Developers of Shell Condominiums: Are You Subject to Ad Valorem Taxes on January 1?
 
November 29, 2007
 
Judith "Judy" Korchin- Miami

The Florida Association of Realtors recently estimated that 37 new high rise buildings containing 20,000 new units are under construction in Miami. Many of these high rise buildings are built as shell structures where (1) the developer builds and finishes a finished exterior and an unfinished interior skeleton of the building, and (2) the ultimate tenant or purchaser of the unit finishes the interior (e.g., floors, kitchen and bath design, wall color) based on their own unique plans and specifications. While each of the Miami high rise buildings under construction will ultimately be assessed and subject to ad valorem real property taxes based on their fair market value, this article assists the developer in evaluating whether and under what conditions their building will be subject to ad valorem property taxes for the tax year 2008. Developers should not assume that a shell building will not be subject to ad valorem taxes merely because it cannot be occupied. There are several considerations depending on the facts and circumstances.

All real property in the state of Florida is annually assessed according to its “just value” on January 1. Section 192.042(2), Florida Statutes provides:

All property shall be assessed according to its just value as follows: (1) Real property, on January 1 of each year. Improvements or portions not substantially completed on January 1 shall have no value placed thereon. “Substantially completed” shall mean that the improvement or some self-sufficient unit within it can be used for the purpose for which it was constructed.

This statute intends not to subject real property improvements to ad valorem real property taxes until the improvement is “substantially complete.” Generally, if an improvement to real property can be put to the use for which it was intended, it is deemed substantially complete for tax purposes even if finishing touches to the improvement remain. Improvements to real property which are not “substantially complete” on January 1 “shall have no value placed thereon.”

The statute clearly creates three distinct categories. First, vacant land is assessed only according to the value of the land itself. Second, a substantially complete improvement to the land is assessed by adding the value of the land to the value of the substantially completed improvement on the land. Third, land containing a substantially incomplete improvement is assessed only according to the value of the land itself; the substantially incomplete improvement on the land is treated for tax purposes as non-existent.

When Is a Property “Substantially Complete”?

Florida courts have held, and the Attorney General has opined, that tax appraisers may properly consider several factors in determining whether an improvement to real property is “substantially complete” for the purpose for which it was constructed and may be assessed a taxable value. These factors include:

• Fitness for occupancy
  
  For structures intended to be fully finished buildings, fitness for occupancy is an important criterion in judging substantial completion. Whether or not a certificate of occupancy has been issued and whether or not all required inspections have been completed may determine whether the improvement is substantially complete. Substantial completion does not mean that every last detail of construction or ornamentation is finalized; a structure may be substantially complete even when there are minor difficulties or “bugs” which require attention.
  
  For structures intended to be shell structures, substantially complete means the shell of the building is complete to the extent that a tenant may finish the unit according to his own plans and specifications and thereafter occupy the unit. Whether a partial certificate of occupancy has been issued and whether or not some required inspections have been completed may determine whether the shell building is substantially complete for the purposes for which it was constructed. The fact that many of the individual units have not been leased or sold to tenants does not preclude a finding that the shell is substantially complete.
• Whether individual self-sufficient units of the improvement are substantially complete, even when the entire complex is not complete
  
  The test for substantial completion is not always whether the entire complex is substantially complete; instead, if certain self-sufficient units within the complex are substantially complete, those self-sufficient units will be assessed a taxable value. Courts have held that self-sufficient units could include individual apartment units, lobby areas, parking areas, dock and pier areas, roof structures, pools, elevators, and systems for plumbing and air conditioning. If these self-sufficient units are substantially complete and may be used for the purpose for which they were constructed, they may be assessed a taxable value regardless of whether the entire construction project remains incomplete.
  
  For example, assume a developer begins construction of a 10-floor condominium building containing 80 individual units. On January 1, the lobby of the building, the plumbing system, the building’s two elevators and floors one through six of the building are completed. However, as of the same January 1 date, construction of floors seven through 10 has not even begun. In this situation, the portion of the building (lobby, elevators, plumbing system, and floors one through six) that are substantially complete would have a taxable value, but the remaining incomplete portions of the building (floors seven through 10) would have no taxable value. Courts have recognized that the value assessed on such self-sufficient substantially complete units is lower than their fair market value would be in a fully completed building.
• Marketability
  
  This factor considers whether a structure is completed to the extent that it could be marketed for a present or future financial gain. For shell buildings, this inquiry depends on whether the individual units within the shell may be sold to a buyer who could subsequently complete and occupy the unit.
• Impediments to substantial completion within taxpayer’s control
  
  Florida courts have not interpreted this factor but the Florida Attorney General has opined that an owner/developer cannot purposefully cause a delay in construction in order to avoid an assessment and taxes. On the other hand, if an improvement is not substantially complete for the purpose for which it was constructed by January 1 on account of delays which are not within the control of the owner/developer (e.g., natural disasters, poor weather conditions which delay construction and contractor delays, etc.), the improvement would arguably not be subject to an assessment and taxes.
  
  Ad valorem real property tax assessments may be challenged before the Value Adjustment Board and in the court system. Settlements with the Property Appraiser’s office may also be negotiated. There are strict time deadlines for challenging the Property Appraiser’s assessment.
  
  For further information, please contact:
  
  Judith M. Korchin, Partner Holland & Knight 701 Brickell Avenue, Suite 3000 Miami, FL 33131 305-789-7764
  
  Mark Holcomb, Partner Holland & Knight 315 South Calhoun Street, Suite 600 Tallahassee, FL 32301 850-425-5634