Hospital property must be used exclusively for hospital purposes and be in such use on the lien date. The California Supreme Court has concluded that property devoted to a nurse's training school, housing for hospital interns, resident doctors, student nurses, certain other essential employees required to be readily available, and recreational facilities used primarily by hospital personnel is incidental and reasonably necessary for the fulfillment of a generally recognized function of a complete modern hospital.

Hospital property is subject to the requirement that the property's use must be for the actual operation of the hospital activity under section 214(a)(3) of the R&T Code. Those portions of a hospital's facilities, which are leased, to a profit making enterprise or not directly contributing to the functioning of the hospital, do not qualify for the hospital purposes exemption. Examples are areas leased to physicians for use as offices for their private medical practices, commercial space leased to retail businesses, and space used for managing a managed health care plan. Thus, portions of hospital property used for other than hospital activities by the nonprofit hospital organization or by another organization, and in some cases vacant and or unused hospital property, are not eligible for the exemption.

Within certain restrictions, hospital gift shops operated in nonprofit hospitals are regarded as within the scope of the exemption because such shops are incidental to and reasonably necessary to a complete modern hospital. If an outside nonprofit organization operates the gift shop, they must file and qualify. Unlike gift shops, hospital thrift shops do not come within the scope of the exemption. The use of hospital property for thrift shops is not considered as incidental to and reasonably necessary to a complete modern hospital.