Everyone likes to build castles in the air sometimes. But from now on, avoid building them in Wisconsin, lest the government decide they are taxable.
The Wisconsin Supreme Court recently ruled that a developer must cover the property taxes on all its declared condominium units, including the ones that haven’t been built yet. This ruling overturned an earlier appeals court decision that would have assigned the tax liability for the condominium association’s undeveloped land to the association’s members, who own condos that already exist.
Saddle Creek, the developer in question, had 41 declared but unbuilt condo units. The Town of Pacific reassessed these units at $32,000 each in 2006, a giant leap from the 2005 value of $5,000 per unit. Saddle Creek contested this valuation, and took the matter up with the Board of Review, claiming development rights could not be taxed. If the town insisted on taxing the empty property as if it held condos, Saddle Creek argued, then the property should be treated as a common element in the condo development, much like a pool or a clubhouse. This would mean the condo association would be responsible for paying the tax.
Saddle Creek contended that it cannot be responsible for paying tax on property it does not own. If and when the 41 condo units are built, someone — either the developer or a subsequent buyer — will be liable for the tax, but until that time, there is simply nothing to tax.
The local assessors determined the $32,000-per-unit value by comparing the unbuilt units with similar “land condominiums” — that is, land that could be sold before condos were constructed. The value, however, is hardly analogous if the undeveloped land cannot be sold.
As a friend-of-the-court in the dispute between the developer and the tax authorities, a Wisconsin condominium owners’ group protested that holding associations liable for the taxes would, in effect, impose taxes on unbuilt units on the owners of already-built units. Typically, in Wisconsin, as in most places, each condo owner pays a fixed percentage of the taxes on common areas, regardless of how many units are actually occupied at a given time. However, under Saddle Creek’s argument, the entire tax liability for the common areas, including the land on which future units would be built, would fall on the owners of any occupied units, even if that meant that one unlucky buyer got stuck with the full load.
The state Supreme Court saw this outcome as unfair, citing a Wisconsin statute requiring that “The percentage interests [of the common elements in the development] must ‘have a permanent character’ and generally may not be changed without the written consent of all unit owners and their mortgagees.” To protect condo owners, the court ruled against Saddle Creek.
Although the court framed the case as a struggle between homeowners and a developer, the real problem is with the ludicrous way in which the town set about valuing and taxing the land. The town’s assessors magically converted raw land that was worth $205,000 for tax purposes in 2005 into 41 fully taxable condominium units worth more than $1.3 million in 2006, all without anyone going to the trouble or expense of actually creating the units. The controversy then became a dispute over which party was liable for the taxes on the units, which, of course, could not actually be sold for anything like $1.3 million, because those units did not exist.
The town’s faulty argument is, in effect, that the land should be taxed based on its potential to be valuable someday, rather than on its actual value today. The state Supreme Court compounded the error by declaring that liability for the tax should fall, not on the actual owner of the property at issue — the condo association — but on the developer who might someday profit from the potential value, should that value ever be realized.
The court theorized that ruling for the developer in this case would mean that with “clever use of definitions in a condominium declaration a developer could avoid paying taxes on a share of the common elements, or that the developer could avoid taxes altogether by never constructing a unit.” That is, if property never exists, the developer could avoid paying the attendant property tax. This sounds suspiciously like common sense.
After all, a property tax is supposed to tax property. Not future property, or “maybe someday” property. Due to the nature of condominiums, the developer had to file a condominium declaration and a plat that listed the planned units as transferable real estate, for any condos to exist at all. Taking such action in Wisconsin, however, now means that those hypothetical units can have a real and immediate impact on the tax rolls.
If any future condominiums get built in the Badger State, I would expect the developer’s condominium declaration to make it crystal clear that the homeowners’ association accepts liability for any taxes on unbuilt units. Which is why, in the end, the Wisconsin Supreme Court’s effort to protect unit owners from exorbitant expenses probably is not going to make a huge difference in the long run. If localities want to have condominiums, they are going to have to treat them as part of the real world.
The problem with castles in the air is that you can’t live in one.