In a move that could cost local arts institutions tens of thousands of dollars, the county assessor’s office has removed the property tax exemption of several groups, including the San Diego Repertory Theatre, the San Diego Symphony and the Gaslamp Quarter Theatre, after determining that their facilities have housed for-profit events.
Property taxes being assessed local arts groups range from about $65,000 for the symphony to $36 for the Sushi performance and art gallery.
According to the assessor’s office, the problem occurs when tax-exempt organizations lease their facilities to organizations that do not possess property-tax exemptions.
According to Chief Deputy Assessor Robert Frazier, an exemption is forfeited whenever the property is not used exclusively for its intended charitable purposes, or when it is used by other than exempt organizations.
“Technically, a one-time use by other than qualifying organizations destroys the exemption,” Frazier said. “There have been some decisions involving incidental or isolated cases that probably would not have destroyed the exemption. But, technically, you can’t do it even once.”
A number of city arts groups have banded together to question the assessments.
“I think it’s unfair,” said Lynn Schuette, director of Sushi. “We’re getting assessed for the first time in nine years. The only people we rent to are nonprofit arts organizations and independent artists. They’re making us pay for renting to artists. For us, it’s a matter of principle. For other organizations it’s significant money.”
Adrian W. Stewart, general director of the San Diego Repertory Theatre, has been appointed to head a San Diego Theatre League subcommittee to study the issue.
“It seriously impairs our ability to serve the community,” Stewart said. “It’s minimal for us, a few hundred dollars, but our concern is how it all ties together . . . . We’re preparing our cases and what our options are. Our goal is to retain the exemption for nonprofit performing arts groups.”
Desperately Needed Money
Loss of property-tax exemption means that nonprofit groups may be liable for real and business property taxes. It does not mean that arts groups lose their nonprofit status or their tax-exempt status, tax officials say. The greatest impact, according to arts leaders, is that the institutions will lose desperately needed money.
“It’s real scary,” said Kit Goldman, managing producer of the Gaslamp Quarter Theatre. “It’s a major thing. Exemption is one of the things that allows us to do business. To lose it would be extremely detrimental to the financial stability that we all fight so hard for.”
The Gaslamp has received a $4,000 tax bill for property valued at about $400,000 in its Hahn Cosmopolitan Theatre.
“We don’t own the building,” Goldman said. “We lease it.”
However, the theater does rent out its stage for occasional business meetings, and there’s the rub, according to officials in the assessor’s office.
San Diego County has about 2,500 organizations, including churches, that are exempt from paying property taxes under the provisions of Section 214 of the California Revenue and Taxation Code, a member of the assessor’s staff said.
A Business Decision
However, it is not unusual for nonprofit organizations, including churches, to accept the loss of their property-tax exemption, Frazier said. When they stand to gain money through renting to a Jazzercise class, for instance, the extra income may be significant.
“It’s a business decision, really,” Frazier said. “If you can make more money from renting out the facility than you save on property taxes from an exemption, it might be good business to go ahead and rent it out.”
San Diego Symphony Executive Director Wesley O. Brustad protested the loss of the orchestra’s exemption last fall. The symphony rented its hall 13% of the time in 1987-88 to “non-qualifying” organizations such as commercial producers, Frazier said. That was sufficient under the current law to destroy the symphony’s exemption from property taxes. (That does not affect the symphony’s nonprofit status as a recipient of donations under federal tax law.)
“Our argument was that, if we rent out 5% of the evenings (to non-qualifying users), then we should pay 5% of the tax,” Brustad said. “But they didn’t buy that. They say it’s like you’re either pregnant or not.”
The symphony appealed its loss of exemption to the state Board of Equalization, the final administrative arbiter in property tax matters, but was overruled. However, the assessor’s office allowed the symphony a 20% exemption on spaces that are used only by the orchestra.
“It’s still worthwhile to rent it,” Brustad said, but “we take a big hit.”
Thousands at Stake
In a related matter, the assessor’s office is also determining who, if anyone, will pay taxes on the $6.5-million Lyceum Theatre complex in Horton Plaza. From $60,000 to $70,000 in taxes may be at stake.
Built jointly by the Hahn Co. and the Centre City Development Corp. in 1986, the theaters are subleased by the CCDC, the city’s redevelopment arm, to the Horton Plaza Theatres Foundation, a city entity, and further subleased to the nonprofit San Diego Repertory Theatre.
“What we’re trying to do is unravel the organizations as they stand down there,” Frazier said. “The city property is not assessable. We will be working down there to determine who owns what.”
Frank Alessi, CCDC finance director, said it is expected that the Hahn Co. will be taxed for the $1-million shell it built. “The goal is to find whether or not the equipment and improvements that the redevelopment agency actually installed are in fact taxable.”
The San Diego Repertory Theatre lost its exemption performing in its required role as Lyceum Theatre manager, said Stewart, the Rep director.
“It’s another example of the one-of-a-kind relationship we have in this facility,” he said. “The absolute mandate” of the Lyceum management contract was “for year-round operation with lots of kinds of organizations using the theater,” Stewart said.
Diversity of Groups
Although most groups using the theater are nonprofit, the theater is also encouraged to rent the Lyceum to a diversity of groups, from beauty pageants to business conferences, Stewart said. The Lyceum was recently rented to the California Pistachio Growers, he said.
Although members of the assessor’s office deny that there has been any special scrutiny of arts groups, several arts leaders say the loss of exemptions did not begin until a member of the assessor’s office attended a 1988 business conference at the Hahn.
San Diego is not the only county to deny arts groups exemptions. Alma Robinson, executive director of California Lawyers for the Arts, an arts support group with offices in San Francisco and Los Angeles, said several arts groups in San Francisco have begun to complain about losing their exemptions.
According to Robinson, enforcement of the provisions of the California Revenue and Taxation Code that affect nonprofit organizations seems to vary from county to county.
“There is so much variation within the counties as to how this is applied that maybe it’s time for the state Legislature to look at it,” Robinson said. “Under federal and state regulations governing nonprofit organizations and income tax exemptions, you file once and then file only if that status changes. It seems like you shouldn’t have to jump through nine more hoops to save $36.”
Deputy Assessor Frazier agreed.
“There’s nothing to prevent the law from being” rewritten, he said. “Maybe these organizations should consider working with the Legislature. . . . None of us likes to see an exempt organization suffer. They need money. Fund-raising is a unique part of their job.”