When a Mississippi nonprofit historical society leases a city building for a museum, is that leasehold interest exempt from property tax?

Plain-English summary

Gulfport's city attorney brought a structural question that comes up whenever a city wants to partner with a nonprofit. The City of Gulfport plans to lease a building to the Historical Society of Gulfport (a Mississippi nonprofit and IRS-recognized 501(c)(3)) for a city-history museum. The Society does not currently plan to charge admission, but might in the future. Two questions: (1) is the Society's leasehold interest exempt from ad valorem (property) tax, and (2) does charging admission change the answer?

The AG answered no on both, with question two becoming moot once question one was answered.

The doctrine starts with the gap between owning and leasing exempt property. Most municipal real estate is exempt under § 27-31-1(b). When a city leases that exempt property to a private party, the lease creates a separate "leasehold interest." That interest is itself a piece of property for tax purposes, and absent a specific statutory exemption, it is taxable to the lessee even though the underlying real estate is exempt to the owner. The Mississippi Supreme Court set this out in Board of Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984), and applied it again in In re Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066 (Miss. 2003).

§ 27-31-1(d) does provide an exemption for property "belonging" to a historical or patriotic association or society used exclusively for the society and not for profit. The word "belonging" is doing the work: it covers ownership, not leasehold interests. Other exemptions in § 27-31-1 explicitly include leasehold interests when the legislature meant to. Subsection (d) does not. So a historical society that owns its museum building is exempt; one that leases the building from the city is not.

The closest statutory hook is § 27-31-33, which authorizes a tax exemption for leasehold interests in municipal property. That statute is limited to interests created before July 1, 1984. A new lease in 2023 cannot use it.

Mississippi tax doctrine then puts a thumb on the scale: tax exemptions are strictly construed in favor of taxation and against the exemption (City of Jackson v. Sly, 343 So. 2d 473, 475 (Miss. 1977)), and the burden is on the party claiming the exemption to establish it. The historical society's leasehold cannot meet that burden because no statutory exemption covers it.

So the leasehold interest the historical society would hold is subject to ad valorem tax. The admission-charge question becomes moot because the underlying exemption is unavailable regardless of how the society uses the property.

What this means for you

If you are a Mississippi city attorney structuring a lease to a nonprofit

The leasehold interest is taxable. Plan for it.

A few practical workarounds to discuss with the nonprofit before signing:
- Have the city pay the property tax on the leasehold and price the lease accordingly. The city absorbs the cost; the nonprofit gets a clean operating environment. The city's payment must be authorized by a specific statute or ordinance and properly documented; do not assume the city can pay private-party taxes without legal grounding.
- Structure as a sale instead of a lease, if the property is suitable for permanent transfer. Under § 27-31-1(d), a society that owns the property is exempt. Confirm authority for the conveyance under § 21-17-1 et seq. and the surplus-property statutes; and check the donation-clause issues from MS AG Op., Mord (Dec. 5, 2022) and the Article 4 § 66 case law.
- License or use agreement instead of a lease. The legal characterization matters. A revocable license that does not create a property interest may not trigger leasehold taxation in the same way, depending on how the assessor characterizes it. This requires careful drafting and assessor coordination.
- Pre-1984 lease analysis. If the property was already leased to the society before July 1, 1984, § 27-31-33 may exempt the existing leasehold. New leases do not qualify.

Document any chosen structure carefully on the city's minutes. Coordinate with the county tax assessor before signing so the assessor knows how to characterize the interest.

If you are running a Mississippi nonprofit considering a lease of municipal property

You will owe property tax on the leasehold interest unless one of the workarounds above applies. Build that into your operating budget. The tax is calculated on the value of the leasehold (often less than the value of full ownership, but not zero).

Before signing, get a written estimate from the county tax assessor of what the leasehold will be assessed at. The assessor's view controls; a confident lawyer's opinion is not the same thing.

