A nonprofit hospital in Viborg, South Dakota, built a clinic attached to the hospital and then leased it to a for-profit medical clinic that operated as a private business. The hospital also built an apartment complex for semi-independent living and rented those units out. The hospital argued all of this was part of providing health care and should be property-tax exempt. Was it?
Plain-English summary
Pioneer Memorial Hospital and Home in Viborg, South Dakota, was a nonprofit hospital that wanted to grow its health-care footprint without giving up property-tax exemption. In 1985 it built clinic space attached to the hospital and leased it to Viborg Medical Clinic, Ltd., a for-profit company that ran an outpatient clinic with two doctors. The lease rate was just enough to retire the construction debt. The hospital also built a 14-unit apartment complex for semi-independent senior living and rented out the units. A separate part of the basement went to an optometrist on a similar lease.
The hospital board argued the whole package was tax-exempt because it was all "part of the spectrum of providing health care" and within the hospital's nonprofit purposes. The board pointed to SDCL 10-4-12, which exempted property owned by charitable institutions that was not "rented, or used for purposes other than the object for which such society or institution was primarily organized."
AG Mark Meierhenry rejected the argument. He walked through the framework: SDCL 10-4-9.3 was the main statute exempting nonprofit health-care property, but it required the property to be "used primarily for human health care and health related purposes" and prohibited assets from being "available to any private interest." The Viborg setup violated both prongs. The clinic was used by the for-profit clinic company, and the apartments were rented to seniors for residential use. The for-profit lessee captured economic value, which was a "private interest" benefit. And the use was rental rather than direct hospital provision of health care.
The AG anchored his analysis in two strict-construction cases (Application of Veith and In Re Jackpine Gypsies) and one earlier hospital-lease case (South Dakota State Medical Association v. Jones, 1966) holding that property owned by an exempt society but rented out for profit was taxable, even when the rental profits were devoted to the society's purposes. The Viborg situation fit that line of cases.
The AG distinguished a 1969 opinion (69-13) where one tax-exempt organization leased to another tax-exempt organization with similar objectives. There, the property remained exempt because the tenant itself qualified for exemption. In Viborg, the tenant was a for-profit clinic and a residential tenant base, neither of which qualified.
The bottom line: SDCL 10-4-12 required the assessor to tax the portion of the property "occupied or rented by the clinic or apartments." The hospital's underlying ownership and nonprofit status could not shelter property that was generating private commercial returns.
Currency note
This opinion was issued in 1986. 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. South Dakota's property tax exemption statutes in SDCL chapter 10-4 have been amended multiple times since 1986, and the South Dakota Supreme Court has had additional opportunities to address the question of when nonprofit-owned property loses exemption through commercial leasing or use. Nonprofit hospitals operating leased medical office buildings, retail pharmacies, or senior housing should consult current South Dakota tax law before assuming exemption.
What the opinion meant at the time
For nonprofit hospitals in 1980s South Dakota, the opinion was a cold shower on a common growth model. Many community hospitals were diversifying into ambulatory care clinics, medical office buildings, and senior housing, often through lease arrangements with private practitioners or developers. The lease-to-for-profit structure gave the hospital a steady income stream and let outside operators run the business sides they were better suited to. But the structure cost the hospital its property-tax exemption on those portions.
For county directors of equalization, the opinion was a clean rule. When a nonprofit hospital leased out part of its property to a for-profit tenant, that portion was taxable. The assessment ran against the hospital as the owner.
For hospital board members weighing whether to build clinic and housing space, the opinion was useful for financial planning. The property tax loss had to be factored into the lease terms. A lease that just covered construction debt service was no longer a break-even deal if property taxes were added.
For nonprofit tax attorneys, the opinion confirmed that direct ownership and direct use by the exempt entity were what mattered. Workarounds where the property was owned by the nonprofit but operated by a related for-profit failed.
For Pioneer Memorial Hospital and Home specifically, the opinion meant losing exemption on the leased clinic, the optometrist's basement space, and the 14-unit apartment complex. The portion of the building actually used as a hospital remained exempt.
Common questions
Q: Did it matter that the apartments were for seniors?
A: Senior housing might have qualified under different exemption provisions (charitable, elderly, or low-income housing) if it met those criteria. But the SDCL 10-4-9.3 health-care exemption did not extend to residential rental, even for seniors, unless the housing was integrated into the hospital's direct care provision (such as nursing home or assisted living operated by the hospital itself).
Q: What if the for-profit clinic served the same patients the hospital would otherwise have seen?
A: The hospital's argument was essentially this: the clinic was an extension of hospital services. The AG rejected it because the clinic was a separate legal entity, captured the profits, and was the one actually using the property. The patient connection didn't bridge the ownership/use gap.
Q: What was the "private interest" prohibition in SDCL 10-4-9.3?
A: A condition that the nonprofit's assets could not be made available to any private interest. The for-profit clinic was a private interest. Even if the hospital was charging it only debt-service-equivalent rent, the clinic's revenue from operating in the space was a private benefit derived from hospital-owned property.
Q: Did the AG say partial exemption was available?
A: Yes. The opinion concluded that assessment ran on "such portion of the property as is occupied or rented by the clinic or apartments." So the hospital portion remained exempt, but the leased portions were taxable on their proportionate share.
Q: Could the hospital have kept the exemption by structuring the lease differently?
A: The opinion suggested two paths: (1) lease to another tax-exempt entity with similar objectives, per the 1969 opinion 69-13; or (2) operate the clinic and apartments directly, with no separate lessee. Either approach removed the for-profit beneficiary.
