Does Sharia-Compliant Financing By Non-Profit Cause Loss of Property Tax Exemption?

In what may well be a case of first impression, the Islamic Center of Nashville on Monday filed suit in a Tennessee federal district court challenging its inability to maintain its property tax exemption after it financed new building construction employing a well-recognized Sharia-compliant technique that uses a legal fiction to avoid borrowing at interest. The Islamic Center of Nashville has continuously operated the Nashville International Academy, a grade K-8 school, at the same site since 1995.  In 2008 it constructed a new school building on the site, financing the construction through a 5-year Ijara agreement.  The agreement involved transfer of title to an entity owned by the bank in exchange for construction funds, repayment captioned as rent, and a return of title once the required number of "rent" payments had been made.

Tennessee Code Sec. 43-610.7 exempts from property tax:

real and personal property owned by religious, charitable, scientific or non-profit educational institutions which is occupied and used by such institutions purely and exclusively to carry out one or more of its purposes....

In May 2016, the Tennessee State Board of Equalization Appeals Commission concluded (full text of opinion) that, while it was sympathetic with the Islamic Center's sincere desire to comply with its religious principles, the formal transfer of title to an entity owned by the bank meant that the property was not exempt from taxation from 2008 to 2013 (when the Islamic Center regained formal title). The Islamic Center then sued for a declaratory judgment and damages.  The complaint (full text) in Islamic Center of Nashville v. State of Tennessee, (MD TN, filed 9/19/2016) argues:

Here, ICN was ironically denied the religious exemption from property taxes by Defendant specifically because of its adherence to its religious tenets.

The suit claims violations of state and federal RFRAs, RLUIPA, the Elementary and Secondary Education Act, and the Establishment Clause. The Tennessean reports on the lawsuit.