If the city wants to absorb the tax, make sure the city's commitment is in writing in the lease itself, and that it survives staff turnover. A handshake from one mayor does not bind the next administration.

If you can structure the deal as a sale or a long-term lease that the law treats as ownership-equivalent for tax purposes, do that. Owned property meeting § 27-31-1(d) requirements is exempt. The leasehold path costs money you may not need to spend.

If you are a county tax assessor

When a municipality leases exempt property to a private party (nonprofit or for-profit), the leasehold interest is taxable to the lessee unless a specific statutory exemption applies. Your office should track these arrangements proactively. The lessee will not always volunteer the information; the city's lease records and minutes are your starting point.

For new leases of municipal property, § 27-31-33 (pre-1984 leasehold exemption) does not apply. § 27-31-1(d) (historical society property) applies to owned property, not leases. The Hattiesburg Coca-Cola, Reed Mfg., and related case lines support taxation.

For pre-1984 leases that are still in effect, § 27-31-33 may apply. Check the original lease date carefully; renewals or material amendments may reset the analysis.

If you are a museum board member, gallery director, or historical society trustee

If your organization owns its building, you are likely exempt under § 27-31-1(d) so long as the building is used exclusively for the society and not for profit. Confirm that "exclusively" and "not for profit" are met; mixed-use, rental income to outside parties, or conversion to commercial activity can defeat the exemption.

If your organization leases its space from a city, county, or other government entity in Mississippi, expect to owe property tax on the leasehold. Build it into the budget. Consider negotiating with the lessor to absorb the tax cost, or restructure the arrangement as a license or eventual transfer if appropriate.

If you charge admission, that may or may not affect the "not for profit" prong of the exemption. The Bruni opinion did not reach the admission question because the underlying leasehold exemption was unavailable. If your organization owns its building and charges admission, get specific advice on whether the admission income jeopardizes the exemption.

If you are a city council member voting on a museum lease

Get the tax cost in writing before voting. The leasehold interest will be taxed, and someone has to pay it. If the city absorbs it, that is a recurring cost the council should budget. If the nonprofit absorbs it, that is a recurring cost the nonprofit should be told about so they can plan.

Look at alternative structures. The Mord (2022) opinion shut down some donation paths, but a sale for consideration under § 19-7-3(3) (counties) or the parallel municipal surplus-property statute can transfer the property and convert the interest to exempt ownership. Get the AG opinion on Mord (2022) and the surplus-sale statute reviewed together with the Bruni opinion before deciding.

Common questions

Q: Does this rule apply to leases to other nonprofits, not just historical societies?
A: The same analysis applies to any nonprofit lessee of municipal property. The specific exemption in § 27-31-1(d) covers historical societies, but nothing in the statutory pattern carves out a leasehold exemption for other 501(c)(3) lessees either. Each nonprofit's eligibility depends on whether a specific statute exempts its leasehold; the default is taxation.

Q: How is the leasehold value calculated for tax purposes?
A: Mississippi assessors typically value the leasehold at the present value of the lease's remaining benefit to the lessee. The methodology varies by assessor. Long leases and below-market rents tend to increase leasehold value; short leases and market rents tend to reduce it. Get the assessor's specific approach in writing.

Q: What if the historical society is paying $1 a year in rent?
A: The leasehold can still be valued and taxed. A nominal rent typically increases the leasehold value (the lessee is getting a benefit far exceeding the nominal rent). Some assessors may take a different view; ask before signing.

Q: Can the city absorb the property tax in the lease?
A: Yes if structured properly and authorized by city ordinance or specific statute. A city that pays a private party's property tax must have legal authority to do so; a vague "the city pays everything" clause is risky without specific authorization. Treat it as a service payment by the city to the lessee for purposes of authorization analysis.

Q: Does selling the property to the nonprofit instead solve the problem?
A: Often, yes. § 27-31-1(d) exempts property "belonging" to a historical society. A sale converts the interest to ownership. But the city has to have authority to sell, and the deal cannot be a disguised donation under the Mord (2022) framework. Consult the surplus property and donation-clause analyses before structuring.

