The Ohio Supreme Court today overturned denials of property tax exemptions sought by the building manager of two Horizon Science Academy charter schools in Columbus. The Court found that state taxing authorities used the wrong standard to conclude the corporation attempted to profit from leasing educational space.

A Supreme Court majority granted a property exemption for tax year 2010 to a unit of New Plan Learning Inc. for a building housing Horizon Science Academy-Columbus Middle School, and remanded to the Ohio Board of Tax Appeals (BTA) the exemption sought by Horizon Science Academy-Columbus High School.

Writing for the majority regarding the high school, Justice R. Patrick DeWine stated the BTA approved the denial of the exemption by finding that the school’s rental payments exceeded the property owner’s expenses for leasing the property. He wrote the law requires the state to prove the lessor (the person leasing the property) intended to profit from the arrangement.

In a dissenting opinion regarding the high school, Chief Justice Maureen O’Connor wrote the majority essentially overruled a standard set by the Court last year to determine whether a landowner intended to profit from leasing space to a charter school. The Court’s July 2016 decision in 250 Shoup Mill LLC v. Testa involved another New Plan property, and the chief justice stated that today’s ruling “does nothing to promote stability and predictability in our legal system.”

Joining the dissent for the high school’s exemption, and writing his own dissent regarding the middle school, Justice William M. O’Neill stated the arrangements do not meet the state requirements to exempt property used for charitable or educational purposes.

“This was a for-profit house-of-cards scheme any way you look at it,” he wrote.

New Plan Purchases Property, Arranges Financing
The owner of the high school property is Breeze Inc., which the Court described as “part of a complex arrangement of community schools and related entities.” New Plan Learning, a non-profit company, leads the entities and is the sole owner of Breeze. Other similar entities hold title to the property used by the community schools. New Plan is the sole owner of 2350 Morse LLC, which leased property to the middle school. Charter schools, also known as community schools, are publicly funded but are operated privately and not by public school districts.

Murat Arabaci was Breeze’s president and chief financial officer before becoming New Plan’s president and chief financial officer. He testified at the BTA that when a charter school receives authorization to operate, New Plan identifies and works to purchase a facility. The property is held by a title-holding entity, like Breeze, which then leases the property to the school. Breeze collects rent from the school and uses the rental income to pay the mortgage on the property. Any surplus rent paid by the Horizon Science Academy to Breeze is passed to New Plan to support affiliated charter schools.

The seller of the property used for the high school told New Plan it wanted to deal only with a for-profit company, and Breeze was formed as a for-profit. Breeze converted into a non-profit in tax year 2011 and sought a property exemption for the building leased to the high school. It also requested a refund of the property taxes it paid from 2008 to 2010.

The property used for the middle school was sold to 2350 Morse, a non-profit company, and the company sought a tax exemption for only the 2010 tax year.

Tax Commission Denies Exemptions
The tax commissioner denied the exemptions and concluded that Breeze and 2350 Morse collected “substantial market-rate rent” and the property was leased with a view to profit. Under the state law at the time the exemptions were requested, R.C. 5709.07(A)(1) did not allow an exemption for property used for educational purposes if the property owner leased the land “with a view to profit.”

The tax commissioner granted Breeze the exemption for the 2011 tax year, noting that the legislature revised R.C. 5709.07(A)(1), which now provides a property tax exemption for property used for educational purposes regardless of whether there is an intent to profit.

New Plan appealed the denials to the BTA, which affirmed the tax commissioner’s determinations, and New Plan appealed to the Supreme Court, which was required to hear the BTA appeal.

Court Examines ‘With a View to Profit’
New Plan sought exemptions under statutes R.C. 5709.07(A)(1), which exempts property for public schoolhouses, and R.C. 5709.12(B), which exempts property “used exclusively for charitable purposes.” Both laws provide that the exemptions are denied if the property is used “with a view to profit.”

Citing two dictionaries, Justice DeWine wrote there is no ambiguity in the plain language used by the statutes. “With a view to profit” means the objective is to profit. He cited the Court’s 2010 Anderson/Maltbie Partnership v. Levin decision where the phrase “with a view to profit” was interpreted to mean that if the lease intended to generate a profit for the owner, then the property did not qualify for an exemption.

