Does occasionally renting out a school gym or auditorium for commercial events strip a school district's property tax exemption?

Plain-English summary

Mohave County Attorney Matthew Smith asked the Attorney General whether occasional commercial use of a school-district-owned facility makes the facility "used or held for profit," which would strip the property of its educational tax exemption under A.R.S. § 42-11104(A). Attorney General Mark Brnovich answered that occasional commercial use does not necessarily strip the exemption, but more-than-occasional commercial use can.

The opinion rests on three pillars:

1. The statute itself. § 42-11104(A) exempts school buildings and equipment if (a) used for education and (b) "not used or held for profit." Both prongs must be satisfied. Tax exemption statutes are strictly construed, but strict construction cannot defeat the legislature's underlying choice to exempt.

2. The school-leasing regime. A.R.S. § 15-1105 lets school districts lease school property to "any person, group or organization for any lawful purpose," including recreational, political, economic, civic, or governmental. Districts must charge at least the cost of utilities, services, supplies, and personnel. Lease proceeds go to the civic center school fund (or to bonded indebtedness under § 15-1102(A)). The legislature plainly contemplated some commercial use.

3. The botanical gardens analogy. Tucson Botanical Gardens, Inc. v. Pima County, 218 Ariz. 523 (App. 2008), held that a non-profit's gift shop selling non-educational goods, plus rental of meeting rooms for weddings and private parties, did not strip the § 42-11116 exemption. The court reasoned that when the non-profit owns and is the primary user of the property, "occasional" non-exempt use does not transform the property into one "used or held for profit."

By analogy, a school district whose primary use of a building is education does not lose the § 42-11104(A) exemption merely because it rents the gym out on weekends. But the more frequent, scaled, or systematic the commercial use, the more likely the property crosses the "used or held for profit" line. The opinion expressly does not draw a bright line, leaving the application to the facts of each case.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical context: what the opinion meant in 2020

For school district business managers

The opinion gave districts comfort to rent out facilities to community groups, civic organizations, and even commercial users on a measured basis without losing tax-exempt status. It also flagged a risk: a district that turned a portion of its facility into a year-round commercial venue (a permanent leased coffee shop, a long-term commercial gym lease) might invite county-assessor scrutiny.

For county assessors

The opinion gave assessors a framework, not a formula. "Occasional" is not numerically defined. Assessors had to weigh frequency, exclusivity of the commercial use, whether the school remained the primary user, and whether the district was actually profiting. A blanket denial of the exemption based on any single commercial transaction was not supportable.

For tax attorneys advising districts

The opinion's reliance on Tucson Botanical Gardens is significant. The court there focused on the primary user test from § 42-11154 (charitable property exemption rules). The AG read § 42-11104(A) consistently, suggesting the same primary-user lens applies to schools. Practitioners could brief county assessors on the analogy.

For civic groups and small businesses renting school space

The opinion did not change rental terms or rates. Districts could still charge "reasonable use fees" covering at least their costs (§ 15-1105(G)(3)). What it did was reduce district reluctance to allow such rentals out of property-tax fear.

Common questions

Q: Does any commercial rental of a school facility kill the tax exemption?
A: No. Under Tucson Botanical Gardens and this opinion, occasional commercial use is consistent with continued exemption. The threshold is somewhere short of "primary use," but the AG declines to specify exactly where.

Q: What's an example of "more than occasional" use that might cost the exemption?
A: The opinion does not give specific examples. By analogy from Tucson Botanical Gardens, the court considered facts like the gift shop's location (wholly within the garden's owned space), the lack of profit, and the limited frequency of meeting-room rentals. A school that turned over a wing of its building for year-round commercial leasing, with substantial outside revenue, would likely lose the exemption for that wing.

Q: Can a school district lease space to a for-profit business?
A: Yes, under § 15-1105(A), to "any person, group or organization for any lawful purpose," subject to the reasonable-use-fee requirement. Past AG opinions confirmed that leases to for-profit dental practices (I02-003) and plant nurseries (I84-136) could be lawful when they served civic or educational purposes. Lawfulness under § 15-1105 is a separate question from tax-exempt status under § 42-11104(A).

Q: Where does the lease revenue go?
A: Into the civic center school fund of the district (§ 15-1105(F)), to be expended for "civic center school purposes." Some proceeds can also be used to pay outstanding bonded indebtedness (§ 15-1102(A)).

Q: What if only part of the school building is used commercially?
A: The exemption analysis can be done parcel by parcel or even use by use, especially after Tucson Botanical Gardens, which treated the gift shop and meeting rooms separately from the rest of the garden. A school could face partial loss of exemption only for the commercially used portion, depending on facts.

