Arkansas Court of Appeals Rules Hospital’s Leased Doctor’s Building Is Not Tax-Exempt: What Nonprofits Need to Know

Posted: April 6, 2026

In a significant decision for nonprofit hospitals and healthcare organizations across Arkansas, the Arkansas Court of Appeals recently affirmed that property owned by a charitable hospital but leased to a separate physician practice group at market rates does not qualify for the constitutional ad valorem tax exemption for property "used exclusively for public charity." Baptist Memorial Hospital – Jonesboro, Inc. v. Towell, 2026 Ark. App. 209 (April 1, 2026).

Background

NEA Baptist Memorial Hospital ("NEA Hospital") is an Arkansas nonprofit corporation that owns and operates a full-service hospital in Jonesboro. Connected to the main hospital is a five-floor medical office building — the "doctor's building" — which NEA Hospital leases to NEA Baptist Clinic ("NEA Clinic"), a separate nonprofit physician practice group, at a market monthly rent of approximately $243,000 (nearly $3 million per year). NEA Hospital also owns a separate parcel at 909 Enterprise Drive, a portion of which NEA Clinic uses rent-free for billing, physical therapy, and sleep-disorder services.

Both entities are part of a large healthcare system controlled by Baptist Memorial Health Care Corporation ("BMHCC"), headquartered in Memphis, Tennessee. NEA Hospital and NEA Clinic share the same sole corporate member but are legally distinct organizations.

When the Craighead County Assessor determined that the portions of these properties occupied by NEA Clinic were subject to ad valorem taxation, NEA Hospital and NEA Clinic sought a charitable tax exemption under Article 16, Section 5 of the Arkansas Constitution and Arkansas Code Annotated § 26-3-301(7). The circuit court denied the exemption, and the Court of Appeals affirmed.

The Court's Holding

The Court of Appeals affirmed on two independent grounds:

1. Leased Property Is Not "Exclusively Used for Public Charity"

The court applied the foundational principle that "taxation is the rule, and exemption is the exception," requiring tax exemptions to be strictly construed in favor of taxation. Under Arkansas law, property owned by a charitable entity but leased to another party — even a fellow nonprofit — does not qualify for the charitable exemption. The court emphasized that the exemption applies only to property actually and directly used for charitable purposes, not merely to property that generates revenue ultimately devoted to charity.

Because NEA Hospital leased the doctor's building to NEA Clinic under a standard commercial lease at market rates, the property was not "actually occupied" by the hospital itself. Arkansas Code Annotated § 26-3-301(7) expressly excludes from the exemption property "leased or otherwise used with a view to profit." The court found that this exclusion applied squarely to the doctor's building and to the portion of 909 Enterprise Drive used by NEA Clinic.

2. NEA Clinic Is Not a "Purely Public Charity"

Appellants argued in the alternative that NEA Clinic, as the leaseholder, should be treated as the property owner under Arkansas Code Annotated § 26-26-905 (which deems a lessee the owner for tax purposes on leases exceeding ten years) and that the doctor's building should be exempt as NEA Clinic's charitable property. The court rejected this argument on two grounds: the lease term did not exceed ten years, making the statute inapplicable, and the evidence did not establish that NEA Clinic qualifies as a "purely public charity."

The court found that NEA Clinic operates essentially the same as any for-profit physician practice group. Critically, out of nearly 100,000 patients treated across all NEA Clinic locations in 2022, only 190 patients — approximately 0.194% — received any charity care at all. The court also noted that NEA Clinic's financial-assistance policy contained numerous exclusions and eligibility criteria, that the clinic's website made no mention of its charitable mission, and that any surplus generated by the clinic would first go toward repaying $226 million in debt owed to BMHCC rather than expanding charitable services.

Key Takeaways for Nonprofit Hospitals and Healthcare Organizations

This decision carries important practical implications for nonprofit healthcare systems and other charitable organizations in Arkansas that own real property:

• Leasing to an affiliate at market rate can cost your exemption. Even if both landlord and tenant are nonprofits within the same healthcare system, a market-rate commercial lease will defeat the charitable tax exemption for the leased space. The key question is whether the property is actually occupied and used by the charitable entity seeking the exemption — not whether the rental income is eventually devoted to charitable purposes.
• Rent-free use is not automatically exempt either. The 909 Enterprise Drive parcel was used by NEA Clinic at no charge, yet still failed to qualify for exemption. The court focused on whether the user of the property — NEA Clinic — was itself a purely public charity. Where the occupying entity is not a purely public charity, the exemption will not apply regardless of whether rent is charged.
• A 501(c)(3) designation alone does not make an organization a "purely public charity" under Arkansas law. Federal tax-exempt status and Arkansas's constitutional charitable property tax exemption are governed by different standards. An organization must demonstrate, among other things, that public charity is its primary — if not whole — object, that it is open to all regardless of ability to pay, and that all profits are applied to maintaining and enlarging the charity. A small fraction of charity care, tightly restricted by policy, does not satisfy this standard.
• Internal cost-sharing arrangements within a healthcare system will be scrutinized. The court examined the flow of funds within the BMHCC system — including the $22 million annual services-agreement payments to the parent entity and the $226 million debt — in assessing whether NEA Clinic truly applied its revenues to charitable purposes. Nonprofit organizations should be mindful that complex intercompany financial arrangements can undermine an exemption claim.
• Property tax planning should be part of your real estate strategy. Nonprofit healthcare organizations developing new facilities, expanding campuses, or entering into space-sharing arrangements should evaluate ad valorem tax exposure as part of the transaction planning process — not as an afterthought.

The Broader Legal Framework

The NEA Baptist decision reaffirms principles that Arkansas courts have consistently applied for well over a century. Since at least 1893, the Arkansas Supreme Court has held that property leased or rented by a charitable organization — even when the rental income is devoted entirely to the charity's mission — does not qualify for the "exclusively used for public charity" exemption. The court distinguished this case from Hardesty v. North Arkansas Medical Services, Inc., 2019 Ark. App. 410, where an exemption was allowed for parcels used exclusively by hospital employees as health-care clinic departments indistinguishable from any other department of the hospital. Unlike in Hardesty, the property here was leased to a legally distinct entity under a formal commercial agreement at market rates.

The decision also reinforces that courts will not permit a charitable organization to gain a competitive advantage over tax-paying businesses through the exemption. The court noted that physicians' offices in Craighead County pay property taxes, and that exempting NEA Clinic's leased space would place it at an unfair advantage over comparable private-practice physicians.

How McDaniel Wolff Can Help

McDaniel Wolff PLLC counsels nonprofit organizations, hospitals, and healthcare systems on Arkansas tax law, nonprofit governance, and real estate transactions. If your organization owns or leases real property and has questions about your ad valorem tax exemption status — or if you are structuring a new facility, campus expansion, or affiliate space-sharing arrangement — our attorneys can help you evaluate your exposure and develop a strategy that protects your organization's interests.

To speak with a member of our team, contact us online or call our office. We serve clients across Arkansas and welcome inquiries from nonprofit organizations of all sizes.