Does a Texas hospital district lose its property tax exemption if it rents out a building it owns?

Texas AG Opinion JM-405: Hospital District Tax Exemption

Plain-English summary

A county attorney asked whether a building owned by the Childress County Hospital District stayed exempt from property tax after the district leased it to three tenants and collected rent. The tenants were two nonprofits, Panhandle Community Action and Panhandle Planned Parenthood, and a state agency, the Texas Department of Health, and the district kept part of the building for its own record and equipment storage. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

JM-405 answered that the rent itself does not destroy the exemption. Public property that would otherwise qualify for a tax exemption does not lose it merely because a charge is made for the property's use or a profit is generated, as long as the charges are incident to the public's use and the proceeds go to the political subdivision. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

The opinion also cleared up a wrong turn. Someone had suggested the building was taxable under Tax Code section 11.11(d), but that subsection applies only to property owned by the state, not to property owned by a political subdivision like a hospital district. So if the building was taxable at all, it would not be under subsection (d). Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

The catch is that exemption still requires the property to be held only for public purposes and devoted to the use and benefit of the public. Whether this particular building met that test was a factual question, and the opinion said the AG's office is not empowered to make that call. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Currency note

This opinion was issued in 1985. 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.

Common questions

Does charging rent make public property taxable?

No, not by itself. JM-405 followed Texas Supreme Court authority holding that otherwise-exempt public property does not lose the exemption just because a charge is made or a profit generated, provided the charges are incident to public use and the money benefits the political subdivision. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Wasn't the building taxable under Tax Code section 11.11(d)?

No. The opinion explained that subsection (d) applies only to property owned by the state. A hospital district is a political subdivision, not the state, so subsection (d) did not make its building taxable. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Then what actually determines whether the building is exempt?

Whether it is held only for public purposes and used primarily for the health, comfort, and welfare of the public. The property does not have to be used for governmental purposes; proprietary public uses count too. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Did the AG decide this building qualified?

No. The opinion said whether the property is actually used for public purposes is a factual matter, and the AG's office is not empowered to rule on it. That determination is left to the local authorities. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Background and statutory framework

The Childress County Hospital District is a political subdivision created under article 4494, V.T.C.S., and article IX, section 9 of the Texas Constitution. The property-tax exemption for public property comes from the constitution: article VIII, section 2 lets the legislature exempt public property used for public purposes, and article XI, section 9 exempts county and city property held only for public purposes. Section 11.11(a) of the Tax Code carries that out, exempting property owned by the state or a political subdivision if it is used for public purposes. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

The rent question was settled by longstanding case law. Lower Colorado River Authority v. Chemical Bank and Trust Company, 190 S.W.2d 48 (Tex. 1945), and A & M Consolidated Independent School District v. City of Bryan, 184 S.W.2d 914 (Tex. 1945), establish that a charge or profit does not defeat the exemption when incident to public use and the proceeds benefit the subdivision. On the separate requirement that the property be devoted to public use, the opinion cited Satterlee v. Gulf Coast Waste Disposal Authority, 576 S.W.2d 773 (Tex. 1978), and framed the test, drawn from State v. Houston Lighting & Power Co., 609 S.W.2d 263 (Tex. Civ. App. - Corpus Christi 1980, writ ref'd n.r.e.), as whether the property is used primarily for the health, comfort, and welfare of the public. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Citations and references

• section 11.11 of the Tax Code
• article 4494, V.T.C.S.
• Texas Constitution article VIII, section 2
• Texas Constitution article XI, section 9
• Lower Colorado River Authority v. Chemical Bank and Trust Company, 190 S.W.2d 48 (Tex. 1945)
• A & M Consolidated Independent School District v. City of Bryan, 184 S.W.2d 914 (Tex. 1945)
• Satterlee v. Gulf Coast Waste Disposal Authority, 576 S.W.2d 773 (Tex. 1978)
• State v. Houston Lighting & Power Co., 609 S.W.2d 263 (Tex. Civ. App. - Corpus Christi 1980, writ ref'd n.r.e.)

Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0405
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1985/jm0405.pdf

Original opinion text

Best-effort transcription from a scanned PDF via OCR. Minor errors may remain; the linked PDF is authoritative.

The Attorney General of Texas

JIM MATTOX
Attorney General

December 23, 1985

Honorable Ann Postma Musgrove
Childress County Attorney
County Courthouse
Childress, Texas 79201

Opinion No. JM-405

Re: Whether a building owned by a hospital district is exempt from taxation under section 11.11 of the Tax Code

Dear Ms. Musgrove:

You ask whether a building owned by a hospital district but leased to three other entities is exempt from ad valorem taxation in an instance in which the district receives remuneration from the entities in the form of rental payments. Although we cannot as a matter of law conclude that such property is tax-exempt, we conclude that the fact that the district receives remuneration in the situation you describe will not deprive the district of tax-exempt status on such property. We do not understand you to ask whether the lessees will be subject to taxation on their leaseholds.

