By: Rich Baker, Soo Yeon Lee, and Susan Thomas
The critical role of real estate in accomplishing the mission of any business or organization cannot be emphasized enough. So, it is true for churches as well. Many assume that real estate transactions involving churches are simple. In fact, it’s the contrary. The purchase and sale of real estate by churches can be more complex than many other real estate transactions. Below are several factors that church leaders should keep in mind when planning and carrying out the purchase or sale of real estate.
Purchase of Real Estate
Zoning: When purchasing real estate with the intention of using the property for religious worship, the first thing to consider is whether or not the property is located in an area that is zoned to allow religious assembly. The zoning may either be of right or by special use. If the property is not located in a zoning district that allows churches of right, it will be necessary to file an application for a special use permit with the local zoning authority. This can be a costly and time-consuming process for the buyer and should be carefully considered at the onset of any real estate transaction. Where zoning is required, a contingency with sufficient time to obtain the zoning must be built into the contract.
It should be noted that because of the noise, traffic, parking considerations as well as real estate exemption that accompanies a religious assembly, zoning will almost always involves engaging in the politics of the community, gaining the favor of the alderman or councilmen, as well as the neighbors. It should also be noted, particularly in urban areas, that parking is often a key issue for zoning. For instance, in Chicago, 1 parking space is required for every 8 seats in the sanctuary while in other municipalities, it can even be as burdensome as 1 parking space for every 2 seats. Moreover, parking lots are subject to landscaping, lighting and setbacks in many municipalities and many properties simply do not have the capacity to accommodate these requirements.
Real Estate Tax Exemption: Property owned by churches and used for qualified tax-exempt religious purposes is entitled to real estate tax exemption provided that the property is not used with a view to profit. Commercial property used for religious worship and related religious activities and residential property used for a parsonage are both entitled to real estate tax exemption.
Illinois real estate tax exemption is not transferable. When legal ownership of an exempt property changes, the new legal owner is required under Illinois law to file a new application for real estate tax exemption. It is a common mistake for a new church buying property a from a selling church to think that since the property is a church and since the selling church is exempt that the buying church will also be exempt from real estate taxes. However, failure to file a new real estate tax exemption application, when discovered by the Assessor, will result in the property being placed back on the tax rolls. In some cases, the Assessor’s office may also issue omitted assessment tax bills for up to three prior tax years depending on when the property was purchased by the new legal owner. Cleaning up omitted assessment tax matters after the fact can be time consuming and expensive, and the church will be responsible for tax bills until the omitted assessments are resolved or the property is sold in a tax sale. Filing a new application for real estate tax exemption as soon as possible after purchase not only ensures that the church is in compliance with Illinois real estate tax laws but will help to avoid the possibility of the property being placed back on the tax rolls and assessed for prior tax years and eventually forfeited.
Shared Use of Property: With many churches declining in enrollment, revenue can be a problem which churches seek to alleviate by renting or sharing their property. However, if an exempt organization uses its real estate “with a view toward profit” it will not be entitled to an exemption. When applying for real estate tax exemption, any use of the property by entities other than the legal owner must be disclosed. This is often seen when there is shared use of the property between the legal owner and one or more other churches or other exempt organizations. In order for the property to qualify for real estate tax exemption, the legal owner and all “guest” churches or organizations must be 501(c)(3) tax exempt organizations who are using the property for qualified tax-exempt purposes. It is particularly helpful to be able to show that the entities sharing your space in some way further your religious purpose. Any use of the property by non-exempt organizations or for non-exempt purposes by exempt organizations will be subject to real estate taxes. In such cases, the Illinois Department of Revenue will issue a partial real estate tax exemption for that portion of the property used for exempt purposes and the remaining portion of the property will be subject to real estate taxes based on the percentage of the property used for non-exempt purposes.
The shared use of the property must be set forth in a Space Sharing Agreement or Agreements signed by representatives of the legal owner and all “guest” churches or organizations. Because of the “with a view toward profit” rule, the language contained in a standard for-profit lease agreement is generally not acceptable to the local Board of Review or the Illinois Department of Revenue for the purpose of obtaining real estate tax exemption. Instead, the Space Sharing Agreement should contain specific information that shows that the space sharing arrangement complies with the strict requirements for real estate tax exemption under Illinois law.
Adaptation and Development of Property: Generally, a property must be in active use in order to qualify for real estate tax exemption. Vacant or unoccupied land that the owner intends to use in the future for an exempt purpose does not qualify. However, the Illinois Department of Revenue allows an exception for “adaptation and development” of the property. If the church plans significant renovations that will prohibit use of the property for an extended period of time or if the church purchases vacant land with the intention of building a worship facility, the property can still qualify for real estate tax exemption during the period of time the property is under renovation or construction. In that case, the real estate tax exemption application must contain detailed information and documents and pictures evidencing the renovation or construction activities.
Sale of Real Estate
Evidence of Authority to Sell and Real Estate Tax Exemption: When a church sells property it will be required to show that it has good title to the property and that it has the authority to sell it. To do so, the title company and the buyer will require a review of its governing documents to see that the proper procedures have been followed in selling the property. Getting these “ducks lined up” in advance of the sale is very important.
A second consideration when a church sells property that is exempt from real estate taxes, is to satisfy both the purchaser’s attorney and the title company with evidence of the current real estate tax exemption. The best evidence is to provide all parties with a copy of the Non-Homestead Property Tax Exemption Certificate issued by the Illinois Department of Revenue. This is particularly important if the property has a partial real estate tax exemption. While the County’s public online tax records will show if a property is 100% exempt from real estate taxes, it is very difficult to determine if a property has a partial exemption or the percentage of a partial exemption based solely on the public online tax records. The Exemption Certificate will show the percentage of the partial real estate tax exemption. Therefore, it is important to keep the Exemption Certificate on file with the church’s records. If the Exemption Certificate is misplaced, it is very difficult – if not impossible – to obtain another copy from the Department of Revenue. (See Real Estate Tax Exemption above for further information pertinent to the Buyer and Seller of exempt property.)
This article provides a brief overview of some of the items to be considered by churches when planning the purchase or sale of real estate, and all transactions must be evaluated on a case-by-case basis. Please contact our office if you would like more information or assistance with your church’s real estate transaction.