Q: What was the strict-construction rule from Veith?
A: Property tax exemptions are construed strictly against the entity claiming exemption and in favor of the taxing authority. A nonprofit asserting exemption bears the burden of fitting cleanly within the statutory terms. Ambiguity goes against the exemption.
Background and statutory framework
South Dakota's property tax exemption regime distinguished sharply between ownership-and-use by an exempt entity (broadly exempt) and ownership-by-exempt-but-use-by-non-exempt (generally not exempt, with narrow carve-outs). The 1966 South Dakota State Medical Association case had established the rule for hospitals and medical organizations leasing out property for commercial use.
The legislature's policy choice was to require both ownership and qualifying use. That kept the exemption tied to actual public benefit. If a hospital owned a building and used it as a hospital, the public benefit was direct. If the hospital owned a building and rented it to a for-profit clinic, the public benefit was attenuated and the for-profit operator was capturing economic value.
Veith and Jackpine Gypsies anchored the strict-construction principle in modern South Dakota law. Tax exemptions had to fit cleanly within statutory terms. A creative interpretation that stretched "health care" to cover any real estate that touched the health-care economy would have collapsed the limiting principle entirely.
The opinion was useful precedent because it covered three different lease scenarios in one ruling: clinic to a medical practice, basement to an optometrist, and apartments to seniors. All three failed. The pattern made the rule easy to apply to similar nonprofit hospital arrangements across the state.
Citations and references
Statutes:
- SDCL 10-4-9.3 (nonprofit health care property exemption)
- SDCL 10-4-12 (charitable property exemption with limitation)
Cases:
- Application of Veith, 261 N.W.2d 424 (S.D. 1978)
- In Re Jackpine Gypsies (S.D. 1986)
- South Dakota State Medical Association v. Jones, 82 S.D. 374, 146 N.W.2d 725 (1966)
Earlier AG opinions referenced:
- 1947-48 AGR 293
- 1951-52 AGR 100
- 1955-56 AGR 347
- Opinion 69-13 (exempt-to-exempt lease)
- Opinion 80-16
Source
Original opinion text
Tax exempt status of a private association
Dear Mr. Buechler:
You have requested an official opinion on the following factual situation:
FACTS:
In 1985, Pioneer Memorial Hospital and Home (a nonprofit entity) of Viborg, South Dakota, constructed clinic facilities which are attached to the Hospital. The Board of Director of the Hospital and Home then leased the clinic facilities to Viborg Medical Clinic, Ltd., (a profit entity) for an amount sufficient to retire the debt incurred in construction. Viborg Medical Clinic, Ltd., provides receiving areas for two doctors. The chief purpose of the clinic is outpatient medical care. In addition, the Board has leased the basement to an optometrist. Moreover, the Hospital and Home has constructed a fourteen unit apartment complex for semi-independent living for a rental charge. The Board's position is that all of the aforesaid property is tax-exempt under the belief that the property is rented or used for a purpose within the scope of the objectives of the Hospital and Home. In other words, the Board maintains that the clinic and apartment complex are a part of the spectrum of providing health care to the residents of this area and it has not '. . . rented, or used (this clinic and apartment complex) for purposes other than the object for which such society or institution was primarily organized.'
Concerning this you have asked the following question:
QUESTION:
Does the property in question fall under the tax exemption status as described in SDCL 10-4-12?
The particular section you inquire about is only one portion of the entire spectrum so far as exemption from advalorem tax on real property in South Dakota. The law as most recently enacted in 1986 describes a number of types of property which, depending upon the circumstances of their use, may or may not be exempt from taxation. The main statute concerning this is found at § 10-4-9.3 which relates to the property of nonprofit corporations used primarily for health care and related purposes. Under this section if property is owned by a corporation or society and used primarily for human health care and health related purposes it is exempt from taxation. However, one of the provisos is that the organization may not have any of its assets available to any private interest. While there are other requirements I do not believe they are particularly appropriate in view of the facts as you have presented them that the Pioneer Memorial Hospital and Home are not themselves making use of the property in question but rather have rented out for private gain the clinic as well as the fourteen unit apartment complex. While you may consider it a part of the spectrum of providing health care in a broad sense, there is not much that relates to human beings and their welfare that would not come under this category were statutes such as this to be loosely interpreted. As you know, however, the general requirement in South Dakota is that specific exemptions from a tax will be construed in favor of the taxing power. Application of Veith, 261 N.W.2d 424 (S.D. 1978); In Re Jackpine Gypsies, ---- N.W.2d ---- (S.D. 1986).
If the clinic were a tax exempt organization or the apartment complex was tax exempt then we might have the situation that existed in Official Opinion 69-13 wherein it was held that property owned by a tax exempt organization and leased to another tax exempt organization having similar objectives remains exempt.
It is generally held where property is owned by an exempt society but that property is rented out for profit, although the profits may be devoted to the purposes of the society, the property nevertheless is taxable. See South Dakota State Medical Association v. Jones, 82 S.D. 374, 146 N.W.2d 725 (1966); 1951-52 AGR 100; 1955-56 AGR 347, and to some extent see also 1947-48 AGR 293 and Opinion 80-16.
For all of these reasons, it is my opinion that the property you have described does not become exempt under the laws of South Dakota but should be assessed as provided in SDCL 10-4-12 -- that is on such portion of the property as is occupied or rented by the clinic or apartments.
Respectfully submitted,
Mark V. Meierhenry
Attorney General