Property Taxation and Leasing of Municipal Property

By David R. Connell

As the weak economy persists, New Hampshire cities and towns continue to look at options for encouraging economic development and enhancing revenues. In some communities, it can be advantageous to allow private companies or individuals to occupy municipally-owned property that is not presently needed for public purposes in order to conduct desirable business or other activities. But, in entering a lease or other agreement for this purpose, a city or town must be keenly aware of the requirements of RSA 72:23.

The primary purpose of RSA 72:23, I is to establish a property taxation exemption for property owned by the State or a political subdivision. However, through a series of detailed amendments by the legislature, the statute also deals at great length with how to assess property taxes on publicly-owned property when it is occupied by a private party under a lease or other agreement. The statute now reads in relevant part as follows:

The following real estate and personal property shall, unless otherwise provided by statute, be exempt from taxation:
I. (a) Lands and the buildings and structures thereon and therein and the personal property owned by the state of New Hampshire or by a New Hampshire city, town, school district, or village district unless said real or personal property is used or occupied by other than the state or a city, town, school district, or village district under a lease or other agreement the terms of which provide for the payment of properly assessed real and personal property taxes by the party using or occupying said property….
(b) All leases and other agreements, the terms of which provide for the use or occupation by others of real or personal property owned by the state or a city, town, school district, or village district, entered into after July 1, 1979, shall provide for the payment of properly assessed real and personal property taxes by the party using or occupying said property no later than the due date. … All such leases and agreements shall include a provision that "failure of the lessee to pay the duly assessed personal and real estate taxes when due shall be cause to terminate said lease or agreement by the lessor.'' All such leases and agreements entered into on or after January 1, 1994, shall clearly state the lessee's obligations regarding the payment of both current and potential real and personal property taxes, and shall also state whether the lessee has an obligation to pay real and personal property taxes on structures or improvements added by the lessee.
(c) If the lessee using or occupying the property fails to pay the duly assessed personal and real estate taxes on the due date, the tax collector of the taxing district involved shall notify the lessor that the same remains unpaid. Upon receipt of said notification from the tax collector, the lessor shall terminate said lease or agreement and pay over to the tax collector from amounts received from said lease such sums as are necessary to satisfy the tax due….

Despite the detail of these amendments, the exact meaning of the statute remains unclear. Is a municipality required to include a property tax clause in every lease agreement, or is it a negotiable item? What if such a clause is omitted? Can property tax be assessed, anyway? Is the lease invalid without a property tax clause?

This article will review the law as it has evolved and discuss certain key court cases in order to identify the property taxation issues that must be addressed by cities and towns contemplating a lease of municipally-owned property.

The Early Law
From colonial times, public property was exempt from property taxation. Not until the second half of the 19th Century did the legislature pass legislation to expressly exempt the property owned by the State and political subdivisions "used for public purposes." See Canaan v. Enfield Village District, 74 N.H. 517 (1908). At the same time, on the assumption that a leasehold interest was taxable real estate, it was common to assess property taxes on the leasehold interest of a tenant who leased surplus municipal property. See discussion in Hampton Beach Casino, Inc. v. Hampton, 140 N.H. 785 (1996).

The foremost example of an early lease of municipally-owned land was the Town of Hampton's 99-year lease of a "narrow strip of undeveloped … barren sand dunes and marsh land," which was subsequently developed by the lessee with 15 blocks of residential and commercial properties at Hampton Beach. The Town's stated purpose was to yield income and to increase the tax base. The rent was fixed at $500 per year for the entire term of the lease. Another clause provided that the Town would not assess property taxes on the land, or, if it did, the Town itself would pay the taxes. (Buildings were taxable.)

