Seeking to cement a tax exemption for faculty homes on its campus, Stanford University on Monday, Feb. 27, filed a lawsuit against Santa Clara County contending that these residences should be treated like other educational facilities.

The complaint, which the university filed in Santa Clara County Superior Court, pertains to the roughly 900 dwellings in the 450-acre area behind the main academic campus known as the Faculty Subdivision. Composed of 691 single-family homes and 222 condominiums, these residences are reserved for Stanford faculty, who like other homeowners are responsible for paying their property taxes.

But, as Stanford emphasizes in its lawsuit, there is a major difference between these homes and most other properties: While the homeowners purchase leases for these dwellings, the university retains an interest in these properties. It enforces the criteria for eligibility and requires homeowners who stop meeting these criteria to sell their leaseholder interests within a specific period of time. Furthermore, faculty must use the property as a primary residence and they cannot perform any home improvement projects without Stanford's permission. If they want to sublet a portion of the property, they can only do so if the tenants are students enrolled at Stanford.

The university, which is forbidden by its founding documents from selling the land, is arguing in its lawsuit that because of these circumstances, the value of the property is split between "faculty interest" and "college interest." The former, which pertains to about 75% of the property's assessed value, does not qualify for tax exemptions while the latter does, Stanford contends.

The suit notes that both the faculty interest and the college interest are presently included in the local property tax assessments for these properties. Stanford is seeking a ruling that would establish that the college interest portion of the property tax bill should be exempt.

The lawsuit focuses on one particular home, 838 Cedro Way, which changed hands in 2018 and which in 2021 received a property tax bill for $37,217, with no reduction for the college interest. Stanford paid the bill but filed a claim for a refund of about $9,000.

According to a letter that Whitney McNair, Stanford's senior associate provost and executive director for Faculty Staff Housing, wrote to the Board of Supervisors in February 2022, the property on Cedro Way had a fair market value of $2.97 million in 2018 (a more recent assessment from the county tax collector in the 2021-22 period raised the assessed value to $3.06 million). About 75% of this value, or $2.23 million, is considered "faculty interest" — the purchase price that the faculty member paid for the property and that is not subject to tax exemptions. The remaining 25% of the assessed value, or about $745,000, is considered "college interest" and, as such, is entitled to the tax exemption, Stanford argued. The amount of the refund was estimated at about $9,087.

In September, Stanford received a letter from County Counsel James Williams, informing it that its refund request was denied.

While $9,087 may seem like a piddling amount for an institution like Stanford to fight over, the ramifications of the lawsuit could be far-reaching. Williams had previously told this news organization that if the university pursues additional refunds based on the same claims, the county and local jurisdictions could lose nearly $5 million annually, which includes a $2.3 million loss for the Palo Alto Unified School District.

Stanford's arguments didn't sway the county's Assessment Appeals Board, which informed the university that it has no jurisdiction over granting exemptions. Williams, for his part, had previously differentiated between tax-exempt facilities such as student dorms, libraries and academic buildings. The university, according to Williams, was not required to pay taxes on more than $15.9 billion of its holdings during fiscal year 2021, the largest tax exemption in the county. The faculty homes, the county had argued, should be treated like any other homes in the county and assessed based on their market value.

Stanford is no stranger to criticism over its tax exemptions. During the university's recent effort to approve a new growth plan, the subject came up repeatedly during public hearings and many local officials from cities around the university, including Palo Alto, made the case for requiring Stanford to make more financial contributions to their communities (Stanford ultimately withdrew its growth proposal in 2019).

But Stanford and its faculty homeowners are arguing that the tax exemptions at the heart of the lawsuit are necessary to fulfill its academic mission. James Sweeney, president of Stanford Campus Residential Leaseholders, an association of faculty leaseholders, applauded Stanford's legal action. In a letter to Stanford President Marc Tessier-Lavigne and Provost Persis Drell, Sweeney noted that recent tax assessments for newly purchased homes have been significantly above purchase prices, a departure from past practices that has created a high financial burden for homeowners.

"Campus homeowners expect to pay their fair share of property taxes, just like everyone else, based on their ownership interests. But high assessment of newly purchased homes — often more than a million dollars above the purchase prices — has led to major financial burdens and hardship," Sweeney wrote in the Monday letter.

The practice of assessing newly purchased homes at such high values, he argued, "endangers the Founding Grant vision of a 'residential campus,' of students and faculty scholars."

"The impacts are felt most acutely by campus homeowners — both home purchasers and those wishing to sell their homes — but also by faculty precluded from purchasing on campus because of the very high tax costs," Sweeney wrote. "These high property taxes create particularly large barriers to homeownership for first-time, often younger, faculty."

Martin Shell, Stanford's vice president and chief external relations officer, said in an interview that the university's chief aim in initiating the legal action is to obtain clarity on state laws that are currently under dispute. Shell said that the university respects the fact that Santa Clara County officials are following the law as they interpret it. This interpretation, however, doesn't take into consideration the long-term retained interest that Stanford has in its housing subdivision, where the property owner purchases the home and not the ground.

"Reasonable minds can disagree, and we think we have a reasonable-mind disagreement here," Shell said.

Making sure that faculty are able to purchase homes and live on campus is critical to Stanford's vision for education, he said. Under founder Leland Stanford's leadership, the university "envisioned a vibrant community with students and faculty all living and learning together."

"We had a faculty residential area since the university was founded," Shell said. "This is critically important to the mission of Stanford because it is part of our history and it is part of what we continue to do daily, with that interactivity between faculty and students."

The university's complaint states that the "college interest" exemption that Stanford is seeking is no different from the housing benefits that public universities throughout California have received.

"A college's use of its property to house its faculty and staff has long been recognized by the California courts as 'use exclusively for education purposes,'" the complaint states. "Stanford's use of its College Interest in the Property as faculty and senior staff housing is reasonably necessary for the fulfillment of a generally recognized function of a complete modern college as it fosters a residential university campus with a strong intellectual community, protects Stanford's long-term success by ensuring on-campus housing is maintained for future generations of faculty, and provides housing that is more affordable for faculty which is necessary to support Stanford's faculty recruitment and retention."