Group Title: Affordable housing issues
Title: Affordable housing issues ; vol. 12 no. 3
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 Material Information
Title: Affordable housing issues ; vol. 12 no. 3
Series Title: Affordable housing issues
Physical Description: Serial
Language: English
Creator: Shimberg Center for Affordable Housing
Publisher: Shimberg Center for Affordable Housing
Place of Publication: Gainesville, Fla.
Publication Date: April 2002
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Bibliographic ID: UF00087009
Volume ID: VID00014
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.


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Volume XII, Number 3

April 2002

On several occasions through the years the Shimberg Center has received inquiries about the exemption
of affordable housing from ad valorem taxes. The following article addresses this topic and was published
by the Florida Housing Coalition in the Spring 2002 issue of "The Housing News Network", pages 21-
23. The article is reprinted in its entirety here with the permission of the authors and the Coalition.
The Florida Housing Coalition is a nonprofit, statewide membership organization whose mission is to
act as a catalyst to bring together housing advocates and resources so that Floridians have a safe and
affordable home and suitable living environment. The Coalition maintains a web site at and can be contacted at 850-878-4219 or by e-mail at

By Louise J. Allen and Brian J. McDonough
Editor's Note: Nonprofits throughout Florida
have had mixed experiences in obtaining the ad
valorem tax exemption. Some property appraisers
have consistently granted the exemption while others
have steadfastly refused the exemption. We hope this
article helps to clarify when the ad valorem exemp-
tion should be granted.
The exemption from ad valorem taxation
available for real property owned by a non-
profit organization and used for charitable
purposes can often make a significant difference
in the financial success of an affordable housing
project. Historically, non-profit corporations

received an exemption from Florida ad valorem
taxes for their properties that were used for the
"charitable" purpose of providing low-income
housing. However, in 1997, Florida's Fifth
District Court of Appeals held in SouthLake
Community Foundation, Inc. v. Havill (Fla. 5th
DCA, 1997) that the exemption is only available
for affordable housing projects that provide
low-income housing exclusively to persons who
are Section 8 Housing and Urban Development
voucher tenants. The SouthLake Community
Foundation case effectively brought into ques-
tion the continuing availability of the ad valo-
rem exemption for affordable housing projects,
which are owned by non-profits in Florida.



In response to the Court of Appeals decision,
the 1999 Florida Legislature enacted Florida
Statutes Section 196.1978, which provides a
specific exemption from ad valorem taxation
for nonprofit corporations that provide low-
income housing provided they meet certain
statutory requirements.
To obtain the ad valorem tax exemption
described in Section 196.1978, a property must
satisfy the following requirements:

1. The property must provide housing to
persons who qualify as low-income (less
than 80 percent of the median annual
adjusted gross income) or very low-income
(less than 50 percent of the median annual
adjusted gross income);

2. The property must be entirely owned by a
nonprofit entity qualified as charitable
under Internal Revenue Code Section
501(c)(3) on January 1st of the year for
which the exemption is being sought.
Property owned by a limited liability
company whose sole member is a 501(c)(3)
corporation and which is disregarded for
federal income tax purposes as an entity
separate from its sole member will qualify
under the statute;

3. The property must comply with IRS Revenue
Procedure 96-32. The safe harbor rules of
Revenue Procedure 96-32 state that an
organization will be considered "charitable"
if it satisfies the following requirements: (a)
at least 75 percent of the units are occupied
by low-income residents (less than 80
percent of area median income); (b) either at
least 20 percent of the units are occupied by
very low-income residents (less than 50

percent of are median income) or 40 percent
of the units are occupied by residents that do
not exceed 60 percent of area median income
(the test described in (b) is referred to as
"20 percent at 50 percent" or "40 percent at
60 percent"); (c) the project is actually occu-
pied by poor and distressed residents; and
(d) the housing is affordable to the charitable
beneficiaries. In the case of rental housing,
the requirement described in (d) will ordi-
narily be satisfied by the adoption of a rental
policy that complies with government-
imposed rental restrictions. For purposes of
the Revenue Procedure 96-32 safe harbor
test, there is generally a one year transition
period for newly acquired projects to satisfy
such requirements; and

4. Florida Department of Revenue Form DR-504,
Ad Valorem Tax Exemption and Return,
must be filed by March 1st of each year.

