It was a logical enough question for Maine Medical Center: how to use its not-for-profit status to avoid paying property taxes on one of its facilities. The seemingly not-so-logical answer was to convert the medical office building into condominium units.
Logical or not, the strategy worked.
A ruling late last month by Maine's State Board of Assessment Review ended the three-year controversy over the tax-exempt status of a medical building operated by Portland-based MMC in the nearby town of Falmouth.
MMC opened the two-story, 40,000-square foot Falmouth medical building in November 1996 at a cost of $5 million.
Maine law says that an entire building--not just certain floors or offices--must provide charitable services to be eligible for a property-tax exemption. Because some of the building's space was leased to for-profit physician practices, the entire building didn't qualify.
Consequently, MMC decided to convert the building into 12 "condominium units" that tax assessors could view as separate and independent.
MMC was seeking a tax exemption for five of those units, which would house various hospital services. The other seven units would be leased to physicians.
Maine's assessment review board granted exemptions to two of the five units that MMC was going to use. One exempt unit houses a diagnostic lab and the other a research and teaching facility.
MMC's not-for-profit subsidiary, MMC Realty Corp., which manages and develops MMC property, uses the other three units. The board said that MMC Realty behaves too much like a for-profit company to qualify for the exemption.
MMC will pay taxes on 10 units and not pay taxes on two. The tax amount will be determined after reassessment.
Although regulators concluded that MMC's tax strategy was legal, and that the system is eligible for an exemption for those two units, they are still concerned that the law governing tax payments by not-for-profits is unclear.
"The state guidelines are vague and have no standards about what constitutes charity," said Anne Gregory, assessor for Falmouth, which challenged MMC's exemption petition. To qualify for an exemption, Gregory added, MMC "has to prove it's providing charity."
MMC argues that as a not-for-profit that dedicates 2% of its annual revenue to charity care, any place it provides medical services--and extends its reach to the larger community--should qualify for the exemption enjoyed by MMC.
MMC, part of the five-hospital MaineHealth system, reported 1999 net income of $28 million on patient revenue of $376.3 million.