Q: What about IRS 501(c)(3) status? Does federal exemption help?
A: No. Federal income tax exemption (501(c)(3)) is separate from Mississippi property tax exemption. The state property tax exemption depends on Mississippi statutory provisions, primarily § 27-31-1.

Q: Does the "not for profit" requirement in § 27-31-1(d) prohibit any income?
A: Not necessarily. "Used exclusively for such society or association and not for profit" is interpreted in light of the society's purposes. Modest admission charges, gift shop sales, or membership fees that support the society's mission generally do not defeat the exemption when the society itself is the operator. Exclusive use by an outside commercial operator likely does. Specific facts matter.

Q: Does this opinion apply to lease arrangements with state agencies, not just cities?
A: The same analytical framework applies. Lessees of state-owned exempt property face the same leasehold-interest taxation question. Specific exemptions for certain state-property leases may exist; check the relevant statute.

Background and statutory framework

Mississippi ad valorem (property) tax is governed by Title 27 of the Code. § 27-31-1 enumerates exemptions. The key subsections for this question:
- § 27-31-1(b): exempts most municipal property from taxation
- § 27-31-1(d): exempts property "belonging" to a historical or patriotic association or society used exclusively for the society and not for profit; also covers garden and pilgrimage clubs

§ 27-31-33 authorizes a tax exemption for leasehold interests in municipal property. Critical limitation: the eligible interests must have been created prior to July 1, 1984. New leases do not qualify.

The doctrinal foundation comes from the Mississippi Supreme Court:
- Board of Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984): leasehold interest in municipal property is taxable absent a specific statutory exemption
- In re Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066 (Miss. 2003): same principle, applied to manufacturer's lease of county-owned property
- City of Jackson v. Sly, 343 So. 2d 473 (Miss. 1977): tax exemptions strictly construed in favor of taxation; burden on party claiming exemption

The AG had previously addressed similar questions in MS AG Op., Vincent (Aug. 15, 2003) and MS AG Op., White (May 21, 2010), confirming that nonprofit leases of city property are taxable to the lessee unless a specific exemption applies. The Bruni opinion is consistent with that long-standing position.

Citations

• Miss. Code Ann. § 27-31-1 (ad valorem tax exemptions)
• Miss. Code Ann. § 27-31-1(b) (municipal property exemption)
• Miss. Code Ann. § 27-31-1(d) (historical or patriotic association property exemption)
• Miss. Code Ann. § 27-31-33 (pre-July 1, 1984 leasehold exemption)
• Board of Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984) (leasehold of municipal property is taxable)
• In re Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066 (Miss. 2003) (manufacturer's lease of county-owned property taxable)
• City of Jackson v. Sly, 343 So. 2d 473 (Miss. 1977) (tax exemptions strictly construed; burden on claimant)
• MS AG Op., Vincent (Aug. 15, 2003) (leasehold of nonprofit on city property taxable)
• MS AG Op., White (May 21, 2010) (leasehold not exempt though municipal property is)

Source

• Landing page: https://attorneygenerallynnfitch.com/divisions/opinions-and-policy/recent-opinions/
• Original PDF: https://attorneygenerallynnfitch.com/wp-content/uploads/2023/01/J.Bruni-January-20-2023-Tax-Exempt-Status-of-Historical-Societys-Leasehold-Interest-Held-in-Municipal-Property.pdf

Original opinion text

January 20, 2023
Jeffrey S. Bruni, Esq.
Attorney, City of Gulfport
2309 15th Street
Gulfport, Mississippi 39501
Re:

Tax Exempt Status of Historical Society's Leasehold Interest Held in
Municipal Property

