The Supreme Judicial Court recently
denied a developer’s application for further appellate review of a decision
concerning the taxation of development rights, whereby the Appeals Court had
ruled
that a town may tax partially-constructed structures – existing on land that
has been submitted to condominium status – which have not yet become lawful
condominium units. R.I. Seekonk Holdings, LLC v. Board of Assessors of
Seekonk, 91 Mass. App. Ct. 1104 (2017)(Rule 1:28) review denied 476
Mass. 1115 (2017). At first blush, the Appeals Court’s decision appears to run
counter to the Massachusetts Condominium Act as well as its own previous
decisions. Indeed, for the last seventeen years, it had generally been well
accepted that land submitted to condominium status – which was subject to
development rights – constituted common area of the condominium, which was
exempt under G.L. c. 183A, § 14 from assessment. Spinnaker Island &
Yacht Club Holding Trust v. Bd. of Assessors of Hull, 49 Mass.App.Ct. 20
(2000); see also First Main St. Corp. v. Bd. of Assessors of Acton,
49 Mass.App.Ct. 25 (2000). The Appeals Court, however, was able to
differentiate the partially-constructed structures at issue in R.I. Seekonk
based on (1) certain language in the condominium’s master deed concerning the
subject development rights, and (2) the progress of construction performed.
The Massachusetts Condominium Act
provides, in pertinent part, as follows:
Each unit and its interest in the common
areas and facilities shall be considered an individual parcel of real estate
for the assessment and collection of real estate taxes but the common areas and
facilities, the building and the condominium shall not be deemed to be a
taxable parcel.
G.L. c. 183A, §
14
(emphasis supplied).
In Spinnaker Island, the Appeals
Court considered whether municipalities may tax rights retained by the
declarant of a condominium to build additional phases of a condominium. Spinnaker
Island, 49 Mass.App.Ct. at 20. In that case, the Assessors of Hull assessed
real estate taxes on ten parcels of condominium land in which the declarant
retained development rights but upon which units had never been “phased in” to
the condominium. Id. at 21-22. The Appeals Court specifically held that
these development rights, which had been reduced to the ten “expansion
parcels,” are not subject to real estate taxation under G.L. c. 183A, § 14. Id.
at 24. More specifically, the Appeals Court explicitly provided that “[b]y
reason of the unambiguous exclusion in G.L. c. 183A, § 14, of common areas from
taxation except to condominium unit owners in proportion to their percentage
interests, the expansion parcels are not subject, as separate parcels, to real
estate taxation.” Id.
In First Main Street, the
Assessors of Acton – instead of assessing development rights as “real estate”
under G.L. c. 59, § 2A, like the
Assessors of Hull in Spinnaker Island – assessed development rights as
“present interests” in real estate under G.L. c. 59, § 11. First Main St.,
49 Mass.App.Ct. at 25. The Assessors of Acton contended that the development
rights were severable from the underlying fee – that while the underlying fee
was common area, the retained right to build on that land is not common area
(and, therefore, was subject to taxation). Id. The Appeals Court
rejected the Assessor’s argument and held that a declarant’s development rights
are not taxable as “present interests” in real estate under G.L. c. 59, § 11. Id.
at 28-30.
The R.I. Seekonk case involved
the Greenbrier Village Condominium located in Seekonk, Massachusetts. When the
Condominium was initially created in 2008, it consisted of eight units.
Thirteen phases were subsequently added by phasing amendments – eventually
creating thirty-one units at the Condominium. The Town of Seekonk assessed
taxes against the declarant on structures that were under construction and
prior to their addition to the Condominium as “units” – via master deed phasing
amendment.
The Appeals Court held that these
partially-constructed structures – unlike the development rights at issue in Spinnaker
Island and First Main Street – were properly assessed by Seekonk.
The Appeals Court seized upon the fact that language in the condominium’s
master deed clearly defined the developer’s intent to exclude the structures
from the condominium’s common area. R.I. Seekonk, 2017 WL 465322, *2.
Indeed, the condominium’s master deed specifically provided as follows:
The Common Areas and Facilities of the
Condominium (sometimes herein also referred to as the “Common Elements”)
consist of the entire Land exclusive of the Units, all as hereinafter described
and defined (and exclusive of any and all rights, interests and/or easements
reserved by the Declarant), and any other property which is herein expressly
included in the Common Areas and Facilities…Until such time as additional
Phases are added to the Condominium by the recording of “Phasing Amendments” as
described below, any buildings or portions thereof existing on the Land
described in Schedule A (other than Phase 1), any other portions of the
building(s) shown on the Site Plan, and any land not described in Schedule A
shall not be part of the Condominium or subject to the Act, and shall be
exclusively owned by, and shall be the exclusive responsibility of the
Declarant or other owner thereof.
The Appeals Court in Spinnaker Island
had specifically provided that “[o]nce it is recognized that the expansion
parcels constitute common area of the condominium, it follows that they are not
subject to real estate taxation because G.L. c. 183A, § 14…provides that
‘common areas and facilities…shall not be deemed to be a taxable parcel.’” Spinnaker
Island, 49 Mass.App.Ct. at 23. The Appeals Court in R.I. Seekonk
reasoned that – where this developer had gone to such lengths to specifically
exclude the structures from the common area – the developer is not entitled to
the tax exemption for common areas provided by G.L. c. 183A, § 14.
Unfortunately for many developers
holding development rights, master deeds – for whatever reason – are commonly
drafted with the exclusionary language seized upon by the Appeals Court in R.I.
