TOWNSEND BALTIMORE GARAGE, LLC, et al.
SUPERVISOR OF ASSESSMENTS OF BALTIMORE CITY
Meredith, Kehoe, Rodowsky, Lawrence F. (Retired, specially assigned), JJ.
This case arises out of a property tax assessment levied by the Supervisor of Assessments of Baltimore City ("the Supervisor"), appellee, upon certain improvements constructed upon real property owned by the State of Maryland. Although real estate owned by the State would ordinarily be exempt from property taxes, the Supervisor asserts that the present property does not qualify for an exemption because the improvements, which were constructed upon the State-owned property pursuant to a series of complex leasing arrangements, are owned and operated in connection with businesses that are conducted for profit by the appellants, Townsend Baltimore Garage, LLC ("Townsend"), and Baltimore LSRP One Business Trust ("BLSRP"). After the Tax Court agreed with the Supervisor's denial of a tax exemption, Townsend and BLSRP filed a petition for judicial review in the Circuit Court for Baltimore City. The circuit court affirmed the decision of the Tax Court, and this appeal followed.
For the reasons stated herein, we conclude that the Tax Court's ruling was in error. Accordingly, we reverse the judgment of the circuit court.
The parties agree that the underlying facts are largely undisputed. The facts were well-summarized as follows by the Circuit Court for Baltimore City:
This case involves two parcels of land within the University of Maryland BioPark in Baltimore City. Both are owned in fee by the State of Maryland for the use of the University System of Maryland. The parcels were conveyed to the State by the City of Baltimore for nominal consideration. The State leased the land to UMB Health Sciences Research Park Corporation under a ground lease. UMB Health Sciences Research Park Corporation (RPC) is a non-profit corporation that enjoys tax exempt status under Internal Revenue Code § 501(c)(3) and was created under Education Article § 12-113, which permits the University system to establish a business entity to further a goal of the University related to its mission. The term of the ground lease is 60 years and 2 days. The ground lease provides that during the term of the lease the improvements upon the land shall be deemed to be owned by RPC. It further provides that upon the expiration of the lease term the title to the improvements shall automatically vest in the landlord without any payment by the landlord.
One of the parcels was subleased by RPC to Baltimore LSRP One Business Trust, a for-profit entity, for a period of 60 years and 1 day. The subtenant agreed to finance and construct an office and laboratory building on the land. The sublease provides that during the term of the sublease title to the improvements shall be held by the subtenant. It further provides that upon the expiration of the sublease term the sublandlord shall be the owner of the improvements free from any interest of the subtenant. The subtenant, in turn, subleased these premises to the State of Maryland for the use of UMB. UMB uses the premises to house programs of the School of Medicine. The parties stipulated that 85% of the office space is used for University purposes.
The other parcel was subleased by RPC to Townsend Baltimore Garage, LLC, a for-profit entity, for a term ending in 2064. The subtenant agreed to finance and construct a parking garage on the land. The sublease provides that during the term of the sublease title to the improvements shall be held by the subtenant. It further provides that upon the expiration of the sublease term the sublandlord shall be the owner of the improvements free from any interest of the subtenant. The subtenant licensed 150 parking spaces to the State of Maryland for the use of UMB. The parties stipulated that 25% of the garage is used for University purposes.
According to testimony before the Tax Court, the transaction was structured in this fashion in order to finance the development of the property. Because of the limited debt capacity of the University, it was necessary to bring in private developers to finance the construction of the buildings. The developers insisted on having ownership of the buildings during the period of the leases because that was necessary in order for them to depreciate the improvements for income tax purposes. That in turn benefitted the University by reducing its rental rate.
The Tax Court did not render written findings of fact, but did provide the following comments in an oral opinion delivered at the conclusion of the hearing in the Tax Court:
The only real issue seems to have been the legal ownership or the ramifications thereof of the buildings.
Important facts: The land in question was owned by the City of Baltimore at one time, was transferred to the State of Maryland for the University of Maryland to a 501(c)(3), not owned by a private entity — well, the 501(c)(3) is a private entity — not owned by a for-profit entity. At least in terms of my analysis, I'm not sure that it matters that it's a 501(c)(3) or the University of Maryland at Baltimore. In either instance, it's a government entity.
And to the extent of the percentages that were agreed to, that a portion of the office building and the garage, twenty-five percent of the garage and eighty-five percent of the office building, were used for public purposes for the University. That there is no doubt that the University, acting through this 501(c)(3), which, if I remember correctly is RPC, entered into an agreement with a private entity, a for-profit organization, to construct an office building and a parking garage. And to the agreed percentages, were leased back to the University for University purposes.
So much for most of the agreed facts that I think are the easy part.
The next part is a little harder. We had to — Who owned these structures? Petitioner basically said that, yes, we entered into a whole stack of agreements that said that the structures were owned by the for-profit entity. I hate to put it this way since, Petitioner, I understand it also includes the University. Am I correct? Documents say that the for-profit entity owns the buildings, but they're arguing today that, in fact, that that's not true. That it was only done for income tax purposes to allow the for-profit to depreciate the building. In fact, these are fixtures and are really owned by the 501(c)(3) because common law says a fixture is owned by whoever owns the land, and we know who owns the land.
It's an argument I'm not going to buy. That if the documents say that it's owned by the for-profit entity, then I'm going to say it's owned by the for-profit entity. And there are — Given the long-term nature of these agreements, its ownership has different meanings in some ways. Clearly, if this was a very short-term lease, that it wouldn't — most of the characteristics of ownership would not — wouldn't apply. But given that these are approximately sixty year leases, and the documents themselves say that the structures are owned by the for-profit, I'm going to say that they're owned ...