$11.3 Million in Property Taxes? Not Yet!

The long awaited ruling on Balfour Beatty’s $ 11.3 Million property tax suit is finally in.  Judge Audlin ruled in favor of the giant British conglomerate’s subsidiary, Southeast Housing LLC.  The company has not paid any property taxes on hundreds of units of privatized military housing it has owned in Key West since 2007. The ruling grants the company a full and retroactive property tax exemption.  The Order was immediately appealed by Monroe County’s property appraiser Scott Russel.

In sum, Audlin’s ruling states that:

1. Back taxes are not permitted where the property appraiser had changed his mind after informally granting an opinion on future exemption status in 2007.
2. Federal and State law prohibit taxation of US government owned property.
3. Even if Southeast Housing LLC is the titled owner of some 890 units of housing in Key West, the true owner for tax purposes is the US government, which is tax exempt.

The Judge concludes that the county and city must reimburse Southeast Housing for taxes previously paid “under protest” for the Peary Court property last year just prior to its sale and that the company should enjoy a full tax exemption going forward.

“We are highly disappointed,” said Property Appraiser Scott Russel. At press time the property appraiser’s attorney, John Dent, had already filed a Notice of Appeal to the 3^rd District Court of Appeal in Miami.  “I still believe we are right and I believe we will win on appeal. We knew this was not going to be the end of it.  This is such an important case.  The losing party was likely going to appeal,” says John Dent.

In 2007, the Navy discreetly transferred all 890 of its NAS Key West family housing units to a private company, Southeast Housing LLC, pursuant to a contract with Balfour Beatty [formerly GMH Housing].   Balfour Beatty was contracted to renovate, maintain and build new family housing for active-duty personnel as well as civilians [which would help the enterprise maintain profitability].

Five years later, the property appraiser realized that he should have been taxing those privately owned units all along and claimed $ 11.3 Million in back taxes and penalties, placing liens on all 890 units.  Balfour Beatty filed suit.

And the battle rages on.  After being exposed in 2012 for its failure to pay property taxes in Monroe County and elsewhere, Balfour Beatty went on a multi directional offensive. The main effort was concentrated on a proposed retroactive full tax exemption in the Florida legislature. The legislative bills seeking a full exemption turned into a compromise supported by State Representative Holly Raschein. The amended version would have made the company liable for taxes only for those units it rented to non active-duty tenants.  The unofficial number of civilian units at one point, as shown in this NAS Key West document, was as high as 40% of then existing units. Balfour Beatty lobbied Governor Scott to veto the amended version of the bill which would have generated millions of dollars in ad valorem taxes not just in Monroe County, but all over Florida, where private companies managed by Balfour Beatty and other military housing contractors own thousands of units including luxury hotels on military land.

Audlin’s March 31^st decision and the resulting loss of over $ 11 million in back taxes as well as many more millions into the future is bad news for Monroe County, the City of Key West, and especially for the School District, which is one of the principal recipients of property taxes.

From a journalistic point of view there’s a strange contradiction between the Judge’s tax exemption ruling and the rhetoric that has been used by the Department of Defense to promote the Military Housing Privatization Initiative (MHPI).  Top-brass military personnel including Rame Henstreet, then commanding officer of the Naval Facilities Engineering Command Midwest, expressed that deficiencies in local property tax revenue was one of the issues that privatization of military housing was meant to resolve.  “One Navy housing plan,” said Henstreet [to The Chicago Tribune in 2005] “includes a way to generate property taxes for communities and schools by allowing a developer to replace the homes, then lease them back to the military.  The home would be taxable, but not the land, which would still belong to the military.”

One of the goals of MHPI was to address the fact that school children in and around military bases often end up in underfunded schools because the very military housing properties where they live with their families are tax exempt as government owned property and therefore do not contribute to school funding.   Transferring the housing units to a private company was going to bring military housing into the tax base.

The problems associated with lack of funding for schools in communities hosting military bases is not a concern reserved for civilians.  The National Military Family Association (NMFA) explains, “the presence of a federal military activity in a school district increases enrollment, yet it reduces the tax base by removing property from the tax rolls.”

As a matter of fact, the US Navy’s solicitation to interested private military housing contractors that led to this particular privatization deal stated:  “Assume that full property taxes will be assessed on all privatized homes.” So, how did privatization of local military housing go from joining the tax base to Judge Audlin’s tax exemption ruling?

Balfour Beatty is a huge company with tentacles all over the globe.  It has navigated all waters including troubled ones.  Balfour knows how to handle local property appraisers.  Balfour Beatty hired a team of top-notch attorneys and played a few tricks.

Trick #1:

Back in 2007, Balfour’s partner GMH Housing got the Monroe County property appraiser’s office to sign a letter saying they would be entitled to a tax exemption. But the letter was based on misleading information.

