News: CJ Exclusives

Student Housing Declared Tax-Exempt

Privately funded campus housing for students ruled state-owned by appeals court

In the late 1990s, Appalachian State University was facing a surging student population and inadequate dormitory capacity. To address the need, the University of North Carolina Board of Governors approved the use of “privately funded student housing.” This, in turn, raises a question of ownership and property taxation: Would such student housing be considered privately owned — and subject to property taxation — or state-owned and tax exempt?

The answer, according to the N.C. Court of Appeals, is state-owned even if ASU could not actually obtain title for many years to come. In making its ruling, the appeals court overturned a decision by the N.C. Property Tax Commission that the property was taxable.

The property in question is the University Highlands apartment complex. In 1999, ASU set up the non-profit Appalachian Student Housing Corporation to fund construction of University Highlands and oversee its operations. The 10-building, 768-bedroom apartment complex opened in August 2000. University Highlands currently leases apartments only to ASU students, with lease dates corresponding to ASU’s academic year. Each unit is connected to the university’s computer network. Complaints about the operation of University Highlands go through ASU’s Office of Student Development, which also handles grievances about ASU’s traditional residence halls.

In June 2001, ASHC and ASU executed an agreement, which states:

“All funds and property received by ASHC shall be held in trust and used or expended for the benefit of ASU to the extent such expenditure is not inconsistent with lawful restrictions… ASHC may, from time to time, transfer any net revenue from its operations to ASU for support of student housing acquisition, development and operation. ASHC shall not transfer any funds or other assets to any person or entity other than ASU except in exchange for capital assets, goods or services at fair market value.”

An agreement between the town of Boone and ASHC prevents the university from taking title to University Highlands before 2025.

In 2001, ASHC applied for a tax exemption for University Highlands. The Watuaga County Commission denied the request. Upon further review the N.C. Property Tax Commission sided with Watuaga County. ASHC then appealed to the appeals court.

As the Court of Appeals noted, “The general rule established by the Constitution is that all property in this State is liable to taxation, and shall be taxed in accordance with a uniform rule. Exemption of specific property, because of its ownership by the State or by municipal corporations, or because of the purposes for which it is held and used, is exceptional.” Furthermore, tax laws “should be construed strictly, when there is room for construction, against exemption and in favor of taxation.”

ASHC advanced several different arguments for an exemption. Among these was that the property really belong to the state, despite ASU not having title to the land.

“We hold that the equitable title held by ASU as beneficiary of this trust is sufficient to show that the property belongs to the State of North Carolina,” wrote Chief Judge John Martin for the court. “Neither the North Carolina Constitution nor G.S. § 105-278.1(b) require the State to have legal title in order to exempt the property from taxation. Nor do we find persuasive Watauga County’s argument that the ad valorem tax exemption law of North Carolina applies only to exempt property to which the taxpayer holds legal title.”

The ruling has significant implications beyond ASU. Four other UNC system campuses have also developed plans to have nonprofit corporations build and manage new student housing. Nonprofit corporations associated with state or local government are also performing traditional government functions in other areas as well.

The case is In re Appeal of Appalachian Student Housing Corp., (03-908) and the decision can be read online here.

Mike Lowrey is associate editor of Carolina Journal.