Twice in later years, the Town of Hampton pursued litigation to the New Hampshire Supreme Court seeking to invalidate the property tax provisions. The Town claimed that the agreement was unconstitutional by granting a special property tax exemption; by making a gift to a private corporation; and by violating the principle of uniformity and equality in property tax assessment. But, the Court held that the tax agreement was a valid contract by the Town to pay the lessee's taxes as consideration for the lessee's undertaking to develop Hampton Beach with valuable improvements. Hampton v. Hampton Beach Improvement Co, Inc., 107 N.H. 89 (1966); Hampton Beach Improvement Co. v. Hampton, 77 N.H. 373 (1914). These cases established the principle that, for a good reason, a municipality could reduce or eliminate property taxes on land leased for private occupancy by making the tax payments itself.

The statutes regarding property tax exemptions were revised in 1957 so that all municipally-owned property was simply entitled to exemption. There was still no reference in RSA 72:23, I to occupancy by private parties. Laws 1957, Chapter 202:2.

The Modern Statute
Significant amendments to RSA 72:23, I began in 1977. First, language was added referring to the agreement of private parties in occupancy to pay property taxes. Laws 1977, Chapter 600:83. Next, language was added to provide that failure of the lessee to pay property taxes shall result in termination of the lease by the municipality. Laws 1979, Chapter 182:1. A third major amendment followed, requiring leases and other occupancy agreements to clearly state the lessee's obligations regarding property taxes and to state "whether" the lessee has an obligation to pay taxes on structures and improvements added by the lessee. Laws 1993, Chapter 195:1. The current statute is substantially the product of these three amendments.

Meanwhile, the Supreme Court had decided Indian Head Nat'l Bank v. Portsmouth, 117 N.H. 954 (1977), in which the City assessed property tax on a parcel that the bank leased from the federal government. The Court held that, under New Hampshire law, leasehold interests are not, after all, "real estate" subject to property taxation. Thus, it became clear that property taxes can be collected from lessees of municipal property only by virtue of agreements that comply with RSA 72:23, I.

At that point, it appeared that:

  • Leaseholds were not real estate and could not, per se, be assessed for property taxes.
  • Property taxes could be assessed on privately occupied municipally-owned land by agreement with the lessee.
  • Such tax clauses were mandatory under RSA 72:23, I.
  • The statute required such agreements to be in writing and contain certain provisions specified in the statute.

But, questions remained: Does the statute require maximum assessment of taxes, or just a clause that addresses the issue in some way? What if a tax agreement clause is omitted entirely?

The Courts Apply the Statute

Appeal of Reid
In Appeal of Reid, 143 N.H. 246 (1998), the Town, through a special authority created by town meeting, leased town-owned waterfront lots to people who built seasonal recreational buildings on them. The lease agreements did not contain provisions for the lessees to pay property taxes on the value of the land. But, in 1993 the Town began assessing the lessees for the value of the land, anyway. The Board of Tax and Land Appeals ruled in favor of the Town. The Board reasoned that RSA 72:23, I should not be read literally, because it would be inconsistent with the legislature's intent to mandate taxation. The Board ruled that, because towns are not authorized to exempt property from taxation under the statute by agreement, the lessees are, therefore, liable for taxes even without a formal agreement.

The Supreme Court disagreed and held that the lessees could not be obliged to pay the taxes. The Court stressed that the leases in question did not unconstitutionally "exempt" property from taxation or shift the tax burden to others, because land leased from a municipality is simply not taxable unless or until a tax clause is included in the lease. The Court, however, reserved judgment on a major issue that was not presented: "[W]e express no opinion as to the validity of leases that do not include a provision providing for the payment of properly assessed taxes as required by the enforcement provision of RSA 72:23, I(b)."

New England Tel. & Tel. Co. v. Rochester
A different approach was taken in New England Tel. & Tel. Co. v. Rochester, 144 N.H. 118 (1999). The City unilaterally amended the telephone company's pole licenses to require payment of property taxes under RSA 72:23, I for occupancy of the street rights of way. The company claimed that this was not an "agreement," but the Court pointed out that pole licenses are subject to modification under RSA 231:163 "whenever the public good requires." Unlike the situation in Appeal of Reid, the consent of the lessee was not required to insert a tax clause. The Court stressed that the "public good" required the amendment in order to comply with RSA 72:23, I, because RSA 72:6 requires taxation of all real estate unless otherwise provided.

