The Most Important Property Tax Exemption Decision in Years

The Most Important Property Tax Exemption Decision in Years by Steven F. Pflaum, Thomas J. McNulty, Tonya G. Newman, and Collette A. Woghiren of Neal, Gerber & Eisenberg LLP in Chicago A recent Illinois Appellate Court decision suggests a Northwest Passage for hospitals around municipalities who wield their land use authority over construction projects to force hospitals to waive their right to seek property tax exemptions. The significance of the decision— especially for hospitals—may not be obvious. The case doesn’t involve a hospital or hospital affiliate. It doesn’t concern the hospital property tax exemption contained in Section 15-86 of the Property Tax Code or, for that matter, any other type of charitable exemption. But it nevertheless constitutes, for the Illinois hospital community, the most important property tax decision since the Illinois Supreme Court unanimously upheld the facial constitutionality of Section 15-86 in Oswald v. Hamer, 2018 IL 122203.

The First District’s decision in Keystone Montessori School v. Village of River Forest.

2021 IL App (1st) 191992, invalidated a tax agreement between a municipality and a not-forprofit school. The agreement included the village’s commitment to issue land use approvals needed for the school to operate in a location that was not zoned for school use. The agreement was conditioned upon, among other things, the school’s express waiver of its right to seek a property tax exemption. After the village rejected five formal requests over a nine-year period to reduce the school’s tax burden, the school sued to invalidate the tax agreement, citing changed circumstances.

Finding a public policy against exemption waivers in the authorization of school property tax exemptions under both the Illinois Constitution and the Property Tax Code, the court agreed with the school that its tax agreement with the village was void as against public policy. Id,

¶¶ 69-70.

This meant the school was free to seek an exemption despite having expressly

promised not to do that.

There is no difference, in terms of the rationale for the court’s decision, between the school property tax exemption authorized by the Illinois Constitution and the Property Tax Code and the charitable not-for-profit hospital exemption also authorized by the Constitution and the Code. In language equally applicable to a municipality’s attempt to convince a hospital to waive its right to an exemption, the Appellate Court declared: “[The Village subsumed to—or usurped for—itself the power to decide whether Keystone would receive the exemption authorized by the Illinois Constitution and provided without express exception in the Tax Code. Similarly, Keystone could not waive that exemption through the Tax Agreement because it was not only Keystone’s exemption to waive. The State extended the exemption to schools because of the benefits that schools, whether public or private, bring to the public. Forming an agreement with the Village purporting to waive the exemption could cause harm beyond the harm to Keystone alone….” Id., ¶ 74.

Hospital construction projects, like those for schools, sometimes encounter overreaching local officials. On occasion, those officials may want hospitals to agree not to seek a property tax exemption for projects sited on newly acquired property. Keystone Montessori School enables hospitals to say “Stop!”—and to explain that the proposed waiver would violate public policy and be void and unenforceable.

The Appellate Court essentially extended to property tax exemptions the protection that the PILOT (Payment in Lieu of Taxes) statute provides against local officials who want to condition land use approval on annual payment of PILOT fees.

See 35 ILCS 200/15-30

(prohibiting local officials from “defer[ring] or delay[ing] zoning changes, site exceptions from zoning, or other administrative measures to coerce an owner of property exempt from taxation to enter into an agreement to make voluntary payments in lieu of property taxes”).” The decision in

Keystone applies statewide, although the village has filed a petition for leave to appeal (PLA) to the Illinois Supreme Court. The Court’s decision whether to grant the PLA and hear the appeal is expected in the Court’s November term.

Time will tell whether Keystone will stop municipalities from expressly demanding waivers of tax exemptions or just force that practice underground. Hospitals should object if their construction projects bog down in administrative delays and burgeoning, burdensome demands by municipal officials. If “shakedown” is the inescapable meaning of the officials’ words and conduct, the logic of Keystone Montessori School suggests that a demand that a hospital waive its right to a property tax exemption need not be stated expressly in order to be out of bounds.