GRAND RAPIDS — A successful appeal by Spectrum Health to win tax-exempt status for a medical office building in Grand Rapids Charter Township could spur similar cases across West Michigan.
It could also deal a blow to property tax revenues at municipalities home to high-tech medical facilities owned by nonprofit health care organizations.
In a case pending before the Michigan Tax Tribunal, Spectrum Health is appealing a decision by Grand Rapids Charter Township to treat its Integrated Care Campus at 2750 East Beltline Ave. NE as a taxable property. The township’s ruling requires the Grand Rapids health system to pay hundreds of thousands of dollars in property taxes annually — as the owners of its previous medical offices did before those services were consolidated to the new Spectrum Health-owned facility.
Spectrum Health also pays property taxes on similar facilities in other communities, although it could appeal those as well, according to executives.
“Because our patients expect us to operate as cost-effectively as possible, we are evaluating the property tax treatment of all of our Spectrum Health Medical Group facilities and will consider applying for additional property tax exemptions in the future,” said David Leonard, Spectrum Health’s general counsel.
The present case involving Grand Rapids Township hinges on whether the Spectrum Health campus meets the requirements of state law to receive tax-exempt status for real estate and a precedent-setting Michigan Supreme Court decision from a decade ago that involved the Wexford Medical Group and the City of Cadillac.
“This is clearly well-settled law in the state of Michigan and this is mystifying to us as to why the township is taking this position,” Leonard said. “We meet the criteria of well-settled state law.”
Leonard expects the case to go to trial before the Tax Tribunal in 2017. Until then, Spectrum Health remains “very open to further discussions with the township about this,” he said.
“We don’t like to be in a dispute with anyone,” Leonard said.
‘WE DON’T AGREE’
Grand Rapids Township has yet to file a formal response to Spectrum Health’s appeal that outlines its legal position. However, the rationale for denying a tax exemption for the Integrated Care Campus stems from the prior taxable status for a number of medical offices in northern Kent County that relocated there nearly two years ago.
In opening the $48 million Integrated Care Campus in 2014, Spectrum Health trumpeted the facility as a new model for delivering health care as it consolidated the health system’s physicians, specialists and medical services into a single location that’s convenient for patients.
“All of those facilities were taxable when (the medical practices) existed elsewhere,” said Township Supervisor Michael DeVries. “Now they move into a facility and they say that due to the nature of their business model there that it becomes tax exempt. It would be safe to assume that we don’t agree with that exempt status.”
However, many of those practices that consolidated into the Integrated Care Campus previously operated in offices leased by the Spectrum Health Medical Group, Leonard said. The owners of those offices — not Spectrum Health — paid property taxes on the sites as landlords, he said.
Grand Rapids Township also considers local facilities owned and operated by Mercy Health and Metro Health as taxable, DeVries said. He worries that if Spectrum Health wins the case at the Tax Tribunal for the Integrated Care Campus, then the other health systems will follow suit and appeal their tax status as well, DeVries.
“If one goes, they’ll all go,” he said.
Holland Township treats Spectrum Health’s $15 million, 58,000-square-foot integrated care center that opened in 2012 as taxable, said assessor Howard Feyen. Spectrum Health has not sought to claim a tax exemption on the facility, he said.
The Holland Township facility consolidated a number of Spectrum Health’s local physicians and medical services into one location — like the Integrated Care Center in Grand Rapids Township.
The question of tax status has arisen in Grand Haven Township, where Spectrum Health and Holland Hospital want to develop a 120,000-square-foot integrated care center through a nonprofit joint venture known as Health Pointe Inc.
Spectrum Health is developing similar, smaller medical centers in Muskegon County and Ionia.
In Grand Rapids Township, Spectrum Health paid a total of $294,590.92 in 2015 summer and winter property taxes on one of the two parcels that comprise the Integrated Care Campus. Spectrum Health paid $124,271.14 on the other parcel for the 2015 summer and winter tax bills.
A CHARITABLE THRESHOLD
In appealing the Grand Rapids Township Board of Review’s March 2015 refusal to change the Integrated Care Campus’s tax status for 2014 and 2015, Spectrum Health argues that since it and its affiliates are nonprofit, tax-exempt corporations, their facilities should receive a tax-exemption.
Spectrum Health’s initial filing last May cited the 2006 Michigan Supreme Court decision reversing Tax Tribunal and lower court rulings for the City of Cadillac, which argued Wexford Medical Group did not qualify as a charitable institution and that its facility did not qualify for tax-exempt status under the state’s property tax law.
