Is the Arkansas statute that conditions property tax exemption for school-leased property on a no-profit showing constitutional?
Plain-English summary
Representative David Ray reported a tension in how Arkansas property is being taxed. County officials had historically treated property leased to open-enrollment public charter schools as exempt from property tax under the state constitution's school-buildings exemption. More recently, some officials began imposing property tax on the same kind of property by relying on A.C.A. § 6-21-118, a 2017 statute that conditions the exemption on the lessor proving no profit from the lease. Ray asked whether the statute is unconstitutional.
The AG's answer is no. The statute is constitutional given how the Arkansas Supreme Court has interpreted Article 16 of the constitution.
The constitutional framework: Article 16 § 5(b) lists what real property is exempt from taxation, including "school buildings and apparatus" and "libraries and grounds used exclusively for school purposes." Article 16 § 6 prohibits the General Assembly from expanding that list. So any statute about school-property taxation has to live within the boundaries the Court has set when interpreting § 5(b).
The Court's interpretation has stripped away the surface differences in § 5(b)'s clauses. Section 5(b)'s clauses use very different language to describe the various exemptions: some require "exclusive use," some merely "use," and the school-buildings clause says nothing about use restriction. But the Court has held that "the principles and rules applying to one category" apply with force to the others (Sebastian Cty. v. Educare Centers; Hilger v. Harding College). The Court reads two themes through all of § 5(b):
- Ownership. Real property owned by a for-profit company is ineligible for the exemption (Educare Centers).
- Use. The property must be used exclusively for public purposes, which excludes any profit-making (City of Little Rock v. McIntosh).
A.C.A. § 6-21-118 is built on those two themes:
- Use. The statute exempts public school buildings used exclusively for school purposes, mirroring the Court's interpretation of § 5(b).
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Ownership. When the property is leased to a school, the landowner (not the school) gets the tax exemption. If the landowner is for-profit and is realizing net profit from the lease, the property fails the ownership theme. So the statute requires proof that the lessor is not making a net profit from the lease arrangement, in two forms:
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Lease-purchase agreements: the lessor must file the agreement with the county recorder. (Filing alone counts as proof.)
- Other leases: the lessor must prove to the county assessor that the lease is "below fair market value" and that the lessor is not financially benefiting from the tax exemption. The statute creates a formula: the difference between lease amount and fair market value must equal or exceed what the property tax would have been.
Article 16 § 6 (which forbids expanding the exemption list) is also satisfied. The statute does not expand the list; it just defines what counts as a no-profit lease for the existing list. That is the General Assembly's authority to provide "definition" regarding constitutional exemptions (City of Springdale v. Duncan).
The opinion does not address the tax status of any specific property. The AG noted the office is not a factfinder. That decision is left to county assessors applying the statute (and, if challenged, to the courts).
What this means for you
Charter school operators
Your landlord must demonstrate the lease is not profit-generating to maintain the property's tax-exempt status. For a lease-purchase agreement, the requirement is just to file the lease-purchase agreement with the county recorder. For other leases, the lessor has to show the county assessor that the lease is below fair market value by an amount equal to or greater than the foregone property tax.
If your school is paying market rent or above, the property may not qualify for exemption and the landlord may pass the tax cost through to you. Build that calculation into your lease negotiations.
School district administrators
For school district-owned buildings, the analysis is straightforward: school district ownership and exclusive school use both clearly meet § 5(b). Your buildings should remain exempt without additional proof.
For property your district leases (where someone else owns the building and rents to you), the lessor's no-profit proof under § 6-21-118 is what keeps the exemption alive. Coordinate with your landlords on the documentation requirements.
Landlords leasing to schools or charter schools
If you lease to a school or charter school and want the property tax exemption to apply, you need to satisfy § 6-21-118's documentation requirements. For a lease-purchase agreement, file it with the county recorder. For another lease, prepare to demonstrate to the county assessor that the lease is below market and that you are not financially benefiting from the tax exemption (the formula in § 6-21-118(b)(3)(B)(ii) is the test).
If your lease pays you above-market or close-to-market rent, your property is not eligible for the exemption under the Court's case law, and § 6-21-118 essentially codifies that limit. Plan for property tax in your underwriting.
County assessors
The AG opinion gives you support for applying § 6-21-118 to property leased to public schools and open-enrollment charter schools. The constitutional challenge to the statute fails because the statute mirrors the Court's interpretation. Your job is to apply the statute's specific tests (lease-purchase filing or fair market comparison) and let the courts resolve any individual property dispute.
Property tax attorneys
This is a useful citation cluster on Article 16. The constellation of cases (Educare Centers, Hilger, McIntosh, Mo. Pac. Hosp. Ass'n) establishes that the various § 5(b) clauses share principles even though their text differs. § 6-21-118 fits within that interpretive frame.
