Morristown Medical Center Ruling Leaves Assessors with Property-Tax Headache

Andrew Kitchenman | November 23, 2015 | Health Care
With few guideposts to go by, municipal tax assessors try to determine what local nonprofit hospitals are worth

Michael Holenstein, whose Sparta-based business advises property owners and towns on assessments.
Hospitals are worth a lot to their communities — in terms of the healthcare they provide, workers they employ, and local charitable efforts they support. What isn’t so clear is how much nonprofit hospitals are worth for property-tax purposes.

Municipal tax assessors — the professionals responsible for determining how much properties are worth and whether they’re tax-exempt are struggling with what to do about local hospitals in the wake of a June tax-court decision that found that Morristown Medical Center isn’t exempt from paying property taxes.

Assessors have few guideposts to these decisions. The primary methods that they use to determine property values — estimating the cost to replace a building, comparing the sales of similar properties, and analyzing the future income from the property — are difficult to complete for hospitals. Few nonprofit hospital properties are built or sold, and the heavy government regulation of hospitals makes them difficult to compare to other income-generating properties.

But experts say that assessor can’t just ignore the challenge posed by the Morristown case.

Part of the challenge to other towns rests in how the Morristown case was resolved. Judge of the Tax Court Vito Bianco found that the majority of Morristown Medical Center’s property was taxable because for-profit activities had become mixed with nonprofit activities.

The next step in the legal process would have been a trial to determine how much the taxable portions of the hospital would have been assessed. Unfortunately for assessors in other towns, the hospital and the Town of Morristown reached a settlement before that trial could occur.

Michael Holenstein, whose Sparta-based business advises property owners and towns on assessments, said this leaves assessors in a bind.

“Everybody would like this to be easier than it is,” Holenstein said. “We really would have liked some guidance from the court on valuation.”

There’s little legal precedent for how assessors should approach determining the taxable value of their local hospitals, according to Jeffrey D. Gordon, a property-tax lawyer and the managing partner of Archer & Greiner’s Princeton office. Gordon and Holenstein spoke at a session on the Morristown case at the New Jersey State League of Municipalities conference last week.

It would be difficult to determine how much a hospital would sell for, experts say. First, few nonprofit hospitals are sold, and when they are, the properties are combined with the hospital’s business operations, making it difficult to tease out how much of the value is linked to the real estate.

[related]Second, it’s difficult to try to determine how much income hospital buildings would generate if they were used for another purpose, since hospital income is more heavily derived from and regulated by the state and federal governments than most other businesses. For example, hospitals are required to provide revenue-losing services in a way that few other businesses are.

Finally, due to the unique nature of each hospital, it will be a challenge for assessors to determine whether their local hospitals operate in a manner that is similar to Morristown’s — and if they do, how much of the building should be taxed.

Gordon and Holenstein suggested that assessors look closely at Bianco’s decision to determine whether their local hospitals operate in a similar manner to Morristown. For example, Bianco found that Morristown provided financial incentives to doctors to increase revenue — the kind of practice that is common in modern hospitals but that Bianco said violated the state’s tax-exemption law.

Other towns are weighing what action to take next. For example, Hackettstown reached a three-year property-tax settlement with Hackettstown Regional Medical Center before the Morristown decision. A town assessor said his office will closely examine the implications of the Morristown case before deciding what to do next.

Gordon said some hospitals may be willing to settle with towns in the wake of the Morristown decision, potentially avoiding costly court cases.

Assessors could be spared making a decision if the Legislature acts first.

Senate President Stephen M. Sweeney (D-Cumberland, Gloucester, and Salem) and Sen. Robert W. Singer (R-Monmouth and Ocean) have said they want to pass a bill that would require hospitals to pay their “fair share” to local towns. Municipal advocates have expressed a concern that statewide legislation wouldn’t adequately address the unique circumstances of each hospital and host municipality.

The implications are important for towns. For example, the bond-rating service Moody’s said last week that additional annual revenue from Morristown Medical Center would be positive for the town’s credit rating. The settlement included $15.5 million in back taxes and penalties, as well as roughly $1 million in annual payments for the next 10 years. The settlement was neutral for the credit of medical-center owner Atlantic Health System, due to its relatively small size in relation to the system’s overall revenue.