Recent changes to Florida’s ad valorem taxing statutes offer substantial benefits to some affordable housing projects. All owners of Florida affordable housing projects should evaluate their projects to determine if their projects may qualify for full or partial tax exemption under the new statutes. If so, an exemption application should be filed by March 1, 2010 with the local property appraiser.
Among other things, the statutory changes made in 2009 and 2007: (1) enable qualifying Florida limited partnerships to obtain tax exemption even though the limited partners are for-profit entities; (2) grant tax exemption before a property is put in service as affordable housing as long as it is being prepared for use as affordable housing; (3) count moderate income tenants or residents toward affordable units; and (4) require assessment of affordable housing projects on the basis of actual net income, taking into account recorded rent restrictions.
New Bases for Exemption
Before June 1, 2009, an affordable housing project in Florida could not meet the threshold requirements for ad valorem tax exemption unless all of the following requirements were met:
- The property was entirely owned as of January 1 of the year by a 501(c)(3) charitable organization (a “Non-Profit Entity”);1
- The property was used by the Non-Profit Entity predominantly (more than 50 percent) for charitable purposes;2
- The Non-Profit Entity was in compliance with Revenue Procedure 96-32 (the “IRS Guidelines”);3 and
- The owner’s annual application for tax exemption has been granted pursuant to standards established in Section 196.195, Florida Statutes.4
These criteria have been interpreted strictly by Florida’s property appraisers, the Florida Attorney General,5 and the Florida courts6 so that only housing units actually in use as affordable housing on January 1 of a year were counted in satisfying the predominant use requirement and vacant land being developed for affordable housing could not qualify for exemption. The 2009 statutory changes considerably liberalize some of these requirements, thereby providing new opportunities to owners of, and private investors in, Florida affordable housing.
Florida Limited Partnerships May Now Qualify for Exemption
Section 196.1978, Florida Statutes, now provides that a “Florida-based”7 limited partnership whose sole general partner is a Non-Profit Entity that satisfies the IRS Guidelines (an “Exempt Entity”) shall be considered an Exempt Entity for purposes of the ad valorem tax exemption. Thus, a Florida limited partnership with one or more for-profit limited partners and an Exempt Entity as its sole general partner may now qualify its affordable units for ad valorem tax exemption.8
Low Income Housing Tax Credits (LIHTC), offered under Section 42 of the Internal Revenue Code, have attracted large amounts of private investment in affordable housing. A limited partnership is usually the preferred ownership vehicle for affordable housing projects because the limited partners, who contribute capital in order to “purchase” the LIHTC credits, can be allocated all of the LIHTC credits for tax purposes under the partnership agreement. Under prior Florida law, these limited partnerships could not benefit from exemption from ad valorem taxation because the limited partnership itself was deemed the owner of the project and did not qualify as an Exempt Entity under Florida’s ad valorem statutes. The 2009 amendments now allow Florida limited partnerships to seek exemption from ad valorem taxation as long as the sole general partner of the limited partnership is an Exempt Entity. Since there are many Non-Profit Entities that are experienced in the management and development of affordable housing projects, this change to Florida law presents a real opportunity for LIHTC investors to achieve the additional economic benefit of exemption from Florida ad valorem taxation.
There is no guidance yet on management limitations on the limited partners in order to ensure that the Exempt Entity is the sole general partner. Presumably, the standards that have developed in existing case law and accounting and tax pronouncements regarding management acts by limited partners will govern. In any event, the limited partnership agreement should be carefully drafted to avoid any argument that the Exempt Entity is not the sole general partner.
Property May Qualify For Exemption Before Occupancy
In order to cross the initial threshold for ad valorem tax exemption it is no longer necessary to show that a property is actually used to provide affordable housing on January 1 of each year. Instead, a new subsection (5) was added to Florida Statute 196.196 stating that property owned by an Exempt Entity, including Florida limited partnerships described in the preceding section, is “used for a charitable purpose” if the organization has taken affirmative steps to prepare the property to provide affordable housing to persons or families meeting the extremely low, very low, low, or moderate income limits (“Eligible Persons”). “Affirmative steps” mean environmental or land use permitting activities, creation of architectural plans or schematic drawings, land clearing or site preparation, construction or renovation activities, or other similar activities that demonstrate a commitment of the property to providing affordable housing.
