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Florida Supreme Court Validates Payment in Lieu of Taxes Agreement

By Tracy M. Evans, Esq., Associate, Saxon Gilmore & Carraway, P.A.

In a unanimous decision, the Florida Supreme Court recently issued its opinion in the case of City of Largo, Florida v. AHF-Bay Fund, LLC, validating a payment in lieu of taxes agreement (“PILOT Agreement”) between a non-profit housing developer and a city. The City of Largo case dealt exclusively with the ad valorem tax exemption for non-profit organizations provided under Section 196.1978, Florida Statutes, but housing authorities may be left wondering what effect, if any, this case may have on the tax exemption provided to housing authorities under Chapter 423, Florida Statutes.

Understanding the background and underlying facts in the City of Largo case is necessary to analyze the possible impact the case may have on Chapter 423. RHF-Brittany Bay (“RHF”), a non-profit organization, acquired certain real property with plans to develop the property to provide affordable housing for low to moderate income families (the “Project”). Pursuant to Section 196.1978, Florida Statutes, the Project was exempt from ad valorem tax because it was an affordable housing project owned by a 501(c)(3) organization.

In order to finance the Project, RHF obtained tax-exempt bonds from the City of Largo (the “City”), and in exchange, RHF entered into the PILOT Agreement with the City agreeing to make annual payments to the City in an amount equal to the ad valorem taxes on the property the City would have otherwise been entitled to receive if the property were fully taxable. The PILOT Agreement stated that it was binding on any subsequent owners.

AHF Bay Fund, LLC (“AHF”), also a non-profit, acquired the Project several years later, and failed to make the payments under the PILOT Agreement. AHF denied knowledge of the PILOT Agreement, and the City filed suit against AHF. The trial court found in favor of the City, awarding $695,158.23 in damages and interest.

The Second District Court of Appeal (“Second DCA”) reversed the trial court, finding that the PILOT Agreement violated public policy of promoting affordable housing and was therefore void. The Second DCA also held that because the PILOT Agreement payments were the substantive equivalent of taxes and AHF was exempt from taxation under Section 196.1978, the PILOT Agreement violated Article VII, § 9(a) of the Florida Constitution, which provides that cities may only impose taxes as permitted by law.

In overturning the Second DCA’s decision, the Florida Supreme Court first looked at the language of Section 196.1978, determining that the statute does not expressly prohibit ad valorem taxation, but rather, provides an exemption that requires affirmative steps to receive. If the affirmative steps are not taken, the exemption is waived. Similarly, because the statute does not expressly prohibit payment of ad valorem taxes or payments equal to the amount of taxes, a property owner can waive the exemption and enter into a valid contract for payment of these amounts.

The Court also found that the PILOT Agreement was not against public policy. To the contrary, the Court determined that if it were not for the PILOT Agreement, RHF may not have been able to obtain financing to build the Project, so the PILOT Agreement actually supported the public policy favoring affordable housing. This, coupled with the strong public policy in favor of freedom of contract, led the Court to conclude that the PILOT Agreement was not void.

The Court also looked at the PILOT Agreement’s constitutionality under Article VII, § 9(a), and determined that the negotiated payments under the PILOT Agreement were not a tax and did not implicate Article VII, § 9(a).

The scope of the City of Largo decision appears limited to Section 196.1978, Florida Statutes, and does not appear likely to impact Chapter 423. Unlike the exemption under Section 196.1978 which requires application for exemption status each year, the exemption provided under Section 423.02 is automatic for all housing projects owned by housing authorities, and other property used in connection therewith also owned by housing authorities. There is no annual application requirement to receive the exemption. Further, Section 423.02 already expressly authorizes housing authorities to enter into PILOT agreements. If anything, the City of Largo decision may provide persuasive support for any challenges to the validity of a housing authority’s existing PILOT agreement.


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