• Community Association Commercial Space Escapes Real Estate Taxes
  • May 15, 2003
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • A recent case shows how a restaurant and real estate office operated by business entities in two buildings can escape real estate taxation. In the case of Saw Creek Estates Community Association, Inc. v. County of Pike, PICS Case No. 02-1525 (Pa. Commw. Oct. 4, 2002), the Pennsylvania Commonwealth Court held that those businesses were "exempt" from a separate tax under the Uniform Planned Community Act ("Act"). In that case the Commonwealth Court reversed a decision of the trial court which had supported the Board-of-Assessment-Appeals assessment on the restaurant of $142,000, and on the real-estate office building of $33,000.

    The Saw Creek Estates Community Association is a not-for-profit corporation organized by property owners of a planned community established under the Act. The Association owns the common areas of Saw Creek, including a water tower, a well house, roads, ponds, green areas, clubhouses, other recreational amenities and the Association office.

    For Profit

    The restaurant, known as "The Top of the World," occupies a portion of the community building which also contains recreational facilities used by the residents, including an indoor pool, indoor tennis courts, indoor racquetball courts, a weightlifting facility and a meeting room. The restaurant is operated for profit by a business entity under a concession agreement with the Association. Under the terms of this agreement, the operator of the restaurant is responsible for all operating expenses and pays the Association a monthly rent of $1,000. The Association, however, owns the restaurant liquor license and distributes alcoholic beverages to the restaurant. The restaurant is primarily patronized by Saw Creek residents, who receive a ten percent discount on meals and purchases.

    The other assessed property, the real estate office, occupies a one-story building located about a half mile from the main entrance to Saw Creek, and is operated as a business entity known as "Community Real Estate Services." Under its lease the tenant pays the Association, as yearly rent, ten percent of the gross commissions generated by sales of real estate, contracts for new home construction, and for renovation, alteration and repair of existing homes. However, that annual rent is not permitted to be less than $24,000 or more than $50,000. While the real estate office is open to the public, it handles only the properties within Saw Creek.

    "Common Facilities"

    Under the Act, each home unit in the Association must be separately taxed and assessed, and the value of that unit must include the value of the units' "appurtenant interest in the common facilities." On the other hand, no separate assessed values may be attributed to, and no tax imposed against, "common or controlled facilities."

    The Act defines "common facilities" as:

    "Any real estate within a planned community which is owned by the association or leased to the association. The term does not include a unit."

    A "unit" is in turn defined as "[a] physical portion of the planned community designated for separate ownership or occupancy, the boundaries of which are described pursuant to Section 5205(5) (relating to contents of declaration; all planned communities) and a portion of which may be designated by the declaration as part of the controlled facility."

    Judge Charles Mararchi, Jr., writing for the Commonwealth Court, found the Act's definition of common facilities "unambiguous." He held:

    "The record in this matter establishes that the unit owners have the appurtenant interests in the common facilities of the restaurant and the real estate office serving the convenience of the Association members. While it is open to the public, the restaurant primarily serves the Saw Creek residents who receive a ten percent (10%) discount. The real estate offices' activities involve only the properties in Saw Creek. Certainly, the rent paid by the operators of the restaurant and the real estate office also benefits the Association and its members by reducing the Association's expenses. Under the statutory scheme adopted in Section 5105(b) of the Act, the value of such appurtenant interests in the common facilities are included in a separately assessed value of each unit, and the common facilities are consequently not separately assessed and taxed."

    Tax Principles

    Further, he rejected the contention of the Board of Assessment Appeals that under general principles of tax assessment law, the use or occupancy of the property, not the ownership, should be a controlling factor in determining whether the properties are entitled to tax exemption. He also rejected the Board's position that the properties should not be exempt because they were operated by business entities for profit, not for the Association's members' free, unfettered use.

    Mararchi's decision seems to support the Act's intent to tax these types of facilities by adding a pro rata portion of their value when assessing each individual unit owner. In effect, the value of each home unit should be increased by the value and income of the restaurant in the community building and the real estate office, in the same way as it should be increased by the commonly owned pools, courts, weightlifting facilities and meeting room.

    It seems that in the long run the assessor's office will make up the challenged taxes on the common facilities by collecting them from the individual owners. However, since it is probably too late to reassess those owners for the applicable tax year of 2000, the Association and its members have apparently achieved a tax break for that year.

    It is noteworthy that the Pennsylvania Condominium Act provides for a comparable taxing scheme, which excludes common areas from taxation. It would seem, therefore, that the Saw Creek decision could also serve as precedent for excluding condominium common areas under the Condominium Act.