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Flying High without PILOTs:
Town of Brookline's Use of a Ground Lease to Thwart Property Tax Exemption for a Charitable Non-profit

By Arshag A. Mazmanian

A charitable non-profit may be entitled to a property tax exemption for real property it owns and which is used for its charitable purposes. But the exemption is generally not available if the non-profit leases the property. There may be many factors, financial and otherwise, considered by a non-profit in deciding whether to own or whether to lease. Perhaps the benefit of the property tax exemption for property owned may be offset by other factors that may result in a decision to lease. This is a "business" decision to be made by the charitable non-profit.

From the standpoint of a municipality desperately in need of property tax revenues, the preference would seem to be to have the charitable non-profit lease rather than own real property in its jurisdiction. But property law (as well as public policy) may be an obstacle to a municipality that takes the position to impose leasing rather than ownership of real estate upon a charitable non-profit.

Let me introduce you to the Town of Brookline, Massachusetts, an affluent residential community of over 55,000 surrounded on three sides by the City of Boston and on the remaining side by the City of Newton. Across the nearby Charles River lies Cambridge. The region features a high concentration of non-profits exempt from the property tax. Brookline has its share of properties off the rolls, but not to the extent of Boston, Cambridge and Newton. Brookline's proximity to these communities makes it a desirable expansion target for charitable non-profits.

Brookline's form of governance is a representative town meeting. The executive is the board of selectmen, consisting of five members, elected at large for staggered three-year terms, usually meeting one evening each week, with annual compensation per member not exceeding $3,000. The legislative entity is the town meeting, consisting of 240 members, also elected for staggered three-year terms from the town's sixteen precincts. Town meeting members receive no compensation and are required to hold but one meeting each year, although it is common to have at least one additional meeting per annum. One of the chores of town meeting is to consider zoning changes, for which a two-thirds vote is required.

Several years ago, steps were taken to rezone a relatively small block in Brookline to permit for a Level 2 lab in a proposed facility that is comparatively tall and dense for the area. A private owner/developer who had past successful projects in Brookline planned to build such a lab to attract firms that might not be able to find appropriate facilities in perhaps higher priced Cambridge and Boston.

Some activists in town expressed concern that if this private owner/developer sold the lab to a charitable non-profit the town might lose out on the anticipated $1 million in property taxes annually for the proposed lab facility. In order to accommodate the zoning change, it was proposed that the property owner/developer would deed the property to the Town for nominal consideration and the Town would then ground lease it back with the rent under the lease to be the equivalent of the property tax, thus keeping the ownership out of the hands of a charitable non-profit that otherwise might be entitled to a property tax exemption. It was further proposed, following the ground lease, that the lab facility would then be developed by the tenant/developer who in turn would sublease the building and pass on the property taxes to the subtenants.

It was necessary for the Town to receive authorization from the Commonwealth of Massachusetts to lease the property that it was set to acquire. (No such authorization is required, however, for the Town to acquire the property.) This resulted in a neat package that went before Brookline Town Meeting for approval. The Massachusetts Legislature accommodated Brookline's ability to lease property after it would be acquired. (It should be noted that the zoning change and the sale/leaseback arrangement were set forth in separate articles, separately voted upon. But it was clear that this was a package deal on the part of the Town.)

For a number of reasons, the Level 2 lab project did not get underway and several years passed. The private owner/developer entered into discussions with the venerable Children's Hospital located in the nearby Longwood Medical Area of Boston which is separated from Brookline by the Riverway road. Brookline was alerted and participated in the discussions to make sure that its scheme of ownership to deny property tax exemption to a charitable non-profit would not be thwarted.

The deal produced from these negotiations consists of a number of documents in addition to the deed to the Town and the ground lease running from the Town as landlord to a Children's controlled LLC as tenant, and in particular a three-party agreement between the Town, Children's and the private developer that addressed environmental issues with the property. Brookline's board of selectmen unanimously approved the deal this past September, with the documents to be held in escrow pending resolution of the environmental issues.

So Brookline came up with its answer to tax-exempt charitable non-profits, at least with regard to a particular parcel of property. The Longwood Medical Area (known as the LMA) is exploding with development and more is in the planning. The LMA needs to expand and there does not seem to be sufficient suitable land available nearby in Boston. Perhaps Brookline, just across the Riverway road from the LMA, is the logical place for such expansion, especially since the lab property is just steps away from light rail public transit. But Brookline has a simple scheme to thwart property tax exemption. Or does it? If something looks too good to be true, then perhaps that's exactly what it is.

Sometimes a lease is not really a lease.

Children's may have agreed to participate because of its expansion needs. In addition to bearing the expense of constructing the lab, Children's has to compensate the private owner/developer through which it will become the tenant. (The amount of such compensation has not been disclosed.) But Children's will be unable to claim the property tax exemption to which it would have been entitled as owner. Down the road, might Children's challenge the scheme, claiming that it equitably has a freehold interest? After all, the $1 million annually in rent (aka property taxes) might better serve Children's charitable mission.

Will Brookline be able to replicate this scheme for other potential charitable non-profit developments that may flow from the expansion of the LMA into Brookline? Might other municipalities adopt the Brookline doctrine? If so, this would be an improvement over PILOTs (payments in lieu of taxes) that bring in only a fraction of property taxes. Pretty slick for a big little town with part-time governance!

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Arshag A. Mazmanian is a resident of Brookline who has posted on this and other subjects involving Brookline at and is a semi-retired attorney who has never served as a Selectman or Town Meeting Member.

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Posted by permission of Arshag A. Mazmanian
© 2007 Arshag A. Mazmanian

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