Dear Mr. Bruni:
The Office of the Attorney General has received your request for an official opinion.
Background
The City of Gulfport owns certain real property that it is contemplating leasing to the Historical
Society of Gulfport for the establishment and operation, by the Society, of a museum dedicated to
the history of the City of Gulfport. The Historical Society of Gulfport is a nonprofit corporation
established pursuant to Mississippi law and has been granted tax exempt status by the Internal
Revenue Service (i.e., the Society is a 501(c)(3) corporation). While the Society does not presently
intend to charge admission to the museum, it has not ruled out doing so if conditions should
change.
Questions Presented
1. Is a leasehold interest held by a historical association or society in property owned by a
municipality exempt from taxation pursuant to Mississippi Code Annotated Section 27-31-1(d)?
2. Would the answer to question one change if a historical society charges admission to the
museum contemplated by the parties (but still fully and lawfully functions as a nonprofit)?

Brief Response
1. Pursuant to Section 27-31-1(d), all property, real or personal, belonging to a historical
society that is used exclusively for the association or society and not for profit shall be
exempt from taxation. However, because the historical society does not own the property
in question and because there is no other statutory authority extending a tax exemption to
a historical society's leasehold interest in property, it is the opinion of this office that the
contemplated leasehold interest to be held by the historical society would not be tax
exempt.

2. Because the historical society is not entitled to an exemption, this question is moot.
   Applicable Law and Discussion
   While in most instances real property belonging to a municipality shall be tax exempt under
   Section 27-31-1(b), a leasehold interest in municipal property may still be subject to ad valorem
   taxes. The Mississippi Supreme Court explained that if a municipality owns real property and
   leases it, the leasehold interest is taxable unless a specific statutory exemption exists. Board of
   Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984); see also In re
   Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066,
   1076 (Miss. 2003) (relying on Hattiesburg Coca-Cola when holding that manufacturer's lease of
   county-owned property was subject to ad valorem taxes once the statutory exemption surpassed
   the constitutional ten-year limitation). This office has also relied on Hattiesburg Coca-Cola when
   opining that "the leasehold interest [in] property owned by a municipality and leased to a nonprofit
   corporation is taxable unless the leaseholder is entitled to a specific statutory exemption." MS AG
   Op., Vincent at 1 (Aug. 15, 2003) (internal citations omitted); see also MS AG Op., White at 1
   (May 21, 2010) ("Although [municipal property] is tax exempt, the privately-held leasehold
   interest is not exempt unless expressly authorized or provided by law.") Notably, exemptions are
   strictly construed in favor of taxation and against the exemption, and those claiming the exemption
   have the burden to establish their right to same. City of Jackson v. Sly, 343 So. 2d 473, 475 (Miss.
   1977).
   Section 27-31-1 enumerates property exempt from ad valorem taxation. Included in those
   exemptions is "[a]ll property, real or personal, belonging . . . to any historical or patriotic
   association or society, or to any garden or pilgrimage club or association and used exclusively for
   such society or association and not for profit. . . ." While leasehold interests are specifically
   addressed and included in other exemptions listed in Section 27-31-1, leasehold interests held by
   a historical society are neither addressed in the exemption provided in subsection (d) nor is there
   a separately stated exemption for leasehold interests held by historical societies. Relatedly, Section
   27-31-33 authorizes a tax exemption for leasehold interests held in any municipal property, real or
   personal, but the statute requires that the eligible leasehold interests were created prior to July 1,
3. Because you are asking about a potential leasehold interest and not a pre-existing one, this
   statute would not be applicable. Therefore, there is no statutory exemption for a leasehold interest
   held by a historical society.

In conclusion, the historical society has a leasehold interest rather than an ownership interest in
the property, and since we find no other statutory ad valorem tax exemption for a historical
society's new leasehold interest held in city property, it is the opinion of this office that the
contemplated leasehold interest to be held by the historical society would not be tax exempt.
Because the society is not entitled to an exemption, your second question is moot.
If this office may be of any further assistance to you, please do not hesitate to contact us.
Sincerely,
LYNN FITCH, ATTORNEY GENERAL
By:

/s/ Abigail C. Overby
Abigail C. Overby
Special Assistant Attorney General