Universities' tenants responsible for property taxes, new law says

FAYETTEVILLE -- About 20,000 square feet of private retail space sits across from a student residence hall on the north end of campus at the University of Arkansas, Fayetteville.

The Garland Center, built in 2010, is a multilevel parking deck with shops at sidewalk level. Among other options, students can buy a sandwich for lunch and shop for eyeglasses.

These sorts of commercial operations on UA-owned sites have raised questions about property taxes, a source of revenue for local government, Washington County assessor Russell Hill said last year.

The county and UA failed to agree on the issue, leading to a lengthy legal dispute. A February 2016 state Supreme Court opinion sided with the university, saying Washington County could not collect property taxes on 11 university parcels.

But lawmakers this year approved a law that "effectively changes the result" of the state Supreme Court case, said Matthew Boch, a Little Rock-based tax attorney.

Under Act 1076 of 2017, tenants now are responsible for property taxes when leasing from a state entity for "an ongoing commercial or residential purpose," the new law states. A few exceptions, such as student housing, are written into the law. Boch said the way the law is written, if a state instrumentality such as a university or commission is alone engaging in commercial activity without a tenant, the new rule would not be triggered.

Across the state, officials offered varied opinions about the effect of the law, which also can be viewed as an example of government placing more scrutiny on tax breaks afforded to colleges and universities.

Hill said UA's property tax bill had been roughly $250,000 before the legal challenges, so he thinks about that much money might flow yearly to local government. After the state Supreme Court's ruling, UA did not seek repayment for roughly $750,000 in property taxes paid over a three-year period, Hill said, and a university spokesman said the school has "no plans" to seek repayment.

The property tax is structured so that Fayetteville public schools would receive 82 percent of the total, whatever it turns out to be, Hill said.

The new law requires state entities to provide a list of affected properties to county assessors, but Hill said none has yet been provided.

In an email, UA-Fayetteville spokesman Mark Rushing said the law "could possibly have some negative impact on our ability to attract and retain lessees moving forward."

But Rushing said UA "believes this is a measure that respects the Arkansas constitution while helping the county access revenues that would not otherwise be available."

The university had earlier argued to the state Supreme Court that a county lacked the legal authority to tax state-owned property, while the county argued that the parcels in questions were not being used for a public purpose. The court's majority opinion emphasized how state-owned property was immune from taxation.

But the justices also said they were ruling on the "narrow issue" of whether 11 UA parcels could be taxed.

In Pulaski County, at least, no big changes in revenue are expected because of the new law.

"I don't think it will be a new revenue source at all, because we already tax anything that is owned by the state or any other government if they're leasing it to a private individual or to a private company," said Joe Thompson, chief assessment administrator for Pulaski County.

The new law is not limited to universities, with language referring to "property owned by the state." Thompson said Pulaski County, where several state agencies are based, taxes properties owned by various state entities, such as a downtown office building owned by the Arkansas Teacher Retirement System.

Boch said he expected state universities to be the entities most affected by the law, though he added he was uncertain how often other state agencies operate in a landlord role.

Schools have at times publicly announced lease agreements and related ventures, such as when Arkansas State University in Jonesboro last year announced a lease with a private developer to build a convention center and hotel on ASU-owned land.

Hannah Towell, assessor in Craighead County, said it is not easy to describe how the county will be affected by the law.

"I would say that is unknown, because we don't know how many properties are leased as we stand now," Towell said.

Nationally, some have called for further examination of various tax exemptions in place for colleges and universities.

Mark Schneider, a vice president and institute fellow at the Washington-based American Institutes for Research, said colleges and universities utilize local government services when firefighters respond to campus, for example.

Schneider said that more attention needs to be paid to such tax breaks.

"We end up paying tons of money for things that we're not even tracking," Schneider said.

UA-Fayetteville has not yet compiled how many commercial properties fall under the new law, according to Rushing. The school owns six dwellings being rented to non-students.

For the nonstudent residential renter, "the fact of a state instrumentality directly leasing to an individual could potentially put that individual on the hook for property tax," Boch said.

At a duplex near the school's research park, Bethra Flowers pays $400 in monthly rent.

"It's already hard enough to pay rent," said Flowers when told about the new law.

Another tenant in a two-bedroom, UA-owned house, Damon Nelson, said, "I would have to move."

The University of Arkansas for Medical Sciences owns about 20 residential properties that will be affected by the new law, Leslie Taylor, a vice chancellor for the Little Rock-based UAMS, said in an email. Previously, the university paid property taxes on the homes, she said.

Boch said the law is "definitely unusual," noting the short time period of occupancy before the tenant must pay property tax.

Previous law outlined how tenants of state-owned property would be responsible for taxes after being the leaseholder for more than 10 years. The new law requires tenants to pay property taxes after occupying the property for more than 90 days.

"You have some potential unfairness for existing lessees, who suddenly find themselves saddled with property tax burdens," Boch said.

Rep. Charlie Collins, R-Fayetteville, said he worked with UA-Fayetteville in drafting the law, which he described as being about fairness.

"We're talking about property that belongs to the university, but they allow somebody else to use the lease for what is essentially a private business enterprise," said Collins. "If you have a business competitive with other businesses and one business has to pay property tax and another business doesn't, you've created a real unlevel playing field."

Hill said he "wasn't totally happy" with the new law, as it requires collecting tax from several tenants rather than a single property owner.

But he also said that charging property tax allows for "fair and equitable treatment," as an entity like UA-Fayetteville "is competing with other property owners who either have commercial or rental properties, and their having to pay taxes."

Along with student housing, other exemptions include leased property used for business and technology incubators, as well as property used "by a private person or entity for the purpose of providing a service to or on behalf of a state entity."

Metro on 09/05/2017

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