December 7, 2004
Page 3
CITY OF MADISON
OFFICE OF THE CITY ATTORNEY
Room 401, CCB
266-4511
DATE: December 7, 2004
MEMORANDUM
TO: Ray Fisher, Director of Revenue
FROM:
SUBJECT: The Ridge Side Cooperative - Tax Exemption
The Ridge Side Cooperative (Ridge Side or Cooperative) owns property at 839-847 Williamson St. in the City and is seeking exemption from property taxes. You have asked for my recommendation on whether you should grant or deny that request. On the information provided and Wisconsin Statutes and case law, I recommend that you deny the request for the reasons stated below.
Ridge Side is established pursuant to Ch. 185 Stats. The chapter contemplates the payment of taxes unless the cooperative is otherwise exempt. Ridge Side asserts that it qualifies for exemption as a benevolent organization pursuant to Sec. 70.11(4), Stats.
Sec. 70.11(4), Stats., providing for certain exemptions from property taxes states in pertinent part:
Property owned and used exclusively by…benevolent associations….
Our court in Columbus Park Housing Corporation v. City of Kenosha[1], has indicated that providing housing to low income persons qualifies the owner of the property as a benevolent organization so long as all other tests for eligibility are met. The sole issue is whether the members of the cooperative receive, or can receive, pecuniary profits or benefits as defined in Wisconsin case law.
That test is stated in Milwaukee Protestant Home v. City of Milwaukee[2]:
In this state a benevolent association must be completely free from the fact or even possibility of profits accruing to its founders, officers, directors or members.
Ridge Side provides housing for low to moderate income persons. It is required to limit unit rent (called “carrying charge” by Ridge Side) to not more than 30% of the income of a two person household having an income equal to 80% of the area median income. At least 51% of the units must be occupied by those meeting the median income level. Prospective members pay an initial fee of four months rent and must be approved by the Board. If approved, they sign an occupancy agreement very similar to leases signed by tenants of for-profit properties. They also sign and agree to follow House Rules which are also similar to what is required by for-profit properties. Thereupon, they are issued a membership share in the cooperative. Board members receive no compensation. No annual dividends are paid to the members. Upon dissolution of the cooperative, all net proceeds must be donated to a 501(c)3 exempt organization providing affordable housing. I have no information showing that Ridge Side itself has been granted 501(c)3 status or that it is exempt from other state taxes.
For the purpose of my recommendation, I will assume, without deciding, that Ridge Side qualifies as a “benevolent organization” within the meaning of sec. 70.11(4), Stats. except for the question of whether the members can receive a “benefit”. The sole issue is whether the members of the cooperative receive, or can receive, any pecuniary profit as that phrase is used in the cases.
As stated, each approved member makes an initial payment of four months carrying charge. Apparently, these funds, or some part of them, go into a no-interest loan fund to assist incoming members who are unable to pay the initial fee. It is not now known whether that fund bears interest, but I will assume that the cooperative operates in a businesslike manner and that the fund does earn interest. The availability of this no-interest loan accrues to the benefit of the incoming tenant.
The Ridge Side Board usually exercises its option to purchase out-going members’ shares under sec. 12.03 of the By-Laws. Paragraph II of the Occupancy And Membership Agreement indicates that upon termination of occupancy and membership of the shareholder member, the out-going member will receive a “transfer value” as defined in Sec. XI of the Ridge Side By-Laws. Sec. 11.02 of the By-Laws reads:
11.02* Transfer Value. Whenever the Board of Directors elects to purchase a shareholder's shares in the Coop, or whenever said stock is transferred, the term "transfer value" shall mean the sum of the following:
(1) The par value of the shares held by the shareholder; plus
(2) An initial down payment is an amount equal to four times the carrying charges of the shareholder's unit on the date of the 1986 closing with the National Cooperative Bank, plus an interest return not to exceed 5% per annum; this return is the maximum, not guaranteed, transfer value of the shareholder's unit; plus
(3) The cost of any pre-approved improvements made upon the unit occupied by the shareholder, less depreciation, all as determined by the Board of Directors in its sole discretion.
* As amended February 23, 1986
The transfer value includes a return and thus is in excess of the initial four month carrying charge and is provided to the out-going member. It is not retained by Ridge Side. Similarly, upon total sale or other transfer of the property, the shareholders receive their “transfer value”, or a prorated share, after distribution of outstanding financial obligations of the Cooperative. By-Laws, Sec. 10.02. Over the years of operation before sale or dissolution of the Cooperative, the property will likely appreciate in value increasing the likelihood that members will receive their full transfer value.
It has been suggested that the four-month initial fee is essentially the same as a security deposit in the private sector and that therefore the additional return of 5% per year on termination of tenancy is the same as the return on a security deposit required by city ordinance and not a proscribed “benefit” to the out-going tenant. I am not persuaded. As seen in the attached pages copied from the Occupancy and Membership Agreement, the carrying charge components are the same as rent components and not a security deposit. Moreover, even if I were to accept the argument that the initial carrying charge payment is similar to a security deposit, the fact remains that a tenant has the opportunity to earn up to a 5% return on that payment. The 5% return -- whether on a security deposit or on the Ridge Side carrying charges -- is the equivalent of a return on investment and is, in fact, a benefit to the out-going tenant.
Our courts have become increasingly sensitive to the impact of granting tax exempt status on the rest of the tax-paying public.
In University Medical Foundation v. City of Madison, 267 Wis. 2d 504, 671 N.W.2d 292 (2003), the Wisconsin Court of Appeals stated (at 513-514):
¶10. Under Wisconsin law, real and personal property are presumptively taxable. See Wis. Stat. §70.109; see also Trustees of Indiana Univ. v. Town of Rhine, 170 Wis. 2d 293, 299, 488 N.W.2d 128 (Ct. App. 1992). Certain property, however, is exempted from tax by statute. Because tax exemption statutes "are matters of legislative grace, id., they are to be "strictly construed in every instance with a presumption that the property in question is taxable, and the burden of proof is on the person who claims the exemption. Section 70.109; see also Deutsches Land, Inc. v. City of Glendale, 225 Wis. 2d 70, 80-81, 591 N.W.2d 583 (1999).
¶11. This presumption in favor of taxability is motivated by "the public interest to stem the erosion of municipal tax bases." International Found. of Employee Benefit Plans, Inc. v. City of Brookfield, 95 Wis. 2d 444, 454, 290 N.W.2d 720 (Ct. App. 1980), aff'd, 100 Wis. 2d 66, 301 N.W.2d 175 (1981). As we explained in International Foundation, [t]he more exceptions allowed, the more inequitable becomes the apportionment of the tax burden. The continuous removal of real property from taxation thus imposes a particular hardship upon local government and the citizen taxpayer.
Upon these cases, I must conclude that the availability of the no-interest loan, out-going members’ receipt of the defined “transfer value” and the receipt of the transfer value upon sale or other dissolution of Ridge Side constitutes a genuine possibility, if not a probability, of profits to Ridge Side members and that the members are not completely free from the fact or possibility of receiving profits, contrary to the Milwaukee Protestant Home requirement for eligibility for tax exempt status.
Michael P. May
City Attorney
MPM:LOB:pah
SYNOPSIS: Ridge Side Cooperative property is subject to property taxation.
12/07/04-F:\ATROOT\Docs\lob\Ridge Side Cooperative.doc
[1] 2003 WI App 204
[2] 41 Wis. 2d. 284, 294 (1969)