If you have a client whose for-profit lease was previously treated as exempt, the AG opinion supports the assessor's authority to revisit that treatment under § 6-21-118.
Common questions
What is A.C.A. § 6-21-118?
A 2017 Arkansas statute that conditions the property tax exemption for property leased to public school districts and open-enrollment public charter schools on the lessor demonstrating no profit from the lease.
What's the difference between § 5(b) and § 6-21-118?
The constitution (§ 5(b)) creates the exemption. The statute defines specifically how the exemption applies to leased school property, by adding documentation requirements that ensure the lease is not profit-generating.
What if a county assessor revokes my property's exemption?
You can dispute the assessor's decision through the standard property-tax appeal process. The AG opinion only addresses the constitutional question, not the application to any specific property.
Does this opinion change tax treatment for school district-owned buildings?
No. School district-owned buildings used for school purposes remain exempt without additional proof. § 6-21-118 only adds the no-profit requirement for leased property.
Are private schools covered?
The statute and the analysis apply to public school districts and open-enrollment public charter schools, not private schools. Private schools have separate tax treatment under different constitutional provisions (charity, etc.).
What about lease-purchase agreements?
For a lease-purchase agreement, the only documentation requirement is filing the agreement with the county recorder. The statute treats that as sufficient proof of no profit.
What does "below fair market value" mean?
The lease is below fair market by enough that the savings to the lessor (the foregone tax) is matched or exceeded by the rent reduction below market. § 6-21-118(b)(3)(B)(ii) gives the formula.
Background and statutory framework
Ark. Const. art. 16, § 5(b). Lists the categories of real property exempt from taxation: public property used exclusively for public purposes, churches, cemeteries used exclusively as such, school buildings and apparatus, libraries and grounds used exclusively for school purposes, and buildings and grounds and materials used exclusively for public charity.
Ark. Const. art. 16, § 6. Prohibits the General Assembly from expanding the list of exempt real property.
A.C.A. § 6-21-118. Implements the school-buildings exemption for property leased to public school districts and open-enrollment public charter schools, with documentation requirements to ensure no profit from the lease.
Educare Centers (Sebastian Cty. v. Educare Centers, 296 Ark. 538 (1988)). Held that property owned by a for-profit company is ineligible for the § 5(b) exemption.
Hilger (Hilger v. Harding College, 231 Ark. 686 (1960)). Read § 5(b)'s separate clauses as sharing common principles.
McIntosh (City of Little Rock v. McIntosh, 319 Ark. 423 (1995)). Held that "exclusive public use is a necessary element for exemption" and that profit-making and exclusive public-purpose use are inconsistent.
City of Springdale v. Duncan, 240 Ark. 716 (1966). Recognizes the General Assembly's authority to provide additional definition regarding constitutionally exempted property.
Citations
- A.C.A. § 6-21-118 (school buildings tax exemption requirements)
- Ark. Const. art. 16, § 5(b) (property tax exemptions list)
- Ark. Const. art. 16, § 6 (prohibition on expanding exemption list)
- Mo. Pac. Hosp. Ass'n v. Pulaski Cty., 211 Ark. 9 (1947)
- Sebastian Cty. v. Educare Centers of Ark., Inc., 296 Ark. 538 (1988)
- Hilger v. Harding College, Inc., 231 Ark. 686 (1960)
- City of Little Rock v. McIntosh, 319 Ark. 423 (1995)
- City of Springdale v. Duncan, 240 Ark. 716 (1966)
- Ark. Att'y Gen. Op. 2003-125, 2012-104
Source
Original opinion text
Opinion No. 2023-044
November 15, 2023
The Honorable David Ray
State Representative
137 Summit Valley Circle
Maumelle, Arkansas 72113
Dear Representative Ray:
I am writing in response to your request for my opinion about the constitutionality of a state statute. Under article 16, § 5(b) to our state constitution, certain real property is exempt from taxation. And article 16, § 6 prohibits the General Assembly from expanding the list of real property that is exempt from taxation. In 2017, the General Assembly passed an act, which is codified at A.C.A. § 6-21-118, that regulates the taxation exemption as it applies to property leased to public schools and open-enrollment public charter schools. You explain that county officials have historically applied the taxation exemption to properties leased to open-enrollment public charter schools. But recently some officials are imposing property taxes on the same properties under A.C.A. § 6-21-118. That statute requires the lessor in certain lease agreements to prove that the lease is not generating a profit for the lessor.
You ask whether A.C.A. § 6-21-118 is unconstitutional under Article 16, §§ 5(b) or 6 of the Arkansas Constitution.
RESPONSE
In my opinion, accepting how the Arkansas Supreme Court has interpreted Article 16 of the Arkansas Constitution, A.C.A. § 6-21-118 is constitutional.