Seekonk. As a practical matter, developers should seek to avoid the
inclusion of such language in their condominium documents and, instead, employ
simple language concerning the land that has been submitted to condominium
status (e.g., “The Common Elements are all portions of the Condominium other
than the Units.”).
Perhaps more unfortunate for developers
holding phasing rights is the fact that the Appeals Court in R.I. Seekonk
went beyond distinguishing the case from Spinnaker Island based on the
language in the master deed. The Appeals Court also held that the
partially-constructed structures could be taxed as present interests in real
estate, under G.L. c. 59, § 11. R.I. Seekonk, 2017 WL 465322, *2. The
Court distinguished this case from First Main Street based on the fact
that the structures “were in fact mostly completed” – whereas First Main Street
involved assessed development rights where no construction had commenced. The
Court provided that “as the First Main St. court reasoned, an
unexercised development right could be converted into a present interest by
initiating affirmative actions, such as ‘build[ing] the additional buildings
and facilities.’”
Notably, the R.I. Seekonk Court
failed to complete the quote from the First Main Street decision, which
provided that the condominium developer must “build the additional buildings
and facilities and amend the master deed, before the expansion phase
land is the holder’s to deal with.” First Main St., 49 Mass.App.Ct. at
28 (emphasis supplied). It appeared that the Appeals Court, in First Main
Street, recognized that in order to tax a development right as a present
interest, the subject unit actually had to be phased into the condominium by
recording an amendment to the master deed. The R.I. Seekonk Court,
however, eschewed the necessity of having a legally-existing unit to tax –
providing that a development right may be taxed once a structure is constructed
on the property.
The Appeals Court’s decision is
problematic, to say the least.
Essentially, towns may now tax
condominium “units” that do not legally exist. If such a tax goes unpaid, what
property interest will the town place a lien on? What property interest would
be foreclosed upon? Will the town take common area land away from the unit
owners of the condominium?
Additionally, the Appeals Court’s term
“mostly completed” would seem to be open to broad interpretation. Can a
structure be assessed once a developer has poured a foundation? Framed walls?
Nailed roof shingles? It is unfortunate that the Court did not provide a
stricter threshold than “mostly completed” (e.g., taxable as a present interest
upon the issuance of a certificate of occupancy).
Also, towns typically tax common area
proportionately to the unit owners of the condominium as “value added” to the
condominium – in accordance with their percentage interest in the common area.
Under the R.I. Seekonk decision, towns will essentially be able to (1)
tax the unit owners in accordance with their percentage interest in the common
areas, and (2) tax partially-constructed structures existing on the common
areas. This would appear to be double taxation. The Appeals Court, in First
Main Street, recognized this issue, providing “[a]s the unit owners have
already been taxed for their interest in the common area land, the assessors
may not tax another slice of the same real property to others.” First Main
St., 49 Mass.App.Ct. at 29.
It is worth noting that, effective
January 1, 2017, G.L. c. 59, § 11 was amended to provide local assessors with
the discretion regarding whether to tax present interests in real estate.
Previously, the statute authorized the imposition of a tax on a present
interest upon written authorization from the Commissioner of Revenue.
Accordingly, local assessors will now be able to tax structures on condominium
property that – in their opinion – are “mostly completed”. A particularly
aggressive town may now be emboldened to assess any partially-constructed
structure on condominium property – whether it is ultimately to become a unit
or some common area facility (e.g., a clubhouse).
The independent value of development
rights, and the notion that a declarant of a condominium should be subject to
taxation for same, has been acknowledged in the industry for more than three
decades. Both the Uniform Condominium Act (“UCA”), which was most recently
amended in 1980, and its successor act, the Uniform Common Interest Ownership
Act (“UCIOA”) provide: “Any portion of the common elements for which the
declarant has reserved any development right must be separately taxed and
assessed against the declarant, and the declarant alone is liable for payment
of those taxes.” UCA § 1-105(c) (1980); UCIOA § 1-105(c) (2014). As explained
in Comment 2 to the UCA provision, “[e]ven if real estate subject to
development rights is a part of the condominium and lawfully ‘owned’ by the
unit owners in common, it is in fact an asset of the declarant… .’” UCA §
1-105(c), cmt. 2 (1980).
However, Massachusetts has its own
unique condominium act codified at G.L. c. 183A, §
1
et seq., which has no comparable provision to that contained in the UCA and
UCIOA. “Massachusetts has not adopted either the UCA or its successor, the
Uniform Common Interest Ownership Act.” Drummer Boy
Homes Ass’n, Inc. v. Britton, SJC-11969, 2016 WL 1191578, at *6 n.17 (2016). And while “the
UCA may serve as a guide to the reasonableness of developer control of the
structure, management and marketing of a condominium, it cannot override the
existing tax law of Massachusetts. That is a task for the Legislature.” First
Main St., 49 Mass.App.Ct. at 29-30 (citing Barclay v.
DeVeau, 384 Mass. 676, 685 n.17 (1981)).
Until such time as the Legislature has
determined whether it is appropriate to assess a condominium’s declarant for
the value of its retained development rights, or partially constructed
buildings on common area, this issue will likely find its way back to the
appellate courts of the Commonwealth.
For
nearly 15 years, Dave has been specializing in complex civil litigation at both
the trial and appellate levels. He has extensive experience in the area of
construction litigation. Dave’s practice is focused on construction, real
estate, and condominium matters. His clients include condominium associations,
real estate developers, general contractors, subcontractors, and individuals.
Dave
is also certified as a player agent by the Major League Baseball Players
Association and has negotiated more than $56 million in professional baseball contracts.
