Stanford wants ‘educational’ tax exemption for faculty homes

Stanford University is seeking to reduce its tax burden on two faculty houses by claiming they are used for educational purposes.

If successful, additional exemptions the university might seek could result in millions of dollars of lost revenue for local schools and governments, particularly the Palo Alto Unified School District, according to Santa Clara County administrators.

Stanford filed an application for a tax refund on the two properties, whose addresses have been redacted from documents, in 2021. The university claimed the educational-use exemption under provisions of the California Constitution and the Revenue and Taxation code. The total request for the property tax excusal is $20,657 in the first year for the two properties and would apply in every subsequent year, the county stated in an email to the Palo Alto Weekly.

If the university pursues additional refunds based on the same claims, the county and local jurisdictions could potentially lose nearly $5 million annually, including $2.3 million each year to the Palo Alto Unified School District. These losses would hurt K-12 students, teachers, and the local economy, Santa Clara County Counsel James Williams said.

The properties are currently being taxed based on their current market value, as is the case with all properties in California. Stanford wants a tax discount of 25% on the land value beneath the properties, which it owns and leases to faculty members. The university claims that it has an “interest” in the properties and that they are exempt from taxation as an educational use. Stanford is not making an exemption claim for taxes paid by the faculty members who own the homes located on the leased land.

But the county has flatly rejected the claims. An Assessment and Appeals Board notified the university in October 2021 that it had no jurisdiction to grant or deny exemptions, nor to consider allegations that claims for exemptions from property tax have been improperly denied, according to a letter to the university.

The university then filed a claim with the Santa Clara County Board of Supervisors in February 2022 for the refund, and Stanford has now designated hired attorneys as their Power of Attorney to deal further with the matter, according to Stanford’s claim letter.

Williams said the county has denied the claim. He noted the county is not denying the educational status of on-campus properties such as student dormitories. The two residential properties, which are long-term leaseholds to faculty members, are not the same as libraries, academic buildings and other facilities that are everyday uses for education on the campus. They are also not located in the core academic campus with these other educational buildings, Williams said, disputing Stanford’s definition of “on campus.”

Stanford owns 8,180 acres of land in Santa Clara and San Mateo County. The university was not required to pay taxes on more than $15.9 billion of its holdings during the 2021 fiscal year, the largest tax exemption in Santa Clara County, according to the Santa Clara County Assessor’s Office, Williams noted.

Stanford’s residential portfolio

More than 1,200 single-family residences are among its holdings. Those homes have a value of almost $1.1 billion, according to the county.

Increasingly, the university has also been buying up single-family homes in the cities of Menlo Park, Palo Alto and surrounding communities to meet the needs of professors the university has said it wants to attract.

Stanford owns the ground lease for its properties. Faculty members lease the ground, often for decades, until they are no longer affiliated with the university. The faculty member purchases the home that is on the land. The faculty member agrees to a value cap of 2% a year, which keeps the home’s value down for the next buyer who takes possession, according to the university’s residential ground lease.

The properties can also be transferred to the surviving spouse of an active faculty member who has died, even if the spouse serves no educational connection to the university. Williams noted this would seem to belie an educational use.

The issue emerged after the Santa Clara County Tax Assessor’s Office began reassessing property values in 2018 for home purchases that occurred in 2017 and thereafter.

In 2019, about 50 Stanford University faculty members who purchased their homes through ground leases in the prior three years had their properties reassessed by the county. Using a little-known rule for homes owned under ground leases, the county valued some single-family homes 12% to 48% higher. The new assessments were based on open-market purchase prices of nearby homes.

Stanford’s stated reason for requesting the exemption is to alleviate cost-of-housing hardships for faculty.

In a written statement, Stanford said: “Homes in the faculty subdivision on Stanford’s campus have traditionally been assessed property taxes based on the faculty’s purchase price of the property, like other residential properties in Santa Clara County. In recent years, the County Assessor has increased the assessed value of some newly purchased faculty homes on Stanford’s campus to levels above the faculty purchase prices.

