During the recent legislative session, the property tax statutes were amended to allow a “non-profit church, religious assembly or religious institution” that leases its property from a for-profit owner to have the same property tax exemption currently available for property leased by charter schools. Under the new provision, property that is leased by a religious entity and used primarily for religious worship can be classified as “Class Nine Property.” Class Nine Property has an assessed valuation of 1% of full cash value rather than the 18% rate applicable to most commercial property. To qualify as a Class Nine Property, both the property owner and the religious entity must first file affidavits with the County Assessor. The property owner’s affidavit must state that:
(1) the religious entity is the sole beneficiary of the change in property tax classification, and (2) the lease rate being charged to the religious entity is consistent with the lease rates that are charged to other tenants of the property or fair market rate.
The religious entity’s affidavit must state that: (1) it uses or holds the property primarily for religious worship and (2) it is the sole economic beneficiary of the Class Nine Property classification.
Each year thereafter, the religious entity must file a comparable affidavit in order to maintain its classification.
The amendments allowing property leased by a religious entity to be eligible for Class Nine Property classification raise several legal questions. For example:
- Will an amendment to the lease be required to reflect the potential for Class Nine Property classification?
- Will the property owner be required to reduce existing lease payments if the property is reclassified?
- Will the property owner be required to file the required affidavit on behalf of the religious entity?
If a reclassification is allowed, how will the parties address its impact on the allocation of property taxes among the tenants?
To clarify these issues, any amendment to an existing lease as well as any new lease should set forth the responsibility of the property owner and the religious institution regarding the required affidavits. In addition, a procedure to determine the square footage of the leased property actually being used for religious worship must also be established in order to enable the property owner and the religious entity to swear that the Class Nine Property is “primarily used for religious worship.” The party responsible for that determination should also be designated. Finally, provisions must be added that address what happens in the event the Class Nine Property designation is terminated due to the action or inaction of one of the parties. Clearly, property owners and religious entities alike should care when incorporating this new exemption into their leases.