This was the May 15, 2007 opinion letter signed by Karl Borglum, then assistant property appraiser, that Judge Audlin found binding on the current property appraiser, Scott Russel.  Indeed Balfour’s attorneys had given Borglum an 80-page brief containing a legal analysis as to why the privatized housing here in Key West should remain tax-exempt.  It disclosed everything about the project…

Everything but one little secret.  And that secret was, that contrary to what was implied in the legal brief – none of the Naval housing properties here in Key West was within a federal enclave.  This detail was essential because Southeast’s privately owned housing units would have been automatically exempt from property taxes had they been situated in an area within exclusive federal jurisdiction.

In fact, all of the old federal enclaves in Key West had been retroceded to Florida’s jurisdiction back in 1991.  In other words, when Balfour’s attorneys were explaining things to Borglum there was no longer a mandatory tax exemption for any privately owned real estate inside places like Peary Court or Sigsbee.  But this was a well-kept secret.

In 2012 The Blue Paper gave Borglum documentation showing that Navy housing properties in Key West were no longer subject to exclusive federal jurisdiction. Armed with this newfound proof of Balfour Beatty’s apparent deception about jurisdictional status, Borglum bravely charged into Balfour/Southeast’s housing projects and appraised every building, claiming $ 11.3 Million in back taxes for the County, the City, and the School District.

But Judge Audlin ruled that Borglum’s new stance was a change in his reading of the law not a change in his knowledge of the facts, which would preclude an assessment of back taxes.   We here at The Blue Paper, who dug up those facts in dusty state archives, beg to differ.

Trick #2  Legal Smoke and Mirrors

Balfour’s attorneys cited four individual state and federal laws they argue require exemption from local property taxes.   But one doesn’t need to be a lawyer to see that each refers to property that is owned by the federal government or situated in an area that has exclusive federal jurisdiction.

Monroe County’s property appraiser is targeting only the privately owned structures, as much as 40% of which have been shown to have been rented to civilians in the past.  There has never been an attempt to tax either the company’s leasehold interest or the land beneath those homes.

“Far be it for this Court to presume that such military housing should be taxable, when the United States Congress has expressly not consented to such taxation,” Audlin states in his ruling.

However, federal law clearly considers Balfour Beatty and Southeast Housing as taxable entities:  Balfour’s attorneys admitted during the trial that the IRS does not consider Southeast Housing a tax-exempt entity nor does it consider the bonds used to finance the company’s for-profit enterprise as tax exempt.

Trick #3:  Poor Little Balfour Beatty

Finally, Judge Audlin found that it would be unfair to collect property taxes on the 890 units owned by Southeast Housing in Key West because, arguably, the true “beneficial owner” of those properties is, in fact, the Navy itself.

But the Navy doesn’t seem to agree.  Base Commanders across the southeast region who have dealt directly with Balfour have not exactly portrayed the Navy as a major “beneficiary” in their partnership with the British conglomerate.

Quite the contrary.  Emails obtained by The Blue Paper show Naval headquarters in Washington reporting on conversations with then NAS Key West Commander Holmes about Balfour’s request to sell Peary Court and reduce the number of improvements they would be required to furnish to Navy families in the deal:

“NAS Key West feels they are the dog end of PPV [Public/Private Venture] … He believes we are past the point of trumpeting the benefits of PPV.”

CO Holmes wrote directly to the Southeast Regional Commander Richard Wolff,

“…the bottom line is that I think the military members are going to continue to get the short end of the stick in this deal when the entire project was put together to improve quality of life in our housing areas.”

“I really think we are opening ourselves up for punishment by putting the property on the open market and giving proceeds to the partner [Balfour],” wrote then CO Bowman, of the Mayport base in Jacksonville, “… the US Navy seems way too eager to jump in head first and bailout the partner by giving up valuable and desirable property, reducing requirements in renovations, losing community centers, etc.”

In fact, Balfour’s Southeast Housing [which Judge Audlin ruled is not the true “beneficial owner” of the real estate in question] borrowed over one-half billion dollars using those homes as collateral and paid itself [Balfour] (apparently too much – according to a Moody’s security analyst report) to carry out the demolition and reconstruction project.

“The Navy,” notes the Judge in his ruling, “contributed 90% of the capital for this project.”  Now that could have been the beginnings of a good reason for the exemption  – if only it were true.

However, the MHPI [Military Housing Privatization Initiative] unequivocally prohibits the Navy from having a majority stake in the company.  The maximum investment the Navy is allowed to maintain in Southeast Housing LLC, under federal law, is 45%.  In other words, the Navy must remain a minority stakeholder in the partnership.

Balfour Beatty’s Southeast Housing is clearly competing with other landlords for non active-duty tenants, they receive government BAH subsidies that are reserved by law for private sector landlords, they borrowed one-half billion dollars using the privatized housing units ‘they don’t own’ as collateral, and yet the Judge felt it would be unfair to have them pay property taxes.

So how did it come to this?

Just one day short of April’s Fool’s Day, Judge Audlin picked up the proposed order written by Balfour’s attorneys, accepted it all, lock, stock, and barrel, and without correcting the facts, even leaving intact the sentence, “Far be it for this Court to presume that such military housing should be taxable” that was written by Balfour’s attorneys, signed on the line at the bottom of the page.