal property of a federally-qualified health center, as defined in the federal social security act, is exempt from property taxation. A “federally-qualified health center” is defined (42 USC 1396d) as a health center serviced a medically underserved population that (i) receives a federal grant under Public Health Act Section 330 (or funding from such a grant by contract), or (ii) is identified by the health Resources and Services Administration and the Centers for Medicare and Medicaid Services as meeting the qualifications for a federal grant.

On its face, MCL 211.7jj seems to include all property owned by a federally-qualified health center, including property leased to for-profit individuals or entities. For example, the “owned and occupied” limitation found in other related exemption statutes was not included by the legislature in enacting the federally-qualified health center exemption statute. However, we believe that MCL 211.181, which provides that if real property (which is exempt from property taxes for any reason) is leased or otherwise made available to a private individual, association or corporation in connection with a for-profit business, then the lessee or user of the real property is subject to taxation in the same amount and to the same extent as though the lessee or user owned the real property. In this regard, a substantial amount of case law in Michigan has focused on exempt hospitals/medical facilities leasing space to for-profit doctors and has concluded that the leased real property owned by the exempt hospital/medical facility is taxable to the lessee (see, for example, Ralph A. Greenburg v City of Madison Heights, 124 Mich. App. 168 (1983)).

Thus, in the event that a property owner claims exemption from all real and personal property tax because it qualifies as a federally-qualified health center, you should be aware that if some portion of its real property (but not its personal property) is leased to a for-profit individual or entity, your assessor should establish a separate parcel identification number for that portion of the leased real property and issue an assessment notice to the lessee.