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A tale of commercial development and PILOTs gone awry p4

5/22/2014 | Real Estate Blog

We are wrapping up our discussion of a case involving payments in lieu of taxes. The original agreement was between a developer whose property straddled the border between two towns and one of those towns. The developer agreed to the PILOTs in return for having access to the town’s public sewer system.

The property changed hands over the years, but the purchasers were apparently not aware of the agreement. It would not have shown up in a title search, and it seems that neither the developer nor the city made a point to bring it to the buyers’ attention. As a result, the owners continued to make the monthly payments but listed them as fees.

A couple of years ago, an employee of the new owner contacted the city to clarify the payments. The mayor wrote back, enclosing a copy of the original agreement and demanding nearly half a million dollars.

The money, the mayor explained, was to cover annual Consumer Price Index adjustments to the payments, a provision included in the original contract (see our May 17 post). Somehow, the CPI increase had not been applied for eight years. The property owner had 30 days to pay, the mayor said, or the city would cut off sewer services to the development.

The parties negotiated and then went to trial. The city asserted that the payments constituted a valid PILOT. The property owner responded that the city was imposing an illegal tax or fee. The court agreed with the company — at least, in part.

The court cast the agreement in a slightly different light. The payments, the judge wrote, were supposed to take the place of what the city would have collected in taxes if the entire property had been located there. In fact, he continued, “the city lacks authority to tax hypothetical property.”

For the court, the payments were not real estate taxes, but neither were they user fees or connection fees for sewer services. In reality, the company, the judge concluded, received nothing for its money.

The company will not be making any more payments, but it may not be getting its money back, either. The court pointed out that those payments may have been the result of the company’s “negligent inattention” to its own records.

Source: Wicked Local Marlborough, “Judge tells Marlborough: ‘In lieu of taxes’ payments were ‘illegal’,” Kendall Hatch (Daily News), May. 9, 2014