Greenberg Traurig Alert

Ad Valorem Tax Assessments Legislation Could Mean Substantial Tax Increase for Developers

April 26, 1996

There are two identical legislative proposals moving quickly through the Florida House and Senate which would provide for partial year assessments of ad valorem taxes for real property substantially completed or destroyed after the January 1st assessment date. The proposed bills, while expected to increase total revenue realized to local governments by approximately $78 million, would drastically escalate the property tax burden of real estate developers. The proponents of the bills contend that the public policy of allowing partial year tax assessments of real personal property to increase revenues outweighs any adverse effects upon the development community.

While the Senate version of the bill has yet to be heard in committee, House Bill 809 recently passed unanimously out of the full committee on Finance and Taxation. The bill will be reported favorably out of committee and sent to the Appropriations committee. Although the bill may be removed from the Appropriations committee by motion of the Chairman, if it passes through the committee, it will come before the House floor very soon.

If implemented as presently drafted, the act would take effect on January 1, 1997, and apply to real property that is substantially completed on or after January 1, 1997.

A. Present Situation

Article VII, Section IV of the Florida Constitution, states that regulations shall be prescribed that secure a just valuation of all property for ad valorem taxation. Assessments shall be changed annually on January 1st of each year, and no assessment shall exceed just value.

Under current Florida law, real property and tangible personal property that is not "substantially completed" as of January 1st of the tax year cannot be assessed. Specifically, while Florida Statute ¤ 192.042 provides for the ad valorem taxation of property according to its just value on January 1st of each year, improvements, construction work, and other portions not substantially completed on January 1st are not assessed. "Substantially completed" means that the improvement, or some self-sufficient unit within, can be used for the purpose for which it was constructed.

Florida Statute ¤ 193.023 currently requires the property appraiser to complete an assessment of the value of all property no later than July 1st of each year. In making an assessment of the value of real property, the property appraiser is required to inspect physically the property every three years to ensure that the tax roll meets all the requirements of law.

B. Proposed Changes

The proposed bills essentially provide for partial year assessments of ad valorem taxes for real property substantially completed or destroyed after the January 1st assessment date.

The policy consideration that apparently supports the act is that it fulfills an important state interest by establishing greater tax equity among property owners.

The proposed legislation, which creates a new statute (Florida Statute ¤ 192.039) for the taxation of substantially complete or substantially destroyed property, provides that an improvement to real property is assessed on the day that it is substantially completed and taxed as if it was substantially complete on January 1st of that year. It is then placed on the partial year assessment roll in the year after it is substantially completed. A tax for substantially destroyed properties is also calculated and placed on the partial year assessment roll in a similar fashion.

Methodology of Calculations

Under the proposed legislation, the tax for substantially completed property is calculated by multiplying the taxable value by the millage rates imposed in the year that the improvement was substantially completed, times the fraction of the year for which the property was substantially completed.

For real property that is substantially destroyed, the tax to be levied is the sum of (a) the product of the taxable value of the property during the period of time that it was substantially destroyed, multiplied by the applicable millage rate multiplied by the fraction of the calendar year for which the property could not be used, and (b) the product of the taxable value of the property during the period of time that it was not substantially destroyed, including the time after it was rebuilt or replaced, if applicable, multiplied by the applicable millage rate, multiplied by the fraction of the calendar year during which the property was not substantially destroyed. If the sum of (a) and (b) is less than the taxes paid for the year in which the property was substantially destroyed, the amount of tax reduction must be applied as credit on the taxes due for the property for the following year.

Effect on Ad Valorem Tax Exemptions

The proposed legislation would also have an impact on ad valorem tax exemptions. Specifically, the proposed bills state that all exemptions authorized in Chapter 196 of the Florida Statutes based on ownership and use of property are applicable to the partial year property assessment roll. The amount of the exemption would be reduced to the extent that the owner claimed the same exemption on another property. The assessment of replacement property is to include only the excess value of the property replaced.

Notice to Taxpayers

The proposed legislation provides for notice to taxpayers of the partial-year assessment and for tax collectors to bill a taxing authority for actual first year startup expenses and costs. It also requires owners of property subject to partial year assessment to file returns by April 1st of the year after substantial completion, indicating the date on which the property was substantially completed.

C. Constitutional Issues

Opponents of the partial year tax assessment legislation have targeted the potential unconstitutionality of the bills. The primary focus is on whether it is constitutional to exclude tangible personal property in any proposal to require partial year assessments of property for ad valorem taxation. Article VII, Section 2 of the Florida Constitution states that: "All ad valorem taxation shall be at a uniform rate within each taxing unit, except the taxes on intangible personal property may be at different rates. . . " This language seems to embody the idea that tangible personal property must be taxed the same as real property for ad valorem tax purposes. Florida case law consistently supports this interpretation.

Additionally, in November of 1992, Florida voters approved Amendment 10, commonly known as the "Save Our Homes" Initiative. This constitutional property tax restriction limits assessment increases on homestead property to the lesser of the annual change in the Consumer Price Index, or 3%, with increases over that amount allowed only upon sales to property or change in the homestead status. The provision also states that all persons entitled to the homestead exemption shall have their homestead assessed at just value as of January 1st, and the assessment shall be changed annually on January 1st of each year. Thus, this raises the issue as to whether or not homestead property can be assessed on a date other than January 1st.

D. Overall Impact

If the proposed legislation is passed, real estate developers will be subject to a substantial increase in their property taxes. For example, under current Florida law, a building that is 75% complete in its construction on January 1st, but which cannot be used for the purposes for which it was constructed, cannot be taxed for that particular tax year. Under the new proposed legislation, the developer in this scenario would be taxed on the 75% of the building already completed. The economic impact on the developer of such a building could be devastating.