Milwaukee Regional Medical Center, Inc. v. City of Wauwatosa

LOUIS B. BUTLER, JR., J.

¶ 79. {concurring in part, dissenting in part). The majority concludes that the Milwaukee Regional Medical Center ("MRMC") is the beneficial owner of the day care facility located on public land owned by Milwaukee County ("County"). Majority op., ¶ 64. As a result, the majority reasons, MRMC does not qualify for a property tax exemption *88under Wis. Stat § 70.11(2). Majority op., ¶¶ 5, 78. The majority also concludes that MRMC does not qualify for the § 70.11(4) tax exemption as an educational association. 7<i.1

¶ 80. Regarding the issue of beneficial ownership, I agree with the majority that we apply a fact-specific balancing test, under which we weigh the indicia of ownership of the County against the indicia of MRMC's ownership, considering all relevant factors pertaining to ownership. See City of Franklin v. Crystal Ridge, Inc., 180 Wis. 2d 561, 568, 509 N.W.2d 730 (1994); Gebhardt v. City of West Allis, 89 Wis. 2d 103, 109, 278 N.W.2d 465 (1979); Mitchell Aero, Inc. v. City of Milwaukee, 42 Wis. 2d 656, 662, 168 N.W.2d 183 (1969). However, I write separately because I disagree with the majority opinion's application of that standard, and am troubled by the extent to which the majority opinion appears to change that standard.

¶ 81. The majority claims to apply the totality of the circumstances balancing test for establishing beneficial ownership set forth in Crystal Ridge, Gebhardt, and Mitchell Aero. See majority op., ¶¶ 35-36. However, reciting the standard and properly applying it are very different things. I conclude that the majority's application of the test for determining beneficial ownership is flawed in two basic ways. First, it fails to consider the totality of the circumstances by focusing almost entirely on current financial benefits provided in the lease agreement while ignoring those lease terms that provide significant future financial benefits. Second, the analysis is incomplete and biased in favor of MRMC ownership because it focuses narrowly on five indicia of MRMC ownership while failing to discuss in *89any depth even one indicia of County ownership. Below, I address in turn these two problems in the majority's analysis, and conclude that a proper application of the test would result in a determination of County beneficial ownership.

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¶ 82. The majority's application of the beneficial ownership test changes the focus from a consideration of all benefits provided to each party under the lease to only those benefits that are currently in effect. Id., ¶ 64. This approach significantly alters the totality of the circumstances test, and is inconsistent with Crystal Ridge, Gebhardt, and Mitchell Aero.

¶ 83. The totality of the circumstances test requires taking into account the terms of the lease as a whole, not just those referring to current conditions and events. This principle was affirmed in the context of the beneficial ownership balancing test applied in Crystal Ridge, Gebhardt, and Mitchell Aero, all of which, in considering the totality of the circumstances, considered the lease as a whole, which the majority fails to do here.

¶ 84. In Crystal Ridge, this court examined all of the provisions of the lease between the parties, including among the emphasized indicia the fact that "upon expiration of the lease, the lessor acquires a full posses-sory interest in the buildings." Crystal Ridge, 180 Wis. 2d at 570. Consequently, the county was determined to be the beneficial owner in that case, based on the totality of the circumstances of the lease and the parties' relationship. Id. at 570-73.

¶ 85. In Gebhardt, this court explained that because ownership is often referred to as a "bundle of sticks," when we determine beneficial ownership, we *90examine all of the relevant sticks, not just the stick of title ownership. Gebhardt, 89 Wis. 2d at 108-09. The Gebhardt court examined factors in a lease for a recreational ice arena reflecting both present and future conditions, noting, for example, that "under the terms of the lease the respondents bear the risk of loss should the ice arena be destroyed during the lease period." Id. at 109. In finding the State to be the beneficial owner, the Gebhardt court found "controlling" "the fact that upon expiration of the lease the state acquires a full and complete possessory interest in the property." Id. at 115.

¶ 86. The Mitchell Aero decision contains the following explanation of the "bundle of sticks" analysis of beneficial ownership:

Ownership is often referred to in legal philosophy as a bundle of sticks or rights.... What combination of rights less than the whole bundle will constitute ownership is a question which must be determined in each case in the context of the purpose of the determination. In this case for exemption one needs more than the title stick to constitute ownership.

Mitchell Aero, 42 Wis. 2d at 662. In Mitchell Aero, this court examined the entire lease over a twenty-year period in light of all relevant considerations, including provisions of the lease referencing future or hypothetical scenarios such as the parties' rights in the face of damage from natural disasters, condemnation, or property abandonment. Id. at 663-65.

