In University of Chicago v. Department of Revenue, the Illinois Appellate Court held that the University’s properties that were used by a for-profit daycare provider were not entitled to property tax exemptions under Section 15-35 of the Property Tax Code, even though the daycares were reasonably necessary for the University’s efficient administration.
The University of Chicago outsourced the operation of two on-campus daycares to Bright Horizons, a daycare provider. The University and Bright Horizons then applied for property tax exemptions under Section 15-35 of the Property Tax Code, which provides that all property of schools (including public school districts) is exempt from property taxes unless it is sold, leased, or otherwise used with a view to profit. Section 15-35 of the Property Tax Code has been construed to extend to property that is used for school purposes as well as property that is reasonably necessary for the accomplishment and fulfillment of the educational objectives, or the efficient administration of a school.
In its decision, the court began by finding that the properties at issue were primarily used for purposes that are reasonably necessary for the efficient administration of the University because on-campus child care alleviated the difficulty in hiring professional employees with young children. Nevertheless, the court still found that the properties were not entitled to exemptions because the use of the properties as daycares was with a view to profit. In making this determination, the court rejected the argument that an organization may contract with third-party, for-profit providers without affecting entitlement to property tax exemption. The issue, rather, was whether the exemption under Section 15-35 of the Property Tax Code still applies if a third-party, and not the property’s owner, receives the profits generated by the property. Based on a narrow interpretation, the court reasoned that there was nothing in the statute stating that the owner of the property must be the entity that profits for the exemption to be inapplicable. In this case, Bright Horizons was generating profit from its use of the properties (even though the University derived no profit from the properties), so the portions of the University’s properties containing the for-profit daycares were not entitled to property tax exemptions.
School districts often rent out space to third-party tenants, including before- and after- school care providers. This case confirms that when third parties use school property with a view to profit, that use may impact the tax-exempt status of the property or leasehold. This case also reiterates that the statute granting property tax exemptions to schools is construed narrowly. While periodic and partial uses of school property by third parties may not be likely to jeopardize the tax exempt status of school property, school districts should carefully consider the possible property tax implications of entering into leases with for-profit entities. As a result, school districts should review their leases of school property for possible property tax implications of this decision and ensure that all future leases expressly deal with the payment of property taxes.