Since the exemption is based on ownership of
the property on January 1st of the applicable
year, a 501(c)(3) organization which acquires an
affordable housing project after January 1st will
not be allowed an exemption for the portion of
the first calendar year it owns the project. The
amount of the exemption is limited to the por-
tion of the property used to provide housing to
low and very low-income persons to the extent
provided in Section 196.196. The property
appraiser obtains this information from a sched-
ule of the tenants and their applicable income
limit, which is attached to the DR-504, Ad
Valorem Tax Exemption and Return. Assuming
the threshold criteria for ad valorem exemption
described above are met, the formula for deter-

mining the amount of the available ad valorem
exemption is a fraction where the numerator is
the number of units in the project used to
provide housing to low and very low-income
tenants and the denominator is the total num-
ber of units in the project. Although students
are generally excluded from the definition of
low-income and very low-income persons
under the Internal Revenue Code rules appli-
cable to tax-exempt bonds, they are included in
the definition of low-income persons under the
applicable Florida statutes with the result that
units rented to students will be considered used
for an exempt purpose. The statute does not
address the treatment of vacant units. Al-
though we have not done an exhaustive study,
it appears that many property appraisers are
treating vacant units set aside for rental to low
and very low-income tenants as used for an
exempt purpose and including them in the
numerator of the above fraction, thereby in-
creasing the percentage of the particular project
which is exempt. However, if this is an issue
for your project, you should contact the county
property appraiser for the project to determine
how it is treating vacant units.
Section 196.196, a statutory prerequisite for
the exemption, requires that the predominant
use (i.e., more than 50 percent) of the property
be exempt. Our experience is that the property
appraisers interpret this to mean that projects
which do not lease at least 50 percent of the
units to low and very low-income persons will
be denied the exemption in full. However,
there is a yet unresolved conflict between
Revenue Procedure 96-32 which provides a one
year transition period for newly acquired
projects to satisfy the safe harbor requirements
that at least 75 percent of the units be leased to
low-income persons and Florida Statutes

Section 196.196 which requires at least 50 per-
cent of the use be exempt on January 1st of the
applicable year. This issue is particularly
relevant during the first year transition period
after a non-profit's acquisition of an existing
property not previously operated as an afford-
able housing project. It is during this period
that the new property owner is actively seeking
to bring the property in compliance with the
Revenue Procedure 96-32 safe harbor guide-
lines. Our experience has been that many
property appraisers are denying the exemption
in the first year if at least 50 percent of the units
in the project are not leased on January 1st to
low-income persons even though the property is
operated in compliance with the Revenue
Procedure 96-32 safe harbor requirements for
obtaining charitable status. Although this result
may not be supported by a literal reading of the
applicable statutes, this will probably remain
the result until a property owner is willing to
appeal the denial of an ad valorem exemption
in circumstances similar to those described.
Because Revenue Procedure 96-32 requires
that at least 75 percent of the tenants be low-
income persons within one year after acquisi-
tion of the property, the ad valorem exemption
will generally be at least 75 percent after the first
year and the predominant use requirement will
not be a problem. As we advise our clients, if
their projects can not satisfy the predominant
use requirement after the first year because less
than 50 percent of the units are leased to low-
income persons, their real problem is they will
fail the Revenue Procedure 96-32 safe harbor
test and potentially lose their tax exempt status
as a charitable organization under Internal
Revenue Code Section 501(c)(3). If that hap-
pens, denial of the ad valorem exemption will
probably be the least of their problems.

Ad valorem exemption makes non-profit
owners real "players" in the acquisition of
existing multi-family apartment projects by
giving them an economic benefit not available
to for-profit owners. This modest advantage
acts to offset other financial challenges faced by
non-profits in acquiring properties. Due to its
relative newness, there are issues regarding
application of the exemption statute such as the
treatment of vacant units and satisfaction of the
predominant use requirement during the first
year of ownership of the project by the non-
profit entity. Even with these open issues, the

ad valorem exemption is so important to the
financial viability of an affordable housing
project that, in our experience, many lenders are
requiring an opinion of counsel that the project
will ultimately qualify for the ad valorem ex-
emption under existing law.

Abu th "uh

Louise J. Allen, Esq., and Brian J.
McDonough, Esq., are Shareholders in the law
firm of Stearns Weaver Miller Weissler Alhadeff
& Sitterson, P.A., located respectively, in the
Broward and Miami offices.

Affordable Housing ISSUES is prepared bi-monthly by the Shimberg Center for Affordable Housing for the purpose of
discussing contemporary issues facing affordable housing providers. Reproduction of this newsletter is both permitted and
encouraged. Comments or questions regarding the content are welcome and should be addressed to Robert C. Stroh, Director.

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