City of Largo v. AHF-Bay Fund, LLC

215 So.3d 10

CITY OF LARGO, Florida, Petitioner,

v.AHF–BAY FUND, LLC, Respondent.

No. SC15–1261

Supreme Court of Florida.

[March 2, 2017]

Alan S. Zimmet and Nicole C. Nate of Bryant Miller Olive, P.A., Tampa, Florida; and Elizabeth Wilson Neiberger of Bryant Miller Olive, P.A., Miami, Florida, for Petitioner

Joseph Hagedorn Lang, Jr. and Christopher William Smart of Carlton Fields Jorden Burt, P.A., Tampa, Florida, for Respondent

QUINCE, J.

This case is before the Court for review of the decision of the Second District Court of Appeal in AHF–Bay Fund, LLC v. City of Largo , 169 So.3d 133 (Fla. 2d DCA 2015). In its decision, the district court ruled upon the following question, which the court certified to be of great public importance:

DO PILOT AGREEMENTS THAT REQUIRE PAYMENTS EQUALING THE AD VALOREM TAXES THAT WOULD OTHERWISE BE DUE BUT

FOR A STATUTORY TAX EXEMPTION VIOLATE SECTION 196.1978, FLORIDA STATUTES (2000), AND ARTICLE VII, § 9(a) OF THE FLORIDA CONSTITUTION ?

Id. at 138. We have jurisdiction. See art. V, § 3(b)(4), Fla. Const. For the reasons that follow, we answer the certified question in the negative and quash the decision of the Second District.

FACTS

AHF–Bay Fund, LLC (AHF) appealed a judgment awarding $695,158.23 in damages and prejudgment interest to the City of Largo, Florida (City) for AHF's failure to make payments pursuant to an agreement for payment in lieu of taxes (PILOT agreement) between the City and RHF–Brittany Bay (RHF), AHF's predecessor in interest. AHF–Bay Fund , 169 So.3d at 135. Under the agreement, AHF was required to make payments that equaled the ad valorem taxes that would have otherwise been due but for the statutory tax exemption found in section 196.1978, Florida Statutes (2000). Id. The facts that prompted the filing of suit are as follows:

In December 2000, RHF acquired the subject property. RHF was a tax exempt 501(c)(3) organization as defined by the Internal Revenue Code. See 26 U.S.C. § 501(c)(3) (2000). RHF planned to develop the property to provide affordable housing for persons with low to moderate income pursuant to chapter 420, Florida Statutes. As set forth in section 196.1978, Florida Statutes (2000), affordable housing projects owned by a 501(c)(3) organization are exempt from ad valorem taxation.

To finance the project, RHF reached an agreement with the City wherein the City would arrange for the issuance of tax-exempt bonds that carried a considerably lower interest rate than RHF could have obtained using traditional bank financing. In exchange for the issuance of the bonds, RHF entered into the PILOT agreement, thereby agreeing to make annual payments to the City "in an amount equal to the portion of ad valorem taxes to which the City would otherwise be entitled to receive for the [p]roperty as if the [p]roject were fully taxable in accordance with standard taxing procedures." The PILOT agreement provided that the amount of the payments would be determined by multiplying the property's assessed value by the millage rate established by the City each year. The PILOT agreement also provided that "the City has and will provide services to [RHF] as a result of [RHF's] status as a tax-exempt entity."

The PILOT agreement specified that it was binding on any subsequent owners of the subject property as long as certain conditions were met, though it made no mention of a covenant running with the land. The PILOT agreement was not recorded in the official public records. However, simultaneously with the execution of the PILOT agreement, the parties executed a memorandum of agreement that was recorded in the public records. The memorandum indicated that the PILOT agreement was available for inspection in the city clerk's office and that it imposed certain covenants running with the land.

RHF made the payments as required by the PILOT agreement for the years 2001 through 2005. AHF, also a nonprofit affordable housing provider, acquired the property in November 2005. AHF has continued to own and operate the property as an affordable housing community since the purchase. However, when the City did not receive the annual payment that was due on December 31, 2006, it contacted AHF. AHF denied knowledge of either the PILOT agreement or the memorandum of agreement, asserting that neither had been shown to be an exception to coverage in its title insurance policy and that neither had been referenced in the special warranty deed by which AHF took title.

Based upon AHF's refusal to make payments under the PILOT agreement, the City filed suit in 2010. The City sought a summary judgment and the trial court granted the motion in part. Ultimately, the trial court entered a final judgment in favor of the City, awarding $695,158.23 in damages and prejudgment interest.

