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Church Property Tax Liability in Arizona for Commercial Leases

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By: Bob Henry

Arizona House Bill 2128, which was signed into law by Governor Doug Ducey on March 23, 2015, has potential impact on the commercial real estate leasing market.  The bill enables owners of real property that is leased to religious institutions to enjoy the closest thing to a complete exemption that is available to lessees of real property owned by for-profit organizations or individuals.

This blog does not opine on policy issues, and the wisdom of this legislation can be debated.  But this legislation nevertheless creates some potential practical and logistical issues—for better or worse, and depending on one’s perspective and circumstances.  On the one hand, landlords and tenants typically celebrate any legislation that reduces taxes on leaseholds.  This increases available funds for tenants and enables landlords to lease spaces for rates that they might not otherwise be able to offer in the market with the more burdensome tax assessment ratio expense tacked on (18% for most commercial properties).  But for every benefit, there is usually a cost—to someone.

Based on this blog’s first review, this legislation could create potential confusion—and potential litigation—down the road for landlords and tenants, especially in multi-tenant facilities with long-term leases and practices in place.  If the existing leases at the facility, for example, entitle the landlord to allocate, on a pro rata basis, the total amount of property taxes owed at the facility, will a religious institution tenant now claim that its pro rata share should be discounted (notwithstanding the terms of its existing lease whereby it agreed to share with all tenants the property tax burden for the facility overall)?  If a religious institution or a landlord does not jump through all the hoops necessary to qualify for this reduced assessment rate on some of the space at the facility, will the landlord, tenant, or other tenants have claims to pursue arising out of the fact that one party did not comply with the statutory requirements that would have, or could have, benefited one or more other parties?  The list of “what ifs” could go on and on, just as it can with any legislation on any issue that tinkers with the rights of parties in certain commercial settings (perhaps exacerbated, on numerous fronts, when the issues involve taxes and religious institutions).

How the courts construe these statutory provisions in practice could very well mitigate or eliminate these concerns, but these are issues to keep in mind for landlords or tenants with spaces that are being, or could be, leased by religious institutions going forward.  And this legislation will undoubtedly add another “issue” for counsel for landlords and tenants with spaces that will potentially be utilized by religious institutions to be mindful of when drafting leases.

Link to HB 2128 here: