N.M. Court of Appeals Rejects CCRC’s Constitution-Based Claim for Charitable Property Tax Exemption
The New Mexico Court of Appeals recently rejected the claim by El Castillo, a Continuing Care Retirement Community (CCRC), for charitable property tax exemptions. I was particularly interested in this ruling, as I have visited the campus several times over the years, and have come to know many residents, who are some of the most active, socially aware seniors I’ve encountered. Just trying to keep up with 78-year old friends who are walking, walking, walking (at 7,000 feet) to their meetings can be a challenge. The campus is very pleasant, quite modestly appointed, and fairly compact — but perhaps most important of all, it has a terrific location. I suspect that is a large part of the reason it is on the tax assessor’s radar. The campus is just a few blocks from the heart of beautiful Santa Fe and steps away from Canyon Road’s art galleries.
El Castillo has operated as a CCRC since 1971, with a Type A or “Life Care” structure, where residents age 65 and older pay non-refundable entrance fees, plus monthly service fees, with the expectation that all needs, whether in so-called “independent” apartments, assisted living units or nursing care, are provided on the same campus. El Castillo is not associated with a particular faith nor with any fraternal organization, but it has operated since its inception under Section 501(c)(3) of the Internal Revenue Code, and thus is exempt from income taxes based on historical rulings that permit charitable tax exemptions for “homes for the aged.” However, as we have discussed in the past in this Blog, a state’s standards for charitable property tax exemptions can be quite different than the IRS approach to charitable income tax exemptions.
State and local governing bodies are constantly in search of tax revenues, and CCRC campuses, especially in urban locations, can be a tempting target. Under New Mexico’s state constitution, at Article VIII, Section 3, “all property used for educational or charitable purposes shall be exempt from taxation.” Prior cases interpreting this provision did not require a facility to be operated “exclusively” for charitable purposes, but the landowner has the burden to show it operates “primarily and substantially for a charitable purpose.”
Key to the court’s denial of the tax exemption was its observation that El Castillo appeared to operate as a self-sustaining unit funded entirely by fees paid by residents, with little or no “charitable” base. The Court rejected El Castillo’s argument that its charitable mission was to provide life-time care for residents who could (and sometimes do) become personally unable to pay, and that such a mission was only possible through “subsidizing” such residents by, in essence, pooling the fees paid by all residents. As demonstrated by contrasting rulings on property tax exemptions in other states, the financial analysis necessary to support a charitable use property tax exemption may require detailed analysis and advanced planning. There is a fine line for any nonprofit to balance costs, sources of revenues and the goal of sustainability. In some instances, I have seen denial of property tax exemptions be the final straw for some nonprofit operators, especially those struggling with rising costs or occupancy rates after the 2008 financial downturn.
In New Mexico, there is both a constitutional basis for seeking a property tax exemption and a statutory basis. The ruling on El Castillo — which by the way, when translated from Spanish, means “The Castle” (a bit of irony perhaps, given the court’s seeming hostility towards the exemption claim, pointing to the lack of “indigent” residents) — was based only on the state constitution. It appears the tax assessor actually failed to perfect his attempt to appeal a separate portion of the lower court ruling that had granted El Castillo the right to charitable tax exemptions on statutory grounds. Thus, it would appear that El Castillo would not immediately feel the effects of the Court’s ruling, at least not for the specific tax years at issue in the multi-year litigation. In a footnote, the Court of Appeals judges acknowedged that their decision on El Castillo creates a “dfferent result” than the same court’s 2013 ruling on charitable property tax exemptions for a different life-care community, La Vida Llena, in Albuquerque, N.M. The Court distinguished the La Vida Llena ruling as based only on statutory grounds.
For the complete ruling, including a complex jurisdictional issue, see El Castillo Retirement Residences v. Martinez, Case No. 31, 704, decided December 17, 2014.