Id. at 134–35 (alterations in original) (footnote omitted). On appeal, the Second District reversed the trial court, finding that the PILOT agreement at issue "violates the public policy of promoting the provision of affordable housing for low to moderate income families and is therefore void." Id. at 138. The court reasoned that the PILOT payments are the substantive equivalent of taxes because the payments are equal to the amount of taxes that would be due if the property were not tax-exempt. Id.

ANALYSIS

The certified question presents two issues: (1) whether the PILOT agreement violates section 196.1978, Florida Statutes (2000), and (2) whether the PILOT agreement violates article VII, section 9(a) of the Florida Constitution. Each will be addressed in turn. Because the issues before this Court on the certified question involve pure questions of law that arise from undisputed facts, they are reviewed de novo. Jackson–Shaw Co. v. Jacksonville Aviation Auth. , 8 So.3d 1076, 1084–85 (Fla. 2008).

The Second District invalidated the PILOT agreement between the City and AHF by finding that the agreement violated section 196.1978, Florida Statutes (2000), and violated the public policy of "promoting the provision of affordable housing for low to moderate income families." AHF–Bay Fund , 169 So.3d at 138. Specifically, the Second District held that " section 196.1978 expressly prohibits ad valorem taxation on properties being used for affordable housing." Id. at 136. Section 196.1978, Florida Statutes (2000), provides in relevant part:

Property used to provide affordable housing serving eligible persons as defined by s. 159.603(7) and persons meeting income limits specified in s. 420.0004(9), (10), and (14), which property is owned entirely by a nonprofit entity which is qualified as charitable under s. 501(c)(3) of the Internal Revenue Code and which complies with Rev. Proc. 96–32, 1996–1 C.B. 717, shall be considered property owned by an exempt entity and used for a charitable purpose, and those portions of the affordable housing property which provide housing to individuals with incomes as defined in s. 420.0004(9) and (14) shall be exempt from ad valorem taxation to the extent authorized in s. 196.196. All property identified in this section shall comply with the criteria for determination of exempt status to be applied by property appraisers on an annual basis as defined in s. 196.195.

§ 196.1978, Fla. Stat. (2000).

We find that the plain language of the statute does not expressly prohibit ad valorem taxation on nonprofit entities that provide low-income housing. Instead, the section provides an exemption to nonprofit entities. However, the statute also requires the nonprofit entity, here the owner of an affordable housing project, to take affirmative steps to take advantage of the exemption. Specifically, section 196.1978 requires the owner to "comply with the criteria for determination of exempt status to be applied by property appraisers on an annual basis as defined in s. 196.195." For example, if a nonprofit owner of a property forgets to file its annual form with the property appraiser then its tax exemption will be waived for that year. See § 196.011, Fla. Stat. (2000). From the text of the statute it is clear that the exemption is not automatic, nor is ad valorem taxation on such properties "expressly prohibited."

Numerous courts have held that tax exemptions can be waived. E.g. , Housing Auth. of Poplar Bluff v. Eastwood , 736 S.W.2d 46 (Mo. 1987) (citing Sprik v. Regents of Univ. of Michigan , 43 Mich.App. 178, 204 N.W.2d 62 (1972) (public university could waive property tax exemption); Clark v. Marian Park, Inc. , 80 Ill.App.3d 1010, 36 Ill.Dec. 241, 400 N.E.2d 661, 664–65 (1980) (nonprofit owner of affordable housing project waived tax exemption by agreeing to pay taxes in annexation agreement with the city); Christian Bus. Men's Comm. v. State , 228 Minn. 549, 38 N.W.2d 803, 811 n.7 (1949) ( "Failure to use due diligence in asserting a right to tax exemption may constitute a waiver of the right."); Rutgers Chapter of Delta Upsilon Fraternity v. City of New Brunswick , 129 N.J.L. 238, 28 A.2d 759, 761 (1942) (taxpayer waived tax exemption by failing to claim exemption in manner required by statute and voluntarily paying taxes).

This case is factually similar to Eastwood , in which the Supreme Court of Missouri concluded that a PILOT agreement between a city and a tax-exempt housing authority did not violate public policy because tax exemptions are waivable. Eastwood , 736 S.W.2d at 47–48. The PILOT agreement in that case expressly acknowledged that the housing project was exempt from taxes. Nonetheless, the housing authority agreed to payments in lieu of taxes in exchange for the city providing general municipal services. In rejecting the argument that the agreement was void as against public policy, the Missouri Supreme Court reasoned that courts throughout the country have held that tax exemptions are waivable and that the agreement showed that the housing authority made a voluntary decision to subject itself to payments notwithstanding its exempt status. Id. at 47. We agree with the decision of that court as well as...