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Oko, LLC v. the Illinois Department of Revenue

June 20, 2011


Appeal from Circuit Court of Macon County No. 09MR604 Honorable Theodore E. Paine, Judge Presiding.

The opinion of the court was delivered by: Justice Pope

JUSTICE POPE delivered the judgment of the court, with opinion.

Presiding Justice Knecht concurred in the judgment and opinion. Justice Cook dissented, with opinion.


In September 2009, plaintiff, OKO, LLC (OKO), filed a complaint for administrative review of the decision of defendant, the Illinois Department of Revenue (Department) denying OKO's application for a property-tax exemption for the tax year 2007 under section 15-65 of the Property Tax Code (Code) (35 ILCS 200/15-65 (West 2008)) because the property in question was not owned by a charitable organization. In May 2010, the circuit court affirmed the Department's decision.

OKO appeals, arguing the Department's denial was clearly erroneous where, under the terms of the sale-leaseback agreement, the previous owner, who is also the lessee, retained sufficient indicia of ownership to qualify for the exemption. We affirm.


A. Subject Property

This case arises from the sale of property located at 815 North Church Street in Decatur, Illinois (property), by Old Kings Orchard Community Center, Inc. (Center), to OKO. The Center is a tax-exempt, not-for-profit organization engaged in community-outreach activities such as after-school programs and meals for children. The parties stipulated the property was being used for charitable purposes. As a result, the issue of charitable use is not part of this appeal.

The Center was operating at a loss, and its mortgage was going to be foreclosed. Decatur businessman Thomas Kowa, president of the Huston-Patterson Corporation, created OKO as a limited-liability company (LLC) for the purpose of purchasing the property. Kowa testified he purchased the Center because he wanted to help the community. However, he explained the Center's chances of staying open were much greater if he paid off the note instead of just donating $100,000. According to Kowa, the Center had a history of encumbering its property with liens it could not pay.

B. Purchase Agreement

On March 16, 2007, OKO entered into a purchase and sales agreement with the Center for $100,000, which was used to pay off the existing mortgage on the property. The agreement provided at closing the parties would execute a lease, the terms of which provided OKO would lease the property to the Center.

C. Parties' Lease and Modifications

On March 30, 2007, the parties entered into the original lease agreement. Thereafter, the parties entered into two subsequent addenda dated March 25, 2008, and September 29, 2008.

1. Original March 30, 2007, Lease

The term of the original lease was for 15 years, with a March 30, 2007, effective date. According to the lease, the Center was to pay $1,000 rent per month. However, paragraph four of the lease stated, "So long as the Premises subject to this Lease retains its status as exempt from real estate taxes, which shall be based upon a final determination from the relevant governmental authority, then Lessor will waive its right to collect any rent ***."

Under the original lease the Center also agreed to pay all utility, maintenance, repair, and insurance costs on the property. However, the Center was not required to pay real-estate taxes. The Center also agreed not to assign or sublet the property without OKO's consent. The Center had the right to purchase the property at any time so long as it maintained its property-tax-exempt status. However, the Center would lose that right if the property lost its tax-exempt status. The original lease also gave the Center the right of first refusal in the event OKO received a bona fide offer on the property.

2. March 25, 2008, Addendum

On March 25, 2008, the parties entered into an addendum to the original lease. The addendum had a March 1, 2008, effective date. The addendum modified paragraph four of the original lease to state OKO would waive its right to collect rent so long as the Center continued its not-for-profit activities as opposed to the original lease which stated the waiver applied if the property retained its tax-exempt status.

3. September 29, 2008, Addendum

On September 29, 2008, the parties entered into another addendum to the original lease. This addendum had a ...

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