You inform us that the Childress County Hospital District is a political subdivision created pursuant to article 4494, V.T.C.S., and article IX, section 9 of the Texas Constitution. Acts 1965, 59th Leg., ch. 647, at 1483. You indicate that Panhandle Community Action and Panhandle Planned Parenthood, two nonprofit corporations, and the Texas Department of Health, a state agency, lease the building from the hospital district. You further state:

The leased building in question is used by Panhandle Community Action, Planned Parenthood, and the Texas Department of Health for the following purposes: to provide health care and community services to area persons in need, including clothing and food, implementing federal housing programs, and implementing state rural transportation programs, and providing for certain medical needs such as birth control, and inoculations. A portion of the building is also retained for use by the hospital district for storage of hospital records and equipment.

You contend that the fact that the district receives rental payments from its lessees should not preclude the district's receiving ad valorem tax exemption on its property. It has been suggested, however, that the property is taxable under section 11.11(d) of the Tax Code regardless of the character of the services provided by the lessees of the building. We disagree. Subsection (d) of section 11.11 provides the following in pertinent part:

(d) Property owned by the state that is not used for public purposes is taxable. Property owned by a state agency or institution is not used for public purposes if the property is rented or leased for compensation to a private business enterprise to be used by it for a purpose not related to the performance of the duties and functions of the state agency or institution. . . .

If the property is taxable, it is not so pursuant to subsection (d), which is applicable only to property owned by the state.

Article VIII, section 1 of the Texas Constitution provides the following in pertinent part:

Taxation shall be equal and uniform. All real property and tangible personal property in this State, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.

Article VIII, section 2 provides the following in pertinent part:

[T]he legislature may, by general laws, exempt from taxation public property used for public purposes. . . . (Emphasis added).

Article XI, section 9 of the Texas Constitution provides the following in pertinent part:

The property of counties, cities and towns, owned and held only for public purposes, such as public buildings and the sites therefor . . . and all other property devoted exclusively to the use and benefit of the public shall be exempt from . . . taxation. . . . (Emphasis added).

Section 11.11(a) of the Tax Code sets forth the following in pertinent part:

Except as provided by Subsections (b) and (c) of this section [which are here inapposite], property owned by this state or a political subdivision of this state is exempt from taxation if the property is used for public purposes.

Property of a political subdivision which would otherwise qualify for exemption from ad valorem taxation under one of the foregoing constitutional provisions will not lose its tax-exempt status merely because a charge is made for use of the property or a profit is generated thereby, provided the charges are incident to its use by the public and the proceeds inure to the benefit of the political subdivision. Lower Colorado River Authority v. Chemical Bank and Trust Company, 190 S.W.2d 48, 50 (Tex. 1945); A & M Consolidated Independent School District v. City of Bryan, 184 S.W.2d 914, 915-16 (Tex. 1945). See also City of Beaumont v. Fertitta, 415 S.W.2d 902, 915 (Tex. 1967) (Walker, J., dissenting); Galveston Wharf Company v. City of Galveston, 63 Tex. 14 (1884). Cf. Santa Rosa Infirmary v. City of San Antonio, 259 S.W. 926 (Tex. Comm'n App. 1924, judgmt adopted); City of Dallas v. Smith, 107 S.W.2d 872 (Tex. 1937); City of Palestine v. Missouri-Pacific Lines Hospital Association, 99 S.W.2d 311 (Tex. Civ. App. - Amarillo 1936, writ ref'd) (cases involved not political subdivisions, but rather institutions of purely public charity). Accordingly, we conclude that, in the situation you describe, the fact that the district receives compensation for the lease of its property will not deprive the district of its tax-exempt status on the property if it would otherwise be tax-exempt.

We note that the Texas Supreme Court has consistently reaffirmed the principle that, in order for public property to be exempt from ad valorem taxation, it must be held only for public purposes and devoted exclusively to the use and benefit of the public. Satterlee v. Gulf Coast Waste Disposal Authority, 576 S.W.2d 773 (Tex. 1978); Leander Independent School District v. Cedar Park Water Supply Corporation, 479 S.W.2d 908 (Tex. 1972); Daugherty v. Thompson, 9 S.W. 99 (Tex. 1888). The test for determining whether public property is tax exempt is whether it is used primarily for the health, comfort, and welfare of the public. It is not essential that it be used for governmental purposes; it is sufficient that it be used for "proprietary" purposes. A & M Consolidated Independent School District v. City of Bryan, supra. It is immaterial whether only residents of the district are benefitted or whether others benefit as well; the fact that property is owned by the public and is used primarily for the health, comfort and welfare of the public of some portion of the state is sufficient to entitle such property to tax-exempt status. State v. Houston Lighting & Power Co., 609 S.W.2d 263 (Tex. Civ. App. - Corpus Christi 1980, writ ref'd n.r.e.). See also Attorney General Opinions MW-430 (1982); MW-391 (1981). The determination that such property is so used in this instance is a factual matter upon which this office is not empowered to rule.

SUMMARY

The fact that a hospital district receives remuneration for leasing a building owned by that district will not deprive that district of tax-exempt status on such property.

Very truly yours,

JIM MATTOX
Attorney General of Texas

JACK HIGHTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General

ROBERT GRAY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Jim Moellinger
Assistant Attorney General