Tuesday, October 7, 2014

Real Property, Probate & Trust Law: Tenants With "Perpetual Dominion" May Be Assessed Ad Valorem Property Taxes

By William J. Pokolsky III and Derek Larsen Chaney

Following two recent Florida Supreme Court rulings, a tenant under a long-term lease of municipal land is now considered an owner and may be assessed ad valorem taxes on the land and improvements constructed thereon.

At issue in Accardo v. Brown, 139 So. 3d 848 (Fla. 2014), and 1108 Ariola, LLC v. Jones, 139 So. 3d 857 (Fla. 2014), was whether the land and improvements under long-term leases granted by Santa Rosa County and Escambia County were subject to ad valorem real property tax rather than intangible personal property tax.

The properties at issue consist largely of beachfront condominiums, single-family residences, and commercial parcels. The lands were conveyed in the 1940s and 1950s by the United States to Escambia County, which later leased some of the lands to Santa Rosa County pursuant to 99-year leases, generally providing for automatic 99-year renewals. Escambia and Santa Rosa then leased or subleased the properties under similar 99-year renewable terms (collectively, “leases”) to private-party tenants or subtenants (collectively, “tenants”) in order to develop the beachfront land. The leases require tenants to pay rent during the lease term but do not include an option to purchase the land or improvements at the end of the term. Each lease also provides that upon termination of the lease the improvements become county property. Accardo, 139 So. 3d at 849 *1; 1108 Ariola, LLC, 139 So. 3d at 858.

By statute, property originally leased for a term of 100 or more years is considered to be owned by the lessee. Accardo, 139 So. 3d at 853 (citing Fla. Stat. § 196.199(7) (2005)).  Thus, a legal battle ensued when the property appraisers for Santa Rosa and Escambia counties began assessing the tenants’ leasehold interests as if the tenants owned the land and improvements.

The tenants argued at trial and on appeal that they merely rented the land, did not own the improvements at the end of the lease, held leases for fewer than 100 years, and therefore were not legal or actual owners of the land or improvements. Ultimately, they argued they could not have equitable ownership absent the right to acquire legal title.  Accardo, 139 So. 3d at 853; 1108 Ariola, LLC, 139 So. 3d at 859.

The First District Court of Appeal disagreed and concluded that the tenants were the equitable owners of the properties because of the nature of their perpetual leasehold interests.  Accordingly, the First District held that because the tenants enjoyed substantially all of the benefits of ownership, including the rights to construct improvements and mortgage, rent, and convey their interests, their interests were subject to ad valorem taxationAccardo, 139 So. 3d at 849 (citing Accardo v. Brown, 63 So. 3d 798, 801–02 (Fla. 1st DCA 2011)); 1108 Ariola, LLC, 139 So. 3d at 859 (citing 1108 Ariola, LLC v. Jones, 71 So. 3d 892, 893 (Fla. 1st DCA 2011)).  The Supreme Court affirmed the First District’s decisions in both cases, concluding that “[t]he interest of a lessee under a perpetually renewable lease is not materially different from the interest of a lessee under a lease for a term of years providing the right for the lessee to obtain title for nominal consideration upon the termination of the lease. In both circumstances, the lessee effectively has the right to exercise perpetual dominion over the property. Accardo, 139 So. 3d at 856.  

These rulings are likely to have an impact on long-term municipal leases throughout Florida, though neither opinion indicates whether the court would reach the same conclusion with respect to leases with substantially shorter terms but similar tenant rights and responsibilities. Other property appraisers may feel compelled to advance this right to tax land and improvements subject to such leases as real property rather than personal property in order to generate additional revenue for their respective counties.