Any company that owns Florida real property and has undergone a change in ownership or control since January 1, 2008 (for example, through a merger or stock acquisition) should be aware of a Florida law that would require the company to notify the county property appraiser of the change in ownership. Failure to file an information return on a Form DR-430 could lead to rather severe consequences if there has been an increase in the value of the real property owned by the company in excess of 10 percent in any single year.
This notification requirement was enacted during the 2008 legislative session (Fla. Laws ch. 2008-173), after the voters of Florida approved “Amendment One” to the state constitution that imposed a 10 percent cap on the annual increase in the assessed value of all non-homestead property for ad valorem taxes other than school district levies. Non-homestead property is generally defined as Florida real property that is not subject to the homestead tax exemption under Section 6 of Article VII of the Florida Constitution or to the agricultural, water recharge or recreation land exemptions under Section 4(c) of Article VII of the Florida Constitution. Non-homestead property would include all commercial, industrial, rental property, second homes, and vacant land that is zoned and platted for residential use. This 10 percent annual cap for non-homestead property was included in Amendment One to provide tax relief similar to the annual three percent “Save Our Homes” cap on the assessed value of homestead properties for many years.
As amended, sections 193.1554 and 193.1555 of the Florida Statutes require that the county property appraiser must reassess non-homestead property every January 1 at its “just value” (essentially, fair market value minus reasonable fees and costs of purchase), but the change resulting from reassessment cannot exceed 10 percent of the assessed value of the property for the prior year. The cumulative benefit of the 10 percent annual cap is lost when there is a change in ownership or control of the non-homestead property, and the property is reassessed to just value as of January 1 following the change of ownership or control. A “change in ownership or control” is defined as any sale, foreclosure, transfer of legal title or beneficial title in equity to any person, or the cumulative transfer of control or of more than 50 percent of the ownership of the legal entity that owned the property when it was most recently assessed at just value.
Section 193.1556 requires the owner of property assessed under sections 193.1554 or 193.1555 to notify the county property appraiser “promptly” if the ownership or control of the property changes. By regulation, the Florida Department of Revenue determined that this notice was not required if the property was transferred by a deed recorded in the public real property records, since the recording constitutes notice to everyone, including the property appraiser. But if the change occurs off record by the cumulative transfer of control of more than 50 percent of the ownership of a legal entity that owns the non-homestead property (for convenience here, the “Target Entity”), then a Form DR-430 must be filed to notify the county property appraiser of the change. The filing instructions for Form DR-430 interpret “promptly” as 60 days after the change in ownership or control, but there is no other authority for this filing deadline in the statute.
Property owners may be surprised that Form DR-430 does not ask the owner to disclose the purchase price paid for the Target Entity that underwent the change of ownership or control. Unlike the repealed Form DR-219 that was formerly required for all deeds transferring Florida real property, Form DR-430 is not designed to assist the property appraiser in determining the just value of the property. Rather, the sole purpose of Form DR-430 is to alert the property appraiser to reassess the property next January 1 at its just value without regard to any previous assessment limitations resulting from the 10 percent annual cap. Of course, if the assessed value of the property is not then limited by the 10 percent cap provision, then the filing of the DR-430 notice form has no legal effect on the property tax assessment because the property would already be assessed at its just value.
A change in control could occur unwittingly over the course of years, as ownership interests in a Target Entity change hands over time to a cumulative extent exceeding 50 percent of the ownership interests. In addition, a change in control of a Target Entity would result in the event of a foreclosure of a mezzanine security interest resulting in a transfer of more than 50 percent of the ownership interests in the Target Entity.
Because of its unfortunate use of the phrase “ownership or control,” the statute is not completely clear on whether the notification requirement is triggered by a change in ownership of an upper tier entity that owns or controls the Target Entity. For example, if the Target Entity is owned by a holding corporation, and a controlling interest in the holding corporation is foreclosed on pursuant to the terms of a mezzanine loan, it is not certain whether the property appraiser notice is required. Similarly, in a corporate reorganization, the direct or indirect ownership of the Target Entity might be transferred to a different intermediate holding company even if ultimate beneficial ownership of the Target Entity remains with the same parent company. For answers to these questions, we will need to wait for further guidance from the Department of Revenue, or possibly a further clarification from the Florida Legislature. In the meantime, the conservative approach would be to treat such indirect transfers of ownership or control as a reportable change with respect to the Target Entity.
As noted above, if the market value of the Target Entity’s non-homestead property has not increased more than 10 percent in any assessment year, then filing Form DR-430 has no legal impact. However, as a practical matter county property appraisers are sometimes less than diligent in assessing property at its just value every year and may not take a close look at the property’s assessed value until they become aware that its ownership has changed. Accordingly, filing Form DR-430 could result in a written inquiry from the property appraiser to the Target Entity, seeking information about the purchase price, merely to determine the just value of the property as of the following January 1. It is important to note that a failure to respond to the property appraiser’s inquiry could limit the evidence that the Target Entity might be able to present in a subsequent contest disputing the proposed new property assessment.
The consequences of failing to notify the property appraiser of a change in ownership can be rather severe if the property has been subject to the 10 percent cap — the owner is liable for the unpaid taxes avoided as a result of the improper application of the 10 percent assessment limitation after the change, plus a penalty equal to 50 percent of the unpaid taxes, plus interest at the rate of 15 percent per annum. In addition, the property appraiser is authorized to look back up to 10 years to determine whether the property owner was granted a property assessment limitation to which the owner was not entitled. The property appraiser is also authorized to file a tax lien against any property in that county that was improperly assessed. If the Target Entity no longer owns property in that county, the property appraiser is authorized to file the tax lien against other property owned by the Target Entity located in any other county in the state. Notwithstanding these enforcement provisions, it should be noted again that the property owner’s liability depends upon whether there is any unpaid property tax resulting from the improper application of the 10 percent assessment limitation after the change of ownership or control, and if the property’s assessed value is not capped then the amount of unpaid tax, penalty and interest is zero.
The effective date for this legislation was for the 2008 tax year, so this notification requirement is effective for all transfers of ownership or control of a Target Entity that occurred on or after January 1, 2008. If a Target Entity has undergone a change in ownership and has not filed the Form DR-430, it is not too late to do so without a penalty, as long as the non-homestead property owned by the Target Entity has not increased in assessed value in excess of 10 percent in any year (beginning with the assessment for tax year 2009), because there is no liability for unpaid tax, penalty or interest if the property has not improperly benefitted from the cap after a change. Given recent trends in Florida real estate values, it is unlikely that there are many properties that would have increased in market value by more than 10 percent in any single year since 2008, and so it is unlikely that filing the Form DR-430 now, even though it may be late, would result in a real property tax liability for the Target Entity.
Looking forward to better times in the Florida real estate market, however, this filing requirement may make a real economic difference for those who contemplate the acquisition of a Target Entity after significant increases in the value of its Florida real property. As a due diligence matter, the prospective acquirer should ask to review the Target Entity’s Florida real property tax bills: if the Target Entity enjoys a capped tax assessment, the tax bill would show a “taxable value” for the property (its assessed value after application of the cap) that is lower than the “market value” of the property (its just value, which will apply after the change of ownership or control). In such a case, the acquirer should expect an increase in the Target Entity’s annual property taxes after Form DR-430 is filed with the property appraiser and the assessed value is re-set to market.