“Thus, the key inquiry in determining whether property is leased with a view to profit focuses on the aim or intention of the lessor,” the opinion stated.

Arabaci explained that the rental payments for the schools are dictated by the lending banks, and banks demanded the schools pay more than the actual cost of the loan. He stated New Plan sought out the minimum amount to charge to the school, and on some occasions when the school had budgetary issues thenNew Plan reduced, deferred, or wrote off rent payments. Justice DeWine noted that Arabaci’s testimony was not disputed.

The opinion stated neither the BTA nor the tax commissioner paid much attention to Arabaci’s testimony. The tax commissioner concluded that because Breeze collected substantial market-rate rent, it clearly entered the lease with a view to profit. The BTA concluded because there was excess rental income generated that was distributed to Horizon and other charter schools, the lease was done with a view to profit.

The Court explained that the generation of excess rental income does not by itself prove the property was leased with a view to profit, but is relevant in that it “sheds light” on the owner’s intention regarding the lease.

The majority opinion noted that in Shoup Mill the property-related expenses constituted 80 percent or less than what New Plan charged Horizon Science Academy Dayton High School, and that the tax commissioner and BTA could have reasonably concluded that arrangement was made with a view to profit. Here, however, the BTA ignored the evidence of intent for the Columbus Horizon high school, so the Court remanded the case to the BTA to consider the purpose of the lease.

Middle School Granted Exemption
For the Horizon middle school, the monthly mortgage payment was $26,000 for the building. New Plan charged the school $30,000 a month. Arabaci testified the lender wanted a 20 to 25 percent “cushion” between the actual mortgage amount and the charge to the school. Arabaci said New Plan was able to negotiate a 15 percent cushion, bringing the rate close to $30,000 a month.

In a per curiam opinion, the Court concluded New Plan was entitled to exemption because the difference between the amount charged and the expenses was set by the lender and not with any intent by the company to profit from the rate.

Justices Terrence O’Donnell, Sharon L. Kennedy, and Patrick F. Fischer joined Justice DeWine’s opinion regarding the high school. The same four justices and Chief Justice O’Connor concurred with the per curiam opinion regarding the middle school. Justice Judith L. French concurred in judgment only with both opinions.

Dissents Defer to Board’s Judgment
In her dissent, Chief Justice O’Connor noted the BTA hearing on whether New Plan leased the Breeze and 2350 Morse property to Horizon with the intent to profit was conducted at the same time as the hearing about New Plan’s property in the Shoup Mill case. She noted the statements by Arabaci about how the rental payments were established and adjusted were part of the record in Shoup Mill. Despite Arabaci’s statements, the Court found the BTA drew reasonable inferences that New Plan intended to profit from the lease based on Shoup Mill’sexcess rental revenue over mortgage expenses.

The dissent also asserted that two pieces of additional evidence about Breeze made it more likely that Breeze had an intent to profit, including the admission that part of the property was being leased to tenants that were not entitled to a tax exemption.

“But instead of applying this court’s previously established standard to the taxpayer here, the majority modifies the standard we announced in Shoup Mill, thereby applying a more favorable standard to Breeze without explanation,” the dissent stated.

Justice O’Neill wrote the structure of the arrangement disqualified 2350 Morse from qualifying as a charitable institution and it is not an educational organization. He asserted that leasing the property to a school is “legally irrelevant” in determining if the property owner receives a tax exemption.

“2350 Morse was earning about $48,000 per year strictly in its role as landlord. Facts are facts, and the motives of the principals here do not convert hard cash into charity,” he wrote. “Rent payments that retire a mortgage result in a commercial building that is mortgage-free. There is no logic that supports the conclusion that this scenario is anything but a very profitable venture for the owner of the building.”

2015-0341. Breeze Inc. v. Testa, Slip Opinion No. 2017-Ohio-7801.

2015-0342. 2350 Morse LLC v. Testa, Slip Opinion No. 2017-Ohio-7800.

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