Eastern Kentucky University plans to fight an expected $90,000 property tax bill on a privately developed and owned apartment complex that it uses as a de facto dorm for students.
EKU is responsible for any taxes on the property under its 20-year lease agreement with Grand Campus Properties in Richmond, but the state Department of Revenue has recommended that EKU may forgo payment of tax bills because it has complete control of the property. As a governmental nonprofit entity, EKU pays no property taxes for its campus to the Madison County school system and other public agencies.
But Madison County Property Valuation Administrator Billy Ackerman disagrees with the Department of Revenue. He says the complex still is privately owned and therefore subject to property taxes, and he intends to bill EKU.
The university says it plans to appeal that decision to the Kentucky Board of Tax Appeals.
As state funding declines, Kentucky's public universities have begun relying more on private partnerships to build the fancier residence halls demanded by students. But as such public-private partnerships in higher education grow, the question of who pays property taxes and who doesn't has become a crucial issue to local officials in college towns.
"I think the more you privatize this stuff, you have to be prepared for these issues, and that may include changing the laws or changing the structure of deals," said Fayette County PVA David O'Neill.
O'Neill was involved in a similar dispute involving the state's first big public-private partnership in higher education, a deal between the University of Kentucky and a private developer to build about $500 million in housing on UK's campus.
In 2012, UK and Education Realty Trust, or EdR, set up a deal in which UK would provide a 75-year lease of its land, but EdR would build, manage and own the dorms.
Because the first new dorms, Central I and Central II, were owned by a private company, O'Neill valued the buildings at $28 million and put them on the tax rolls.
Unhappy with O'Neill's decision, UK and EdR consulted with the state revenue department and presented O'Neill with a new plan.
EdR would pay roughly $280,000 a year on the two new dorms, the full amount of property taxes owed, according to O'Neill. But for the rest of the new dorms they were planning, UK and EdR changed the terms of their deal so UK owned the buildings, and therefore would not owe property taxes.
So far, EdR has built dorms worth about $323 million.
"I will stop short of calling it tax evasion, but they did restructure the deal so that ownership of the buildings went to UK," O'Neill said. "I was not privy to these plans until they presented me with a new deal."
Executive Vice President Eric Monday said UK's primary concern was protecting students from extra costs.
"One of the reasons the agreement was made was because of ensuring our students paid the lowest rates," Monday said.
Also important was the margin of profit to EdR. The company eventually is supposed to get a 9 percent rate of return on its investment, and the complicated financial picture did not account initially for property tax payments. UK also gets a percentage of revenue once EdR hits a certain threshold.
In the EKU case, developer Brent Rice and former state senator Ed Worley built the $9.5 million property as a private development on Lancaster Avenue, close to the EKU campus in Richmond. The developers paid property taxes for much of last year, and EKU paid the rest when it took over the property last fall.
Under the lease, EKU pays $2.58 million a year in rent for 512 beds and is responsible for insurance and maintenance costs. If EKU decides to buy the property, it will receive a credit of $125,000 a year against the purchase price.
As in the UK case, state revenue department officials agreed with EKU, not the local PVA.
"EKU merits this tax-exempt ruling because through our lease agreement with Grand Campus Properties, beneficial and equitable ownership is vested in the university," Scott Cason, EKU's vice president of marketing, said in a statement. "Through this agreement, we are responsible for generating revenue, meeting our expenses, and for all maintenance and upkeep of the facility. We plan to follow the appropriate appeal process and will abide by any final ruling."
Geri Grigsby, an attorney with the state Finance and Administration Cabinet, said the property should be exempt from taxes because EKU is solely responsible for the buildings and because it might buy them. As such, it meets the definition of "public property used for public purposes" that is exempt from property taxes under Section 170 of state law, Grigsby said.
That's where Ackerman disagrees.
"I believe at this point it is still owned by the private entity, so it is not exempt," he said. "I do think it's important to the community, but more than anything, it's about following the guidelines and the laws we have. It's not a political statement or anything like that, it's just based on my understanding of exempt property, and it's not exempt."
The school board, fiscal court, library board and other agencies that receive funding from property taxes have agreed to join forces in a lawsuit to press the issue, depending on how the appeal goes.
"This is new territory for us," said David Gordon, executive director of the state Department of Revenue. "Every project has to be looked at and reviewed separately."
Brad Hughes of the Kentucky School Boards Association said the issue has caught the attention of officials in every county with a public university.
"As these public private-partnerships come up that save the universities money, which we're all for, the local school leaders, the library boards, the fire departments, all will be keeping a close eye on it," he said. "Everyone wants the universities to save money, but we don't want them to do it at the expense of schools. And it's a large revenue loss, not chump change."
Hughes predicted the issue eventually would have to go through the court system.
"With the potential of much broader implications, this issue can't rest on the interpretation of one attorney or one judge," he said.