Background and statutory framework

The Arizona Constitution authorizes, but does not require, the legislature to exempt educational, charitable, and religious property from taxation, so long as the property is "not used or held for profit." Ariz. Const. art. 9, § 2. The legislature exercised that authority in A.R.S. § 42-11104(A): "Libraries, colleges, school buildings and other buildings that are used for education, with their furniture, libraries and equipment and the land that is appurtenant to and used with them, are exempt from taxation if they are used for education and not used or held for profit."

The general rule for tax exemption: strict construction against the exemption (Verde Valley Sch. v. Yavapai Cty., 90 Ariz. 180 (1961)). Every ambiguity is read against the property owner. But the rule has a counterweight: strict construction "should not be used to subvert the underlying desire to exempt certain properties from taxation." Verde Valley Sch., 90 Ariz. at 182.

The school-leasing statute (§ 15-1105) creates an explicit framework for renting school property to outside users. Subsection (A) lets districts lease for "any lawful purpose," including economic, political, recreational, religious, and civic. Subsection (G)(3) defines "reasonable use fee" as at least the cost of utilities, services, supplies, and personnel the district provides. Subsection (F) sends proceeds to the civic center school fund.

Then there's the Tucson Botanical Gardens opinion, which is the closest Arizona decision on point. The county assessor had denied the § 42-11116 exemption for the garden's gift shop (which sold t-shirts, salsa seasonings, and other non-educational items) and meeting rooms (rented for weddings, private parties, occasional art sales). The Court of Appeals held that as long as the non-profit was the primary user and the non-profit's tax status was confirmed under § 42-11154, occasional non-exempt use did not strip the exemption.

The AG read that holding into § 42-11104(A): if a school district is the primary user and the property is overwhelmingly used for education, occasional commercial rentals do not flip the property into "used or held for profit" status.

Citations and references

Constitutional provisions:
- Ariz. Const. art. 9, § 2 (educational, charitable, religious property tax exemption authority)

Statutes:
- A.R.S. § 42-11104 (educational property tax exemption)
- A.R.S. § 42-11116 (charitable organization exemption, e.g., botanical gardens)
- A.R.S. § 42-11154 (501(c)(3) status / primary user rule)
- A.R.S. § 15-1102(A) (lease proceeds for bonded indebtedness)
- A.R.S. § 15-1105 (school property leasing rules and "reasonable use fee")

Cases:
- Tucson Botanical Gardens, Inc. v. Pima Cty., 218 Ariz. 523 (App. 2008), occasional non-exempt use by non-profit primary user does not strip exemption
- Verde Valley Sch. v. Yavapai Cty., 90 Ariz. 180 (1961), tax exemptions are strictly construed but strict construction cannot defeat the legislature's exemption choice

Source

• Landing page: https://www.azag.gov/opinions/i20-009-r19-007
• Original PDF: https://www.azag.gov/sites/default/files/2025-06/I20-009.pdf

Original opinion text

To:

Matthew J. Smith

Mohave County Attorney

Question Presented

Whether commercial use of a school-owned facility constitutes being "used or held for profit," thereby disqualifying the facility from full property tax exemption pursuant to Arizona Revised Statutes ("A.R.S.") § 42-11104(A)?

Summary Answer

Occasional commercial use of a school-owned facility does not necessarily constitute being "used or held for profit," and therefore does not necessarily disqualify the facility from receiving a full property tax exemption pursuant to A.R.S. § 42-11104(A), although more than occasional commercial use could constitute being "used or held for profit."

Background

The Arizona Constitution permits, but does not require, the Legislature to exempt from taxation the property of "educational, charitable and religious associations or institutions not used or held for profit." Ariz. Const. Art. 9, Sec. 2. With that authority, the Legislature has long chosen to exempt educational properties from taxation. Under A.R.S. § 42-11104(A), "[l]ibraries, colleges, school buildings and other buildings that are used for education, with their furniture, libraries and equipment and the land that is appurtenant to and used with them, are exempt from taxation if they are used for education and not used or held for profit." Thus, in order to determine whether an educational property in Arizona is exempt from taxation, the property must be both "used for education" and "not used or held for profit." Id.; see also Tucson Botanical Gardens, Inc. v. Pima Cty., 218 Ariz. 523, 525, ¶ 7 (App. 2008). Laws exempting property from taxation are to be strictly construed against the exemption, with every ambiguity in the statute to be construed against exemption. Verde Valley Sch. v. Yavapai Cty., 90 Ariz. 180, 182 (1961). It is also true, however, that the principle of strict construction of exemption statutes should not be used to subvert the underlying desire to exempt certain properties from taxation. Id.