DISCUSSION
Since this office not a factfinder when issuing opinions, I cannot opine about the tax-exempt status of any specific property. I can, however, explain the constitutional principles that apply in making that decision and compare those principles to A.C.A. § 6-21-118.
- Arkansas constitution. Article 16, §§ 5 and 6 of the Arkansas Constitution work in tandem: the former establishes an exhaustive list of real property that is exempt from taxation, and the latter prohibits the General Assembly from expanding that list. Under article 16, § 5(b), the following real property is exempt from taxation: "public property used exclusively for public purposes; churches used as such; cemeteries used exclusively as such; school buildings and apparatus; libraries and grounds used exclusively for school purposes; and buildings and grounds and materials used exclusively for public charity."
Article 16, § 5(b) contains markedly different language to describe these exemptions. For example, the first clause exempts (1) public property (2) used exclusively for (3) public purposes. Yet the other clauses contain no requirement that the property be publicly owned. To be eligible for the exemption, certain types of property must be "used exclusively" for specified purposes, other types must be merely "used" for specified purposes, and the "school buildings and apparatus" clause contains no use restriction of any kind.
Based on the language of the constitution alone, the property that is the subject of your question would likely be exempt from taxation. But a court faced with your question would have to review the constitution in light, not just of its language, but also of how the Arkansas Supreme Court has interpreted that language.
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Arkansas Supreme Court decisions. Under those decisions, the court has seen these very different clauses and declared that the constitution uses "similar[]…language" to describe the exemptions for "school, public[,] and charitable purposes." The Court then used this "similarity" to declare that "the principles and rules applying to one category" of exempt property "will apply with force to the other categories." These decisions import the textual requirements of one clause into the other clauses. When the Court's decisions are viewed as a whole, at least two clear themes emerge: (1) ownership—real property owned by a for-profit company is ineligible for the tax exemption; and (2) use—the property must be used exclusively for public purposes, which excludes any profit making.
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Arkansas Code. Both these themes can be seen in the statute you ask about. Section 6-21-118 exempts "[a] public school building from taxation under Arkansas Constitution, article 16, § 5" when it is "[o]wned by a public school district or open-enrollment public charter school" or "[l]eased by a public school district or an open-enrollment public charter school" if certain conditions apply. Your questions pertain to whether those additional conditions render the statute incompatible with the constitution. If the statute were incompatible with article 16, § 5(b), that would have to be because the statute contradicted the ownership or use elements discussed above.
Regarding the use theme, and just like article 16, § 5(b)—as it has been interpreted by the Court—buildings and grounds of public school districts and open-enrollment public charter schools are exempt from taxation only if they are exclusively used for school purposes. Accepting this interpretation, § 6-21-118 is entirely compatible with article 16, § 5(b).
The same is true regarding the ownership element. When land is leased by a school district or open-enrollment public charter school, the land's use would clearly meet the constitutional standard. But that does not necessarily settle the ownership question. When a school leases real property, it is the lessor, the landowner, that receives the benefit of the tax exemption. If that landowner is a for-profit company or is generating a net profit from the real property's use, then the real property would not qualify for the tax exemption. Perhaps recognizing this, § 6-21-118 requires proof that the lessor is not realizing a net profit from the lease. The necessary proof depends on the type of lease:
- Lease-purchase agreement: In a lease-purchase agreement, the real property is "exempt from taxation…[if] the lessor…file[s] the lease-purchase agreement with the county recorder."
- Any other lease: In any other kind of lease, in order to receive the tax exemption, the lessor must prove that the lease agreement is "below fair market value." To prove this, the lessor must "present evidence to the county assessor that" the lease agreement "is for an amount below fair market value" and that the lessor is not financially benefiting from the tax exemption. The statute establishes a formula to determine whether the lessor is financially benefiting: "The difference between the amount of the lease agreement and fair market value is equal to or greater than the amount that would have been collected in taxes on the public school building if the public school building had not been exempt from taxation under this section."
Nothing about the requirement of filing the lease-purchase agreement conflicts with article 16, § 5(b) as interpreted by the Court. Nor do I see anything unconstitutional under that interpretation in requiring the lessor in any other lease arrangement to prove that the land is not being used to generate a profit. That is precisely what the Court has required in several cases. Instead of being incompatible with article 16, § 5(b), § 6-21-118 seems squarely within the General Assembly's authority to provide additional "definition" regarding property exempted from taxation under the constitution.
You also ask whether § 6-21-118 violates article 16, § 6. That provision prevents the legislation from expanding the list of realty that is exempt from taxation. Section 6-21-118 does not expand the list of such property. Instead, it defines what it means for property leased to schools to be leased without a net profit. Therefore, the statute does not violate article 16, § 6 either.
Assistant Attorney General Jodie Keener prepared this opinion, which I hereby approve.
Sincerely,
TIM GRIFFIN
Attorney General