St. Clair Cnty. v. Scott Air Force Base Props., LLC
| Decision Date | 13 February 2014 |
| Docket Number | NO. 5-12-0570,5-12-0570 |
| Citation | 2014 IL App (5th) 120570 |
| Parties | ST. CLAIR COUNTY, ILLINOIS, Plaintiff-Appellee, v. SCOTT AIR FORCE BASE PROPERTIES, LLC, Defendant-Appellant (The Department of Revenue and Brian Hamer, as Director of Revenue, Defendants). |
| Court | United States Appellate Court of Illinois |
Appeal from the
Circuit Court of
St. Clair County.
Judge, presiding.
¶ 1 Held: Administrative agency decision finding an agreement constituted a license, rather than a lease, was erroneous where the agreement fit within the statutory definition of a PPV military public/private residential development lease.
¶ 2 The instant case involves a series of agreements under the Military Housing Privatization Initiative (MHPI) (10 U.S.C. §§ 2871-85 (2006)). Pursuant to those agreements, the Air Force leased a portion of Scott Air Force Base to defendant Scott Air Force Base Properties, LLC (SAFBP), and conveyed title to the improvements on that landto SAFBP by quitclaim deed. The agreements called for the defendant to renovate existing housing units, build additional units, and manage the housing units as rental property, to be leased primarily to military members assigned to Scott Air Force Base. The defendant filed property tax exemption applications based on the federal government's ownership of the underlying ground. See 35 ILCS 200/15-50 (West 2006). The applications were initially denied; however, a final administrative decision by the Illinois Department of Revenue found that the property was tax-exempt. On administrative review, that decision was reversed by the circuit court of St. Clair County. At issue in those proceedings was whether the defendant's interest in the property constituted a true leasehold or merely a license in the property. See 35 ILCS 200/9-195 (West 2006). The defendant appeals, arguing that the administrative agency correctly determined that it held only a license because the Air Force retained control over the leased property. We affirm the decision of the circuit court.
¶ 3 The MHPI was established as part of the 1996 Defense Authorization Act. Bessinger v. United States, 448 F. Supp. 2d 684, 686 (D. S.C. 2006); see 10 U.S.C. §§ 2871-85 (2006). The purpose of the MHPI is to give the military tools to " 'upgrade military housing on an accelerated basis' " through agreements with private entities. Bessinger, 448 F. Supp. 2d at 686-87 (quoting 141 Cong. Rec. S18853). The MHPI gives the Department of Defense authority to enter into several different types of agreements with private entities to achieve this goal. Bessinger, 448 F. Supp. 2d at 687. In general,these agreements give the private entities income-earning opportunities or money-saving benefits in exchange for providing housing and related services for military personnel. Bessinger, 448 F. Supp. 2d at 686-87. In relevant part, it gives the Department of Defense authority to convey or lease military facilities to private entities for these purposes. Bessinger, 448 F. Supp. 2d at 687; see 10 U.S.C. § 2878 (2006).
¶ 4 Pursuant to the MHPI, the Air Force issued a request for proposals (RFP) to renovate existing housing units on Scott Air Force Base, build additional units, and provide property management services for the project. In addition, because the need for housing exceeded the space available on the base, the RFP required bidders to bring additional property to the project. The additional land was needed in order to provide sufficient housing at the desired density. The RFP specifically stated that bidders should assume that their interest in the project would be subject to state and local property tax and that the lessee would be responsible for any such taxes assessed. Bidders were therefore required to take state and local property tax into account in preparing their financial projections.
¶ 5 The defendant was the successful bidder. On January 1, 2006, the parties executed several documents. One of those was a ground lease, under which eight parcels on Scott Air Force Base were leased to the defendant. Seven of the parcels contain housing units, and the eighth parcel contains a maintenance facility. The lease transferred possession of the eight parcels to the defendant, effective January 1, 2006. The term of the lease is for 50 years, with the exception of two parcels, which have shorter lease periods.