In order to prevent abuse, the statute also provides that, (i) if the property is transferred for a purpose other than directly providing affordable homeownership or rental housing to Eligible Persons or (ii) is not in actual use providing such affordable housing within five years after the date the exemption is granted, the property appraiser shall serve the owner with notice of intent to record a notice of tax lien against any property owned by that owner within the county. In such case, the owner is subject to the taxes otherwise due without the exemption, plus 15 percent interest per annum and a penalty of 50 percent of the taxes owed. If the owner no longer owns property in the county, but owns property in any other county in Florida, the property appraiser shall record in each such other county a notice of tax lien on such other property. Prior to filing such a lien, the owner must be given 30 days notice to pay the taxes, penalty, and interest. The sting of this provision is considerably lessened, however, by the ability to extend the five-year period by showing a continuation of affirmative steps to develop the property for affordable housing purposes.9
The IRS Guidelines, which are incorporated in Florida’s requirements for ad valorem exemption, require that the project is actually occupied by poor and distressed residents. At first blush, this would prevent vacant land or an empty project from qualifying for ad valorem tax exemption; however, the IRS Guidelines allow a reasonable transition period to put a project in service, if a project requires construction or rehabilitation. Whether a transition period is reasonable is determined by reference to all relevant facts and circumstances; however, if a project operates under a government program that specifies a transition period, that period will be used to determine reasonableness. Florida’s new statute allows a five-year transition period (with possible extensions) to prepare a project for use as affordable housing. Therefore, presumably, this period would be considered reasonable under the IRS Guidelines.
Moderate Income Residents Now Included As Eligible Persons
Individuals and families whose household income is 120% or less of area median gross income (“Moderate Income Residents”) may now be included in counting the units that are used to provide affordable housing. However, the property must still satisfy the IRS Guidelines, which will have the practical effect of limiting the number of units occupied by Moderate (or higher) Income Residents to 25 percent of all units.10 Nonetheless, the inclusion of Moderate Income Residents in the count may provide benefit to some projects.
March 1 Deadline for Exemption Application
In general, Florida requires every person or organization that has legal title to real property that is entitled by law to exemption from taxation as a result of its ownership and use to file an application for exemption with the county property appraiser on or before March 1 of each year.11 As discussed above, the 2009 statutory changes create new categories of property that can qualify for full or partial tax exemption as of January 1, 2010.
- Property owned by an Exempt Entity that is in the process of permitting, design, construction, or renovation for use as affordable housing may now qualify for exemption.
- Florida-based limited partnerships with a sole general partner that is an Exempt Entity may now qualify their affordable housing projects for exemption.
Any Tax Exempt Entity (including a Florida limited partnership with a Tax Exempt Entity as the sole general partner) that owns improved or unimproved Florida real property that is used or intended to be used for affordable housing should evaluate the effect of these 2009 changes to determine whether its property qualifies for full or partial tax exemption under Florida law. If so, the exempt application should be filed on or before March 1, 2010.12
VALUATION OF AFFORDABLE RENTAL HOUSING
Since 2007, Section 193,803, Florida Statutes, has required that property used for workforce rental housing or affordable rental housing and that is subject to recorded use rent restrictions be assessed under the income approach using the actual net operating income. This requires the property assessor to take into account rent restrictions in valuing an affordable project. Although this has been a mandate since 2007, without a specific appeal by the property owner for use of this methodology, GT has found that many property appraisers are continuing to value affordable housing projects based on prior methods that did not take rent restrictions into account.
Basically, it is the property owner’s responsibility to provide the property appraiser by April 1 of each with a return on a prescribed form, which includes a rent roll and an income and expense statement for the preceding year. Failure to provide this information on a timely basis results in an estimated assessment based on the best available information, which may not include actual net operating income statistics.13
In order to qualify for valuation based on net operating income, an affordable rental project must be subject to a land use agreement that is recorded in the county in which the property is located and that restricts the use of the property to affordable housing for a period of at least 20 years. Some affordable housing projects are subject to rent restrictions that are incorporated in their loan documents or organizational documents, but which are not recorded against the land as use restrictions. Often an attorney can turn such restrictions into a recordable use restriction, thereby qualifying the rental project for assessment based on net operating income. Owners of affordable rental housing whose property is not subject to a recorded use restriction meeting the standards of Section 193.803, Florida Statutes, should consult their counsel about creating such a recordable use restriction.