Ossipee v. Whittier Lifts Trust
The view that property tax clauses are mandatory was reinforced in Ossipee v. Whittier Lifts Trust, et al., 149 N.H. 679 (2003). A sub-lessee of a State-owned communications tower had a lease that did not provide for payment of property taxes. The Town assessed taxes anyway, and litigation ensued. The trial court ruled that, under RSA 72:23, I, the sublease agreement must contain a tax clause and ordered the parties to insert one. The case was appealed on other issues, so this particular issue was not addressed by the Supreme Court.

Somersworth and Four Up, Inc. v. Sunningdale Golf Club, Inc.
A more nuanced analysis was called for in the superior court case of Somersworth and Four Up, Inc. v. Sunningdale Golf Club, Inc. (Strafford County No. 02-E-0188, decided September 5, 2003). The City leased a 280-acre tract to Four Up for 38 years to build and operate an 18-hole golf course. The lease agreement provided that the lessee would pay property taxes on the land assessed as unimproved recreational land and no taxes on the structures and other improvements. Sunningdale, a tax-paying competing golf course operator, attacked the validity of the tax clause, claiming that RSA 72:23, I does not authorize the parties to negotiate or waive payment of property taxes. The court was confronted by competing arguments about the meaning of the Reid and Rochester cases.

Sunningdale argued that RSA 72:23, I does not authorize the parties to negotiate or waive any portion of the property taxes that could be assessed. It argued that the statute removes the property tax exemption in full for municipal property leased for private occupancy. Sunningdale also argued that any agreement to reduce Four Up's property tax would unconstitutionally shift the tax burden to others. The court, however, disagreed. First, the court ruled that, as stated in Reid, there is no constitutional issue because the municipally-owned land is exempt in the first place. Then, the court ruled that the tax clause was valid, focusing on RSA 72:23, I(b), which requires leases to "state whether the lessee has an obligation to pay real and personal property taxes on structures or improvements added by the lessee." This, the court said, establishes that it is permissible under the statute not to tax structures and improvements added by the lessee.

Certainly, any agreement to allow occupancy of municipally-owned land for any substantial period should have some form of property tax clause in writing. To omit such a clause would unnecessarily raise the issue of the validity of the agreement. The property tax clause must contain the prescribed terms for payment and termination set forth in RSA 72:23, I(b).

It is less clear how much discretion a city or town has to negotiate the level of property tax payments. In most cases, there will be no issue, because one of the purposes of the lease will be to generate property taxes. But, in some circumstances, a prospective lessee may be proposing a business or other activity that is beneficial to the community, yet the lessee is unwilling or unable to pay high property taxes. In negotiating a limit on property taxes, a municipality must understand the risks.

As illustrated by the Sunningdale case, the statute itself confers broad discretion in the case of improvements made by the lessee. But, with respect to land and existing improvements, there is a good deal of uncertainty. One view, expressed in the Rochester case, is that there is a duty to assess and collect the maximum possible property taxes. On the other hand, the reasoning of the Supreme Court in the old Hampton Beach cases may still be valid. There, the Court held that the Town of Hampton itself was entitled to contractually assume the burden of the property taxes on the leased land in exchange for other public benefits derived from the private development. In cases arising today under RSA 72:23, I, it seems reasonable to allow the municipality to make a similar bargain in the lease's tax clause to offset some or all of the property taxes that would otherwise be assessed to the lessee. The most straightforward way to do so would be by making an appropriation of money in the budget for the purpose of paying the taxes. Although it would be largely a bookkeeping procedure to pay taxes from municipal funds, the budget appropriation would constitute a transparent public policy choice by the legislative body, not a questionable "tax break" for the lessee.

Dave Connell is legal services counsel for the New Hampshire Local Government Center. Local officials in NHMA-member municipalities may contact LGC's legal services attorneys for more information on this and other topics of interest Monday through Friday 8:30 a.m. to 4:30 p.m. by calling 800.852.3358, ext. 384. School officials should contact the New Hampshire School Boards Association attorney at 603.228.2061.

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