¶ 6 The lease contains a provision noting that the improvements on the parcels were conveyed to the lessee by a quitclaim deed, but it defines the "leased premises" to includeboth the land subject to the lease and the improvements conveyed separately. Condition 6.1 provides that the "sole purpose" for which the leased premises are to be used is the "design, demolition, construction, renovation, operation[,] and maintenance of a rental housing development *** primarily for use by military personnel and their dependants authorized to live on Scott Air Force Base." Other conditions of the lease provide that the relationship between the parties is "understood and agreed" to be that of landlord and tenant, and that the lessee is to pay any taxes as they became due.
¶ 7 An operating agreement was signed by the parties and incorporated into the lease. That agreement provides that housing units may only be offered to "target tenants" unless occupancy falls below 95%. Target tenants include personnel designated by the wing commander of Scott Air Force Base as "key and essential" and military members with dependants who are eligible for family housing on Scott Air Force Base. If occupancy falls below 95%, units may be offered to single military members, "geographically single" members (that is, military members whose families do not reside with them), and civilian employees of Scott Air Force Base.
¶ 8 On the same day, the parties executed a quitclaim deed conveying the housing units and "ancillary improvements" on the leased parcels to the defendant, along with any personal property included in the improvements. The deed did not convey any interest in the underlying ground. The deed includes a provision noting that it is subject to the conditions of the lease. The deed further provides that title to the improvements will revert to the federal government at the end of the 50-year lease period. Significantly, the deed contains a notation that future tax bills are to be sent to the defendant.
¶ 9 In addition, the parties signed a lock box agreement. The lock box agreement set up several accounts, including an "Imposition Reserve Account." Funds from that account are to be used for paying insurance premiums and property taxes.
¶ 10 On February 25, 2008, the defendant filed applications for property tax exemptions with the St. Clair County Board of Review. On July 10, 2008, the applications were denied. The defendant filed a protest to this decision and requested a hearing before the Administrative Hearings Division of the Illinois Department of Revenue. St. Clair County intervened in the proceedings.
¶ 11 In January 2010, the matter came for a hearing before Administrative Law Judge (ALJ) Kenneth Galvin. At the hearing, Robin Vaughn testified on behalf of the defendant. Vaughn is the executive vice president of the Hunt Development Group, which owns one of the entities that owns defendant SAFBP. Vaughn testified that his company's core business is constructing housing on military bases. He testified that SAFBP is a for-profit entity that was organized specifically for this project. He further testified that all of the related entities involved are also for-profit businesses. Vaughn acknowledged that the RFP expressly required bidders to take into account property taxes when preparing their financial projections, and he acknowledged that the defendant did, in fact, take the tax into account when preparing the financial projections in its bid.
¶ 12 Vaughn described the MHPI bidding process. He explained that a bid has three components-the financial projections, the property management and operations component, and the design and construction component. He further testified that bidding often involves a two-step process. In the first step of that process, the bidders mustdemonstrate that they have both the financial ability and the expertise necessary to complete the project. The second step allows qualified bidders to put forth their actual proposals.
¶ 13 Vaughn acknowledged that numerous provisions of the lease and associated agreements address payment of taxes by the successful bidder. For example, condition 8.1 of the lease provides that the lessee is responsible for paying property tax on the project. In addition, the restrictive covenants and use agreement both specify that the project owner is responsible for paying the property taxes. The restrictive covenants define the project owner as the defendant.
¶ 14 Vaughn testified that the private parcel SAFBP was required to bring to the project includes 381 housing units. He acknowledged that these units are subject to the same rules as the housing units located on the base. He testified, however, that SAFBP did not even apply for a tax exemption for that parcel.
¶ 15 Paula Baker, SAFBP's community director, testified in more detail regarding the restrictions imposed on the management of the property by the various agreements. She explained how the requirement of renting to target tenants works. As previously noted, target tenants are people who are required to live on the base because they have been designated "key and essential" and active duty military members with families. Other eligible tenants include single military members assigned to Scott Air...
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