Justices ruled that the Tax Tribunal and state Court of Appeals misapplied the law by focusing on the free medical care that the Wexford Medical Group provided. They ruled that the Wexford Medical Group, which is organized as a nonprofit corporation, “is a charitable institution because it exists for, and carries out, the purpose of giving a gift for the benefit of an indefinite number of persons by providing free and below-cost medical care to anyone who needs it without qualification, and it realizes no pecuniary gain from its activities. As such, it is entitled to an ad valorem tax exemption.”
To win its case, Spectrum Health needs to show that the Integrated Care Campus meets the legal definition of “charitable” in state law and provides charitable care there, said Jack Van Coevering, a tax attorney of Bloom Sluggett Morgan PC in Grand Rapids.
“You have to show some activity there that is charitable in nature. A lot of times, these hospital cases hinge on what you do there that is charitable,” said Van Coevering, a former chief judge and chairman of the Tax Tribunal. “Just saying that you’re a hospital doesn’t get you there. They can show that they’re a nonprofit and they can show that they’re organized for a charitable purpose, but then they have to go and show that what they do there is charitable.
“If you don’t come up with proof that you’re doing something charitable, then you’re not going to win.”
A Tax Tribunal ruling would apply only to the real estate and facility in question of that particular case.
Whether a medical facility deserves an exemption from property taxes comes down to the specific facts and circumstances of the case, Van Coevering said.
Individual medical offices or facilities must meet the legal requirements for a tax exemption. Under state law, a hospital or health system cannot use the charitable care provided at one facility to support a tax-exempt status at another property or for the entire organization, he said.
A medical facility could earn tax-exempt status if it provides charity care, serves Medicaid patients or has a public health function, Van Coevering said. In the Wexford case, the argument for tax-exempt status was supported by the medical group having a separate fund to support medical care for indigent patients.
“It wasn’t a large portion, but it was significant enough you could say they operated consistent with their charitable purpose,” Van Coevering said.
Spectrum Health physicians at the Grand Rapids Township facility participate in Medicaid and follow a “strong” charity care policy, supporting the case for tax-exempt status, Leonard said.
In pleadings filed with the Tax Tribunal, Spectrum Health Primary Care Partners — which does business as the Spectrum Health Medical Group — states that 99.77 percent of the Integrated Care Campus is used by charitable affiliates. Spectrum seeks a ruling for tax-exempt status for that portion of the building. The remaining 0.23 percent, or 266 square feet, is leased to an ear, nose and throat medical practice and “should possibly be subjected to property taxation,” according to the May filing to the Tax Tribunal.
If the Tax Tribunal sides with Grand Rapids Township and rules the Integrated Care Campus as taxable property, Spectrum Health then asks for a reduction in the assessed value of two parcels that comprise the Integrated Care Campus. One parcel has an assessed value of $6.16 million, which Spectrum Health wants lowered to $4.5 million. The other is assessed at $3.47 million, and Spectrum Health asked the Tax Tribunal to lower it to $2.5 million.
‘LINES ARE GETTING BLURRED’
The tax status of real estate owned by a nonprofit organization is an issue that comes up regularly. It depends on how active a municipality or township reviews properties and facilities to determine whether they qualify for a continued or new exemption, said Karrie Zeits, a municipal attorney for Smith Haughey Rice & Roegge PC in Traverse City.
Some communities are taking a harder look at whether nonprofit organizations meet requirements in the law for tax exemptions on real estate, Zeits said.
“It’s not uncommon and I think that taxing jurisdictions, at least up here, more and more are scrutinizing these tax exemptions,” she said. “They have an obligation to the other taxing jurisdictions on the tax bill who collect a millage (such as schools, libraries and counties) to make sure that they are protected and are getting the taxes that are due them.”
While the Wexford-Cadillac case answered key questions a decade ago, there’s been a trend over the last several years in health care for physicians who had previously worked in private, for-profit practices going to work for nonprofit health systems as employees.
That has contributed to increased scrutiny by assessors about the tax status of new medical offices and facilities owned by nonprofit hospitals and health systems to house the physicians they now employ, said Feyen, the assessor in Holland.
“Like all things today, the lines are getting blurred. There’s definitely a distinction or an interweaving now of what used to be a doctor’s practice and the hospital has a role,” Feyen said.
Ultimately, DeVries, the Grand Rapids Township Supervisor, would like to see the matter settled by legislation enacted that better clarifies what kind of facilities are exempt from property taxes.
“It really needs to have a good definition,” he said. “We need legislation that makes sense and that helps define better what is exempt and what is non-exempt. We can’t keep having changes on what is exempt and non-exempt without having the Legislature pay attention to that.
“How do we function here in government when it continually affects the revenue streams?”