“The Assessor’s re-assessment of properties at levels beyond faculty purchase prices has created unexpected and substantial financial hardship for some faculty homeowners and does not reflect Stanford’s restrictions on faculty sales, ownership and use of these properties. It is important to note that faculty homes are on ground leases, so homeowners do not own the full property interest in these homes. Stanford is seeking a partial property tax exemption for some of the affected homes based on the value of the interest in the property retained by Stanford as the underlying property owner.”

The university stressed that it is critical to Stanford’s educational mission to provide housing that is affordable for faculty.

“Stanford’s retained interests and restrictions in the homes are designed to achieve this objective of affordable faculty housing,” the university stated.

Williams said the faculty homes are “functionally not distinguishable from private residences. Nobody would conflate them with a student dorm. The houses are the same as every other private family house. The difference is that Stanford subsidizes the purchases.”

Stanford’s claim to the board of supervisors said that high Bay Area housing prices make it impossible for many faculty members to afford homes in surrounding neighborhoods off campus.

Similar concerns and claims were raised in a lawsuit against Orange County regarding land leases and faculty housing at the University of California, Irvine. University administrators also argued it needed the exemption to attract quality faculty.

A lower court sided with the plaintiffs against the county, ruling that a provision of the state constitution that excludes from taxation a property that is “used exclusively for public schools, community colleges, state colleges (or) state universities,” applied in the Orange County case. The state Court of Appeal and California Supreme Court overturned that ruling, however.

In 1992, the state Supreme Court unanimously ruled that faculty and staff who lease campus houses must continue to pay property taxes. About 200 U.C. Irvine faculty and staff had sought exemptions.

The Supreme Court found that leased housing on land owned by a tax-exempt institution may be tax exempt only if the housing is essential to the purpose of the institution.

“If their leasehold interest in the property on which the homes are situated is entitled to an exemption because the property is being used for faculty housing, then it is difficult to understand on what basis an exemption could be denied to the faculty members’ property interest in the homes themselves,” the Supreme Court stated.

If the use of property for faculty housing is an exclusive use of property for university purposes under state provisions, then a faculty member who bought a home on private property and used it as his or her family residence also could claim an entitlement to an exemption because that property too would be property used for faculty housing, the court noted.

“As these examples demonstrate, plaintiffs proposed interpretation … proves too much,” the court said.

“The leasehold interests of (U.C. Irvine), which are privately owned interests used for the private owner’s residences, are not property used exclusively for university purposes within the meaning of section 3(d). Plaintiffs are not entitled to the exemption they seek,” the court reasoned.

‘The houses are the same as every other private family house. The difference is that Stanford subsidizes the purchases.’

James Williams, county counsel, Santa Clara County

The Palo Alto Unified School District, in an amicus brief supporting Orange County, stated the harm that a tax exemption would cause. Citing tax revenues it receives from Stanford, the school district noted a significant part of its funding is derived from taxes from Stanford University employees who lease their land from the university.

The Stanford Campus Residential Leaseholders’ Association in 1991 had filed a claim for an exemption for its individual leaseholders, but it was not part of the lawsuit in Orange County. The claim was contingent on the Supreme Court’s Orange County ruling and it wasn’t pursued, the university noted in a public statement after the high court’s decision.

In its current claims, Stanford has cited some of the same tax code and state constitution sections as were used by plaintiffs in the Orange County case. It’s unclear what new arguments Stanford would bring that were not already decided by the high court in the Orange County case.

Williams wasn’t surprised by the university’s efforts, however.

“What’s not new is Stanford’s pushing the boundaries” regarding its attempts to garner tax exemptions, he said.

He noted the university’s successful win in 1978 of a tax exemption for the Stanford Golf Course on 166 acres.

The county claimed in a lawsuit that the golf course didn’t qualify for the exemption because it wasn’t exclusively used for educational purposes within the meaning of the state constitution.

The Santa Clara County Superior Court and the state Appeals Court ruled in favor of Stanford, however, since the university used the golf course for golf class instruction of students, intercollegiate and intramural college competition by students and university team varsity long-distance running. Stanford students, faculty and staff also use the course for recreational golf play. The court said that even if the majority of the use is for paid members, they are still alumni.