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City of Largo, Florida v. Ahf-Bay Fund, LLC.

Supreme Court of Florida
215 So. 3d 10 (2017)
ELI5:

Rule of Law:

A statutory tax exemption for a charitable entity is a waivable privilege, not a mandatory prohibition; therefore, an entity may voluntarily enter into a contractual agreement to make payments in lieu of taxes (a PILOT agreement) in exchange for consideration, and such payments do not constitute an unconstitutional tax.


Facts:

  • RHF, a tax-exempt 501(c)(3) nonprofit, planned to develop an affordable housing project on a property in the City of Largo.
  • Under Florida Statutes, RHF's project was exempt from ad valorem property taxes.
  • To finance the project, RHF needed low-interest, tax-exempt bonds, which the City agreed to help issue.
  • In exchange for the City's assistance with the bonds, RHF entered into a Payment in Lieu of Taxes (PILOT) agreement, promising to make annual payments to the City equal to the property taxes it would have owed without the exemption.
  • A memorandum of the PILOT agreement was recorded in public records, stating the agreement imposed covenants running with the land.
  • RHF made the required PILOT payments from 2001 through 2005.
  • In November 2005, AHF-Bay Fund, LLC (AHF), another nonprofit affordable housing provider, acquired the property from RHF.
  • AHF failed to make the PILOT payment due at the end of 2006, asserting it was unaware of the agreement.

Procedural Posture:

  • The City of Largo filed a lawsuit against AHF-Bay Fund, LLC in a Florida trial court for failure to make payments under the PILOT agreement.
  • The trial court entered a final judgment in favor of the City of Largo, awarding damages and interest.
  • AHF, as appellant, appealed the judgment to the Florida Second District Court of Appeal; the City of Largo was the appellee.
  • The Second District Court of Appeal reversed the trial court, finding the PILOT agreement void as against public policy.
  • The Second District Court of Appeal then certified a question of great public importance to the Supreme Court of Florida for review.

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Issue:

Do Payment in Lieu of Taxes (PILOT) agreements, which require a statutorily tax-exempt entity to make payments equal to the ad valorem taxes that would otherwise be due, violate section 196.1978, Florida Statutes, or Article VII, § 9(a) of the Florida Constitution?


Opinions:

Majority - Quince, J.

No. A PILOT agreement does not violate Florida statutory or constitutional law because a tax exemption is a waivable privilege, and such contractually agreed-upon payments are not taxes. The court reasoned that section 196.1978 provides an 'exemption' from taxes, not a 'prohibition' against paying them. An entity can waive this exemption, as RHF did here, through a voluntary, bargained-for exchange to receive a benefit—in this case, favorable financing through tax-exempt bonds. Furthermore, the payments are not unconstitutional taxes because they do not meet the legal definition of a tax. A tax is an enforced burden imposed by a government's sovereign right to support general government functions. Here, the City acted in its proprietary (contractual) capacity, not its sovereign (taxing) capacity, and the payment was consideration for a specific service benefiting RHF, not a unilateral imposition for general revenue.



Analysis:

This decision validates the use of Payment in Lieu of Taxes (PILOT) agreements as a crucial financing tool for public-private partnerships, particularly in affordable housing development. It establishes that statutory tax exemptions are privileges that can be voluntarily waived through contract, not mandatory prohibitions on payment. The ruling reinforces the high bar for invalidating contracts on public policy grounds and clarifies the critical distinction between a government's proprietary role as a contracting party and its sovereign role as a taxing authority, thereby protecting mutually beneficial economic development agreements from constitutional challenges.

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