CHICAGO -- A recent Ohio Supreme Court decision has raised concerns about the issuance of tax-exempt bonds to build independent living communities within retirement centers.
In withdrawing some of the property tax exemption enjoyed by a Dublin, Ohio, retirement center, the court also held that an independent living community does not meet the definition of hospital facilities under Ohio law.
A bond lawyer said the court decision could increase the financial burden on other retirement centers and could lead to more widespread use of bond validation proceedings.
The City of Dublin School District appealed to the Supreme Court in 1987 after the state tax commissioner and Board of Tax Appeals granted the Friendship Village retirement center a full exemption from property taxes. Both the tax commissioner and the tax board granted the exemption based on a 1981 bond validation proceeding that determined that Friendship Village qualifiers as a hospital facility under Ohio law.
The school district contended that the property tax exemption applied only to a 60-bed nursing home and not to 236 residential apartment units in the retirement community.
The State Supreme Court on May 11 reversed a Board of Tax Appeals decision that said the whole retirement center, located in a suburb of Columbus, qualified for full property tax exemption as a hospital facility.
In its decision, the high court agreed with the Dublin School District that some parts of Friendship Village are used for private residences and should not be exempt from property taxes.
In addition, the Supreme Court ruled that the granting to Friendship Village of a full property tax exemption by the state tax commissioner and tax board, based on the 1981 bond validation proceeding, was illegal because the school board did not have a chance to challenge the exemption in that proceeding.
The court remanded the case back to the tax board and ordered state tax commissioner Roger Tracy to determine "what parts, if any, of [Friendship Village] are hospital facilities and thus tax-exempt and to make the appropriate split-listing of exempt and nonexempt property."
Jeffrey Rich, an attorney for the Dublin School District, estimated that Friendship Village will have to pay the district about $1.2 million in back property taxes.
Friendship Village cannot appeal the ruling to the federal level because all the arguments in the case centered around Ohio issues, said Ray Anderson of Vorys, Sater, Seymour & Pease, the law firm for the retirement center. But the center will not ask the states Supreme Court to review the case again. Anderson said.
Phil Johnston, a partner at Vorys Sater, said the court decision has no implications for the retirement center's outstanding debt because the suit did not question the tax-exempt status of the bonds.
In 1985, the Franklin County Hospital Commission issued $12.5 million of revenue bonds to help finance the construction of Friendship Village.
However, the case could affect the future issuance of debt by retirement centers across the state, according to some attorneys.
"Clearly, the language of the Friendship Village decision raises questions about a number of facilities and questions about financing retirement communities," said one attorney in Cleveland who asked not to be identified.
Through the case centered on a property tax exemption for a retirement community, the court "confused the issue" of bond financing for independent living structures by saying that they are not hospital facilities, the attorney said.
Richard Desmond, a partner at the law firm of Squire, Sanders & Dempsey, said that the confusion could be clarified in one of four other similar cases that are pending before the Ohio Supreme Court, One of the cases was argued before the court last week, Desmond said.
Anderson said that Ohio bond lawyers he has spoken with have been reluctant to issue opinions on retirement center issues pending clarification of the Friendship Village case.
Anderson said that the uncertainty could increase the use of bond validation proceedings, which could increase issuance costs and delay bond sales.
In Ohio, issuers may seek validation for their bond issues in county Common Pleas Court.
Bond lawyers "have put the brakes on anything pending to reconsider whether to issue bonds without a bond validation proceeding, which shifts the burden from a person to a court," Anderson said.
Adding to the uncertainty is the inconsistency between the ruling and a 1990 Ohio state law relating to health care bond financings, Anderson said.
"Bond lawyers are concerned about how you can add two and two and get three," Anderson said.
While the 1990 law said that independent living facilities on hospital grounds would be subject to property taxes beginning in 1991, it included a grandfather clause that allowed facilities already with property tax exemptions to retain that status, Anderson said.
The Friendship Village decision amounted to "judicial legislation" because it took away the full property tax exemption that the grandfather clause allowed the retirement center, Anderson said. The Board of Tax Appeals granted the exemption in 1987, he said.
As a result, some bond attorneys are concerned that the decision could lead to the "jerking" of other retirement centers' property tax exemptions, Anderson said.
Desmond said his firm is "sorting out" the impact of the Friendship Village decision on future bond issuance by retirement centers.
"We're in the gray area," Desmond said.