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by Arnaud and Naja Girard…….

A few months back The Blue Paper discovered an infamous loophole by which the City of Key West rewards illegal vacation rental owners with transient rental licenses. This week a closer look at Monroe County’s property taxes revealed another troubling disparity: Some property owners have maneuvered to pay up to nearly 10 times less in property taxes than other owners of comparable properties.

This loophole is called the “income approach” and as you’re going to see, it’s made some very rich people even richer. But if Commissioner Romero has her way, it could also become one of the strongest tools used to fight Key West’s housing crisis.

Under the income approach taxable value is determined by measuring the amount of income generated by a property (rather than the actual real estate market value) “I’ve been speaking with Property Appraiser, Scott Russel and State Representative Holly Raschein,” Commissioner Romero told The Blue Paper, “The goal is to create a tax incentive for long-term workforce rental housing using the income approach.”   The property assessment method is already in use in Key West and it does result in considerably lower property taxes but, not surprisingly, it has thus far favored only the biggest property owners and the most lucrative transient rentals.

Here’s what we found:

Most of the big hotels on the island, like the Casa Marina, don’t pay property taxes based on the market value of their waterfront property. They pay in proportion to their profits. That is the “income approach. No special legislation is required. The decision to use the income approach rather than looking to comparable sales [real estate market value] is left to the discretion of the property appraiser.

For instance, in 2000 when the Walsh family, owners of Ocean Properties Hotel Resorts, was hit with a property tax hike for their 32 luxury waterfront cottages on Sunset Key they sued the Property Appraiser to force him to assess their properties under the income approach. Irwin Higgs, the Property Appraiser at the time, finally settled for an income approach assessment, but complained that the Walshes had been refusing to disclose how much money they were actually making on Sunset Key. Propert values are currently appraised as low as $75 per square foot for the land beneath their $800/night waterfront cottages, while other homeowners on the exclusive offshore island pay on the basis of as much as $600 land value per square foot.

Similarly, over at Sunset Marina on Stock Island the property appraisal method was switched to the income approach after attorney Barton Smith became the new owner in 2013 and filed a petition challenging his assessment.  The taxes were reduced from $67,000 in 2012 to $30,000. Interestingly only Mr. Smith’s slips were devalued. The other individual slip owners in the “dockominium” kept paying the full rate. When The Blue Paper looked into this disparity it was discovered that the methodology used to assign new values to Smith’s properties was, in part, contrary to Florida Statute.

A few weeks later the Property Appraiser informed Mr. Smith that he was discontinuing the use of the income approach for Smith’s properties. Yet Mr. Smith is still going to pay more than 50% less in taxes* on those 31 slips than other individual slip owners. Indeed, even though the income approach value was admittedly excessively low, the law allows the taxable value to increase only at the rate of 10% per year.* It could take as many as 10 years for Mr. Smith to begin paying the same amount of taxes as his neighbors. Smith filed a petition with the Value Adjustment Board last week, challenging the Property Appraiser’s decision.

Clearly the tax code allows for a lot of flexibility. The burning question is why, in Key West, with its overheated economy, are property tax assessments favoring the most lucrative activities and most affluent citizens and not the embattled and desperately needed long-term rentals?

“I am told that it’s possible,” says Commissioner Margaret Romero, “But that there would be a need for some legislation. I’d like to see the Property Appraiser begin to assess rental property that voluntarily provides workforce housing at prices that are within the affordable housing guidelines under the income approach rather than on the basis of the ever-rising real estate market.” She suggests that the incentive should only apply to owners who sign a minimum one-year lease.

Commissioner Romero is also exploring the possibility of extending the homestead exemption to affordable workforce rentals. The owners of the badly needed long-term rental properties are stuck between a rock and a hard place: Assessments for single-family homes that are owner-occupied are capped at 3% increase per year, but long-term rental property owners are only protected from skyrocketing real estate market sales by a 10% cap on annual increases. “I think that if you’re providing long–term housing to local workers at affordable prices then your property should be protected by that same 3% cap,” says Commissioner Romero.

Let’s see where this goes. Stay tuned.


* The 10% cap on increase in assessed value applies to all property taxes except for School taxes.


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