Court Opinion

ID: 4149694
Source: CourtListenerOpinion
Date Created: 2017-03-02 16:06:51.254833+00
Date Added: 2024-06-11T13:28:44.720414
License: Public Domain

Supreme Court of Florida
                                   ____________

                                  No. SC15-1261
                                  ____________

                         CITY OF LARGO, FLORIDA,
                                 Petitioner,

                                         vs.

                             AHF-BAY FUND, LLC,
                                 Respondent.

                                  [March 2, 2017]

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,

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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.

                                  -3-
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

                                        -4-
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

                                         -5-
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, 204 N.W.2d 62 (Mich. Ct. App. 1972)

(public university could waive property tax exemption); Clark v. Marian Park, Inc.,

400 N.E.2d 661, 664-65 (Ill. App. Ct. 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, 38 N.W.2d 803,

81 n.7 (Minn. 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, 28 A.2d 759, 761 (N.J. 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

                                        -6-
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 other courts that have

held similarly.

      In the instant case, RHF made a voluntary decision to subject itself to

payments equaling the ad valorem taxes notwithstanding its tax-exempt status.

Therefore, while nonprofit entities are typically exempt from ad valorem taxes, this

is an exemption that may be waived either due to a lack of due diligence in

meeting the requirements of the statute or by voluntarily agreeing to waive the

exemption as the result of a contractual agreement. Consequently, we find that the

statute does not expressly prohibit the payment of ad valorem taxes or payments

that equal the amount of taxes that would be due if a property owner decides to

waive the exemption and enter into a contractual agreement, as was done here.

      Because the statutory exemption can be waived, and there is no statutory or

constitutional provision that expressly prohibits the exaction of ad valorem taxes

on nonprofit entities, this Court would only find the agreement void in the event

that it is “clearly injurious to the public good” or “contravene[s] some established

                                        -7-
interest of society.” Fla. Windstorm Underwriting v. Gajwani, 934 So. 2d 501, 507

(Fla. 3d DCA 2005) (quoting Banfield v. Louis, 589 So. 2d 441, 446 (Fla. 4th

DCA 1991)). Courts typically do not strike down a contract, or any portion of a

contract, based on public policy grounds except in extreme circumstances:

      Courts . . . should be guided by the rule of extreme caution when
      called upon to declare transactions void as contrary to public policy
      and should refuse to strike down contracts involving private
      relationships on this ground, unless it be made clearly to appear that
      there has been some great prejudice to the dominant public interest
      sufficient to overthrow the fundamental public policy of the right to
      freedom of contract between parties sui juris.

Id. (quoting Banfield, 589 So. 2d at 446-47 (quoting Bituminous Cas. Corp. v.

Williams, 17 So. 2d 98, 101-02 (Fla. 1944))).

      In its decision, the Second District recognized that there is a strong public

policy of “promoting the provision of affordable housing for low to moderate

income families.” AHF-Bay Fund, 169 So. 3d at 138. However, there is also a

strong public policy favoring freedom of contract. “Freedom of contract is the

general rule . . . .” State ex rel. Fulton v. Ives, 167 So. 394, 412 (Fla. 1936). “[I]t

is a matter of great public concern that freedom of contract be not lightly interfered

with.” Bituminous Cas. Corp., 17 So. 2d at 101. “[R]estraint is the exception, and

when it is exercised to place limitations upon the right to contract . . . it can be

justified only by exceptional circumstances.” Ives, 167 So. 2d at 412. In the

instant case, the City and RHF entered into a voluntary agreement, supported by

                                          -8-
valid consideration. The parties agreed on the method of calculating the

consideration for their agreement and, until 2005, performed their respective

obligations. While the Second District correctly noted the public policy favoring

affordable housing for low-income families, we find that this contract supported

that public policy by enabling RHF to procure the funding necessary for the

building of the apartment complex. But for the tax-exempt bonds that RHF

received in exchange for these payments, the affordable housing complex might

never have been built. Therefore, we preserve the agreement between the City and

RHF, considering the long-standing policy to uphold contracts between parties and

the fact that the contract here supported another public policy, that of providing

affordable housing to low-income families.

      The Second District also invalidated the PILOT agreement on the ground

that it violated article VII, section 9(a) of the Florida Constitution. Article VII,

section 9(a) of the Florida Constitution provides in relevant part:

      Counties, school districts, and municipalities shall, and special
      districts may, be authorized by law to levy ad valorem taxes and may
      be authorized by general law to levy other taxes, for their respective
      purposes, except ad valorem taxes on intangible personal property and
      taxes prohibited by this constitution.

