It often becomes necessary for a church to seek out tenants to meet the financial needs of the congregation. Some churches are happy to open their doors to other churches, while others take on churches and for-profit tenants alike to make better use of their facilities. Whatever the approach, I always caution churches that the mix of churches and for-profit tenants can make a world of difference to their property taxes, especially when that tenant is a for-profit organization. Lease to the wrong tenant, or paper the deal the wrong way, and a church can lose an exemption it has held for years.
What follows is a simplified overview. The law in this area is vast and complicated, and the proper professional should always be consulted before signing a lease.
The Three Exemptions
When it comes to churches and for-profit tenants, the property tax analysis starts with the exemptions. Provided the real property is owned and operated for religious or other charitable purposes, institutional property tax exemptions are available in California. But the church’s own use of the property matters just as much as the exempt status of any tenant when the assessor decides whether the property stays exempt.
There are three basic exemptions: the Church Exemption, the Religious Exemption, and the Welfare Exemption. The Church Exemption is the narrowest — it applies only to areas used exclusively for worship or parking, and not to fellowship halls or other non-worship activities. It also requires an annual filing.
The Religious Exemption is broader. It covers property used for worship, fellowship, religious counseling, offices, parking, and schools of grade twelve and under, and it has a valuable one-time filing provision rather than an annual one. It remains available even if another church rents the property part-time for worship, as long as the owner church also conducts its own worship services there.
The Welfare Exemption is the broadest of the three, covering the greatest number of uses. But it comes with the most paperwork, and it is the exemption that comes into play the moment a for-profit tenant regularly uses your property, a situation at the heart of the churches and for-profit tenants question.
Property Owned by a Church and Used by Others
Here is where churches most often get into trouble. Property, or a portion of it, that is owned by one organization and used by another is not eligible for the Welfare Exemption unless specific requirements are met. Under the California Constitution and Revenue and Taxation Code section 214, the property must be used exclusively for religious, hospital, scientific, or charitable purposes, and owned or held in trust by a qualifying nonprofit.
When property is used regularly by another charitable organization, or used beyond the scope of religious worship and schools, the Welfare Exemption must be claimed for that use. And it must be claimed annually with the county assessor where the property sits.
There is one procedural trap worth flagging. The county assessor cannot grant the Welfare Exemption unless the claiming organization already holds a valid Organizational Clearance Certificate issued by the Board of Equalization. The BOE determines whether the organization itself qualifies and issues the certificate; a copy can then be filed with claim forms in any county in California. Many churches file the county claim and are surprised when it stalls because the BOE certificate was never obtained.
What Churches and For-Profit Tenants Need to Watch
In short, the Welfare Exemption is available to property owned by organizations that are formed and operated exclusively for qualifying purposes, that use the property exclusively for those purposes, and that hold a current tax-exempt letter from the IRS or the California Franchise Tax Board. The property should also be irrevocably dedicated to those qualifying purposes in the organization’s governing documents.
If the church is a qualifying claimant, it can lease property to another organization without losing its exempt status, provided the lessee also meets the requirements and files its own Welfare Exemption claim. But the leasing arrangement should never be intentionally profit-making or commercial in nature. With churches and for-profit tenants, the moment a lease looks like a commercial deal, the exemption is in jeopardy, and that is exactly the situation a church wants to structure carefully in advance rather than explain to the assessor after the fact.
A Practical Note
Between the two church-side exemptions, the Welfare Exemption covers the widest range of uses, while the Religious Exemption is usually more desirable for church-owned property because of its one-time filing provision. Which one fits depends entirely on how the property is actually used and who else is using it. For any church weighing churches and for-profit tenants against its exemption, the lease and the exemption strategy should be worked out together, not separately.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