Analysis

In analyzing whether commercial use of a school-owned facility constitutes being "used or held for profit," thereby disqualifying the facility from full property tax exemption pursuant to A.R.S. § 42-11104(A), it is important to note that school districts are authorized under A.R.S. § 15-1105 to lease school property for consideration "to any person, group or organization for any lawful purpose, including recreational, educational, political, economic, artistic, moral, scientific, social, religious or other civic or governmental purpose in the interest of the community." In doing so, a school district must "charge a reasonable use fee for the lease of the school property," which is defined as "an amount that is at least equal to the school district's cost for utilities, services, supplies or personnel that the school provides to the lessee pursuant to the terms of the lease." A.R.S. § 15-1105(A), (G)(3). Monies received from any such lease of school property must be "promptly deposited with the county treasurer who shall credit the deposits to the civic center school fund of the respective school district." A.R.S. § 15-1105(F). Those funds "may be expended for civic center school purposes[.]" Id. A school district may also use the proceeds from the lease of school property for, among other things, "the payment of any outstanding bonded indebtedness of the school district." A.R.S. § 15-1102(A).

No Arizona case addresses whether commercial use of a school-owned facility constitutes being "used or held for profit," thereby disqualifying the facility from full property tax exemption pursuant to A.R.S. § 42-11104(A). At least one Attorney General Opinion recognizes that "in some instances property owned by [a] school district may be taxable." Ariz. Att'y Gen. Op. I89-070, 1989 WL 266992 (1989). A few Attorney General Opinions have opined as to whether leases by schools to certain for-profit entities were lawful under A.R.S. § 15-1105(A). See Ariz. Att'y Gen. Op. I02-003, 2002 WL 470840 (2002); Ariz. Att'y Gen. Op. I84-136, 1984 WL 61335 (1984). These opinions and the applicable statutes relating to the leasing of school property, together with the statutes governing the use of proceeds from such leases, suggest that it is possible for school districts to lease school property to commercial users while still satisfying the "not used or held for profit" requirement in A.R.S. § 42-11104(A).

Support for this conclusion can be found in Tucson Botanical Gardens, Inc. v. Pima County, 218 Ariz. 523. Tucson Botanical Gardens involved a claim under A.R.S. § 42-11116, which provides an exemption for the property of, among others, botanical gardens that are qualified as non-profit charitable organizations under I.R.C. § 501(C)(3) if the property was "not used or held for profit." The county assessor had denied the exemption for parts of the garden, including a gift shop that sold non-educational items (t-shirts, stationary, salsa seasonings, hats, etc.), as well as meeting rooms that were rented occasionally to third parties for non-charitable purposes (weddings, private parties, and meetings) and that were used occasionally to exhibit art for sale from which the garden received a commission. Tucson Botanical Gardens, 218 Ariz. at 526, ¶ 10.

With respect to whether the sales of non-educational goods in the gift shop and renting out the meeting rooms from time to time might cause those properties to be considered "used or held for profit," the court rejected the Assessor's argument that that income disqualified those spaces from receiving an exemption. The court relied upon a 1997 amendment to A.R.S. § 42-11154, which stated that a non-profit organization's status may be established by a letter of determination issued in the organization's name either by the Internal Revenue Service or the Arizona Department of Revenue. The court, interpreting Section 11154 alongside Section 11116 concluded that where a valid non-profit organization is the sole owner and only user of a property, as with the gift shop in the case, the property is exempt under Section 11116. 218 Ariz. at 528, ¶ 16. And, where "a non-profit organization owns and is the primary user of its property but allows occasional use of the property for non-exempt purposes," the non-profit organization is still "the 'organization using the property' under A.R.S. § 42-11154(2)," meaning that the non-profit status controls and the property is not "'used or held for profit.'" Id. at 527-28, ¶¶ 19-21.

In short, the court concluded that when a non-profit organization is the primary user of a property it owns, but allows occasional use of its property for non-exempt purposes, the property does not lose its tax exempt status for being "used or held for profit," so long as the organization's non-profit status under A.R.S. § 42-11154 is proved and all other requirements of the tax exemption statute are met. 218 Ariz. at 528, ¶ 20.

Conclusion

Occasional commercial use of a school-owned facility does not necessarily constitute being "used or held for profit," and therefore does not necessarily disqualify the facility from receiving a full exemption under A.R.S. § 42-11104(A), although the facts of any particular case, and the matching of those facts to the statutory schemes discussed above, will drive the outcome in any particular instance, and more than occasional commercial use could constitute being "used or held for profit."

Mark Brnovich

Attorney General