Aug. 31, 2009 – A divided Wisconsin Court of Appeals held on Aug. 27 that vacant land reserved for further development of a condominium project is taxed to the owners of existing condo units, not the developer.

The court concluded in The Saddle Ridge Corp. v. Board of Review for Town of Pacific, 2007AP2886, that undeveloped land is the condominium project’s “common element” of which the existing units’ owners possess an undivided interest. The built unit, plus a percentage of ownership in the “common element,” comprises the taxable parcel.

In dissent, presiding Judge Charles Dykman warned that the court’s decision permits developers to shift its real estate taxes to others, but also allows them to avoid property taxes from the time they form a condominium until the time the first structure is built.

Review of an assessment

Although most units were completed and sold to individuals, land within Saddle Ridge’s condominium project remained for 41 declared, but unbuilt, units. The Town of Pacific notified Saddle Ridge that it would assess the undeveloped land as 41 separate “tax parcels” belonging to the developer.

On appeal to the Board of Review for the Town of Pacific, Saddle Ridge argued that it did not own the vacant land under the terms of the condominium declarations. Rather, the developer asserted, the individual owners of the built units were the proper owners.

But the Board of Review upheld the assessments, contending that Saddle Ridge had beneficial ownership of the land.

Saddle Ridge successfully appealed to the circuit court which agreed that the condominium declarations assigned ownership of the unbuilt units to the individual owners of the completed units.

Declarations control

In a majority opinion by Judge Paul Higginbotham, the court held that the beneficial ownership test did not apply in the context of a condominium development’s declarations.

“Courts have traditionally applied the so-called beneficial ownership test when a tax exempt entity such as a public university or municipality holds paper title to a property but has transferred at least some of the sticks in the proverbial bundle of rights to a taxable entity,” the court explained.

“We conclude that imposing a common law test of ownership for tax assessment purposes would be inappropriate in the condominium context because the legislature has adopted a comprehensive statutory scheme that addresses condominium ownership rights,” the court said, referring to the Condominium Ownership Act found in chapter 703 of the Wisconsin statutes.

The court explained that the statutory scheme “explicitly provides that ownership of the type of property at issue here – a common element of the condominium – is determined under the terms of the declaration creating the condominium, and further provides that taxation of common elements is based on the ownership arrangement established in the declaration.”

Vacant land is a common element

Under state law, a condominium is established by recording a condominium declaration and plat with the register of deeds where the property is located, the court explained. The Condominium Ownership Act then creates two specific ownership forms: the “unit” and the “common elements.”

The court explained that a “unit” is a part of the condominium intended for any type of independent use. The “common elements” are all of a condominium other than its units, the court said.

“In light of the statutory definitions of ‘unit’ and ‘common elements,’ we observe that the vacant land reserved for development here is plainly a common element of the condominiums,” the court said.

The court then went on to explain that every unit owner holds an “undivided interest” in the common elements equal to that set forth in the condominium declaration, pursuant to Wis. Stat. § 703.13 (1). Wis. Stat. § 703.09 (1)(e) instructs that the condominium declaration sets forth the percentage interest in the common elements for each unit.

“A unit, together with its undivided interest in the common elements, constitutes real property,” the court wrote, citing § 703.21 (1). Accordingly, each unit and its percentage of the undivided interest in the common elements constitute a separate parcel for assessment and taxation purposes, the court explained.

The court then analyzed the Saddle Ridge declarations that divide the common interest among the built units. “Thus, under the condominium declarations, once one or more units are built, the unbuilt units do not possess any appurtenant interest in the common elements of the condominiums,” the court found.

“Because Saddle Ridge, as owner of the rights to develop the unbuilt units, does not own any part of the condominiums’ common elements, including the land reserved for development, Saddle Ridge is not assessable for the land in question, except for its ownership share of the land as an owner of unsold built or partially built units,” the court concluded.

Misunderstood the issue?

Writing in dissent, Dykman argued that the majority had missed the real issue. “[T]he threshold question is not who owns the common elements; rather the question is what are the taxable parcels,” he wrote.

Answering his own question, Dykman said that the declared, but unbuilt, unit is a statutory “unit,” creating a “parcel” subject to assessment and taxation.

“One reason that declared but unbuilt units must be ‘units’ that establish parcels subject to taxation is that the majority’s result leads to this: When a condominium is ‘born’ by recording a declaration and plat (as Saddle Ridge did), there is nothing to tax because until something gets built, no units exist,” Dykman wrote.

“This is far from a speculative problem,” Dykman added. He noted testimony in this case that a municipality might have to wait for 12 to 15 years before something is finally built, enabling a developer to avoid real estate taxes for that length of time.

“If the majority is correct, Saddle Ridge has found the Holy Grail of real estate taxation,” Dykman said. “Not only can Saddle Ridge transfer its real estate taxes to others, it can avoid property taxes entirely, from the time it or any landowner forms a condominium until the time the first structure is built in the condominium.”