Art. VII, § 9(a), Fla. Const. In its decision, the district court concluded that the

payments under the PILOT agreement are, in substance, disguised ad valorem

taxes, and the City did not have the authority to impose taxes in circumvention of

                                          -9-
the affordable housing tax exemption. AHF-Bay Fund, 169 So. 3d at 137. Thus,

the court held that the PILOT agreement violated article VII, section 9(a) of the

Florida Constitution, which provides that cities may only impose taxes as

permitted by law. Id.

      What constitutes a “tax” has been well established by Florida courts. A tax

is an enforced burden imposed by a sovereign right for the support of the

government, the administration of law, and the exercise of various functions the

sovereign is called on to perform. State v. City of Port Orange, 650 So. 2d 1, 3

(Fla. 1994) (citing Klemm v. Davenport, 129 So. 904, 907 (Fla. 1930); City of

Boca Raton v. State, 595 So. 2d 25 (Fla. 1992)). Thus, there are two factors that

exist when taxes are imposed: (1) the government acts unilaterally by sovereign

right, and (2) the government acts in order to support routine government

functions.

      Neither of the two factors are present here. First, the City did not act by

sovereign right in entering into the agreement with RHF. Local governments

operate in several different capacities, including proprietary (i.e., as a party to a

contract), and governmental (i.e., by sovereign right). E.g., Daly v. Stokell, 63 So.

2d 644, 645 (Fla. 1953); Commercial Carrier Corp. Indian River Cty., 371 So. 2d

1010 (Fla. 1979). Here, the City’s decision to accept RHF’s offer and enter into

the PILOT Agreement was a proprietary one. See Daly, 63 So. 2d at 645.

                                         - 10 -
      [A]ny contract . . . that redounds to the public or individual advantage
      and welfare of the city or its people is proprietary, while a government
      function, as the term implies, has to do with the administration of
      some phase of government, that is to say, dispensing or exercising
      some element of sovereignty.

Id. The City did not exercise any element of sovereignty by entering into the

PILOT Agreement. When a city enters into an express, written contract it waives

sovereign immunity. Pan-Am Tobacco Corp. v. Dep’t of Corr., 471 So. 2d 4 (Fla.

1984).

      In its decision, the Second District relied on our decision in State v. City of

Port Orange, 650 So. 2d 1 (Fla. 1994), to conclude that the payments were ad

valorem taxes disguised under another name and that the power to tax cannot be

broadened by semantics. The issue in Port Orange was whether a “user fee”

unilaterally imposed on all developed property for improving roads was really a

“tax.” Id. at 3. However, in this case, the City did not unilaterally impose any

obligations, and the payments were not used for routine government functions,

such as roads. The City and RHF negotiated the method to calculate the

consideration for the City’s authorization of the tax-exempt bonds. The City

performed this non routine service specifically for RHF.

      Furthermore, the obligation under the PILOT agreement was not citywide.

Instead, the payments were offered to the City by RHF to induce the City to

exercise its proprietary capacity to contract with the Capital Trust Agency for the

                                        - 11 -
sole benefit of RHF. Respondent argues that the City used the PILOT payments as

general revenue. However, Respondent fails to provide any evidence in support of

this argument, and instead appears to take issue with the value of the City’s service

compared to its perceived benefit. Nonetheless, the PILOT agreement was

consideration for the City to authorize the tax-exempt bonds. That authorization

facilitated the conversion of the property to affordable housing.

      Therefore, because the City did not act unilaterally by sovereign right for the

purpose of supporting government functions, the payments negotiated by the City

and RHF are not taxes and do not implicate article VII, section 9(a).

Consequently, the agreement does violate the Florida Constitution.

                                  CONCLUSION

      Because the PILOT agreement does not violate section 196.1978, Florida

Statues (2000), or article VII, section 9(a) of the Florida Constitution, we answer

the certified question in the negative and quash the decision of the Second District.

We do not address Respondent’s argument concerning whether the PILOT

agreement at issue is a covenant with the land, as that issue is beyond the scope of

the certified question. See McKenzie Check Advance of Fla., LLC. v. Betts, 112

So. 3d 1176, 1178 n.4 (Fla. 2013) (declining to address issue outside the scope of

certified question).

      It is so ordered.

                                        - 12 -
LABARGA, C.J., and PARIENTE, LEWIS, CANADY, and POLSTON, JJ.,
concur.
LAWSON, J., did not participate.

NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION, AND
IF FILED, DETERMINED.

Application for Review of the Decision of the District Court of Appeal – Certified
Great Public Importance

      Second District - Case No. 2D14-408

      (Pinellas County)

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

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