¶ 87. In contrast with our decisions in these cases, where the court looked at the leases at issue in their entirety under the totality of circumstances test, the majority in this case confines its analysis to the terms of the lease that reflect the present conditions of the parties. The majority ignores those terms reflecting benefits that will be granted to the County in the *91future, suggesting that the parties come back to court to re-litigate the tax exemption issue as those benefits come to fruition. Requiring the parties to re-litigate this issue each time a lease term comes to fruition would not only be contrary to the totality of the circumstances test, it would also be an unjust imposition on litigants and an impractical drain on the judiciary's resources.

II

¶ 88. The majority mentions in passing, and in an incomplete manner, the numerous indicia of County ownership. The majority produces side-by-side lists of indicia of County ownership and indicia of MRMC ownership. Majority op., ¶¶ 55-56. However, its list of County ownership indicia fails to take into account all of the factors identified by the circuit court. While the majority opinion asserts that in compiling the list it "benefit[ed] from the circuit court's analysis," majority op., ¶ 55 n.13, the majority's list omits the following indicia favoring County ownership that were included in the circuit court's list: (1) the County's right to terminate the lease and take possession of the property if construction was not completed on time; (2) MRMC's duty to indemnify the County for damages; and (3) MRMC's responsibility to keep the day care center in clean condition, serving at least 140 children. Compare Milwaukee Reg'l Med. Ctr., Inc. v. City of Wauwatosa, 2006 WI App 139, ¶ 41, 295 Wis. 2d 211, 720 N.W.2d 161 (Wedemeyer, RJ., concurring in part, dissenting in part), with majority op. ¶ 55.

¶ 89. Rather than considering in depth the various indicia of beneficial ownership favoring both County ownership and MRMC ownership, the majority narrowly focuses on the following indicia favoring MRMC ownership: (1) the length of the lease term; *92(2) MRMC's exclusive occupancy of the property; (3) MRMC's current retention of the title of the day care facility; (4) the current minimal rent which MRMC pays the County; and (5) the County's lack of involvement in the day-to-day operation of the facility. Majority op., ¶¶ 57-62.

¶ 90. The majority fails to adequately explain the basis for its emphasis on these five factors. The first two factors that the majority claims have significant weight in the balancing test — the length of the lease and MRMC's exclusive occupancy — are common lease terms and are therefore merely indicative of lessee status and are not particularly weighty indicia of ownership. The majority itself concedes that exclusive possession is to be expected with a lease agreement, but nonetheless proceeds to place great emphasis on this factor. See majority op., ¶ 58.

¶ 91. The third indicia highlighted by the majority, current retention of title by MRMC, should bear no more weight than the undisputed fact that the County will ultimately retain legal title to the land. As the majority concedes, possession of legal title does not guarantee that a party is an "owner" for tax exemption purposes; rather, the whole purpose of the "beneficial owner" inquiry is to move beyond such original surface determinations based on mere technical title. See majority op., ¶ 33. Consequently, it is difficult to fathom why the MRMC's (temporarily) retained paper title should bear more weight in our analysis than any of the indicia of County ownership.

¶ 92. The final two indicia emphasized by the majority warrant more discussion.

¶ 93. I respectfully disagree with the majority's view that because the County (unlike the governmental units in Gebhardt and Crystal Ridge) is not directly *93involved in the day-to-day operation of the facility, it does not retain significant control over the use of the child-care facility. While the County does not set the price of child care or employ County employees to operate the center, there are many significant respects in which the County retains control over the center. Foremost, the County strictly limits MRMC's use of the property to "a child care center to serve employees and students of the Milwaukee Regional Medical Center, its member organizations and the general public and for no other purpose .. . ." This language is similar to the lease requirement in Gebhardt limiting the respondent's use of the facility to "ice skating related sports and recreation." See Gebhardt, 89 Wis. 2d at 111. Additionally, the County mandates that MRMC must maintain a child-care program capable of serving at least 140 children.

¶ 94. In addition to mandating the type and size of the service provided by MRMC, the County restricts future changes to the facility. The County retains extensive control over any modifications made to the child-care facilities and grounds, as was the case in both Gebhardt and Crystal Ridge. See Gebhardt, 89 Wis. 2d at 111; Crystal Ridge, 180 Wis. 2d at 569-70. MRMC must gain approval from the County for any additions or alterations costing more than $50,000, and the County's written consent for any substantial improvements made in the last ten years of the lease. Furthermore, the County requires MRMC to provide fencing and forbids placing signs on the property without permission. The lease also requires MRMC to keep the facilities in good, clean and safe condition, and allows the County the right to enter the premises, with notice, at any reasonable time to determine if MRMC is meeting its obligations under the lease. By emphasizing the *94County's lack of day-to-day operation of the facility while omitting discussion of these indicia of control, the majority engages in an incomplete analysis.

¶ 95. The majority's narrow focus on the "present financial benefit" factor fails to acknowledge the other benefits the County receives from the lease agreement, including important non-financial benefits. See majority op. ¶¶ 60-62. For example, the record indicates that the County entered into the lease agreement with MRMC because there is a public benefit to providing child-care services on County public land. The lease agreement states, "WHEREAS, Lessor is satisfied that it is in the best interest of Milwaukee County and its residents to make said land available to Lessee for the purposes herein stated."

¶ 96. In addition, while the majority points to the 50-year lease as an important indicia of MRMC ownership because the lease term allows MRMC to engage in long-term planning, the opinion fails to acknowledge similar long-term or future benefits to the County. See majority op., ¶ 57. Such future financial benefits to the County include MRMC's obligation to pay the County an agreed upon market rental rate for the final twenty years of the lease; the County's right to possession if construction was not completed; the County's right to indemnification; and the County's right to complete title and possession of the child-care facility free of any encumbrances at the end of the lease.

¶ 97. This last benefit is particularly significant because, under the current lease, the County will claim title to the improvements to the property, valued at $1,172,400 in 2003, without any expenditure by the County. In Gebhardt, this court determined that a similar lease provision restoring a full and complete possessory interest in the property to the State upon *95termination of the lease was a controlling factor in our conclusion that the State had beneficial ownership. Gebhardt, 89 Wis. 2d at 115. The majority here fails to explain why the future transfer to the County of more than a million dollars in improvements is not worth substantive consideration, in contrast with the indicia of MRMC ownership it chooses to emphasize.

¶ 98. Additionally, the County's current financial benefits are not insignificant. These include MRMC's payment of a pro rata share of the County's obligation to the City of Wauwatosa for the construction of a new fire station and fire fighting positions; MRMC's obligation to purchase water, sewer, and security services from the County throughout the lease term; and the County's receipt of insurance coverage throughout the lease. These current financial benefits, taken with non-financial benefits and future financial benefits, weigh in favor of a determination of County beneficial ownership.

¶ 99. In my view, when the County anticipates a public benefit from an agreement and that benefit is exceeded (MRMC serves more than 140 children), that benefit must weigh heavily on the side of the County being the beneficial owner, along with the other above-mentioned indicia. To ignore the significance of these benefits may distort the importance of the current favorable financial terms enjoyed by MRMC. It is possible the current financial terms are simply the terms required for the County to recruit a non-governmental partner to provide important public benefits, such as ensuring the availability of child-care services to county residents. Indeed, this court recognized in Gebhardt that, "public policy favors this type of tax-exempt treatment for conveyance-leaseback arrangements between private enterprise and governmental bodies." Gebhardt, *9689 Wis. 2d at 115. A full analysis of the circumstances in these types of agreements requires taking into account the non-financial benefits that often represent the impetus for making the agreement in the first place.

¶ 100. Such a full analysis is lacking from the majority opinion. I do not disagree with the existence of the facts listed by the majority opinion as indicia supporting MRMC ownership; however, many of the listed facts are merely benefits accorded to MRMC as a lessee, and do not necessarily indicate beneficial ownership.2 As Wis. Stat. § 70.11(2) provides, "[1]easing the property exempt under this subsection, regardless of the lessee and the use of the leasehold income, does not render that property taxable."

¶ 101. In short, I fail to understand the justification for the majority's disproportionate emphasis on the above indicia purportedly favoring MRMC ownership. Even if the above-mentioned indicia warrant the weight the majority gives them, by discussing a select number of MRMC ownership indicia in detail without similarly addressing any of the County ownership indicia, the majority opinion fails to apply the comprehensive balancing test established by Crystal Ridge, Gebhardt, and Mitchell Aero, which requires an examination of all relevant indicia.

¶ 102. Once the indicia of County ownership that were omitted by the majority are taken into account, *97and once all indicia of beneficial ownership, not just those five favored by the majority, are carefully considered, it becomes clear that the indicia weigh in favor of County, not MRMC, ownership.

¶ 103. In conclusion, the majority opinion fails to accord appropriate weight to indicia of ownership showing that Milwaukee County retains considerable control over the MRMC child-care facility, receives significant present and future financial benefits, and obtains non-financial benefits from the child-care facility lease agreement. As a result, I would affirm that portion of the circuit court's ruling in this case that would allow MRMC a tax exemption under Wis. Stat. § 70.11(2).

¶ 104. For the foregoing reasons, I respectfully concur in part and dissent in part.

¶ 105. I am authorized to state that Chief Justice SHIRLEY S. ABRAHAMSON joins this opinion.

I agree with and join this latter conclusion.

For example, the majority lists as indicia of MRMC ownership the following lessee-specific benefits: (1) the term of the lease; (2) exclusive occupancy, as traditionally accompanies a lease; (3) the right to notice before the County enters the property, which is also generally accorded to lessees; (4) MRMC's retention of title of the day care facility, but only through the duration of the lease; and (5) the amount of rent paid, which I have already addressed. Majority op., ¶ 56.