Most multifamily owners are familiar with reserve requirements
for items such as fire alarms and alarm replacement. Yet those
owners may be surprised to learn that complying with the latest
fire code changes can jeopardize statutory caps on property tax
increases. In fact, recent changes to the International Fire Code
(IFC) could substantially increase fire safety requirements, trigger loan defaults and escalate repair and property tax costs for
apartment owners.
By their nature, apartment buildings are not, and cannot
be, constructed to meet future unanticipated building code requirements. In many
jurisdictions, property owners know that if
their building suffers more than a
50% loss, they will
be required to satisfy new code requirements during reconstruction. However, few
owners expect to be saddled with retroactive application of new code requirements
even if there is not a casualty.
The IFC provides a comprehensive regulatory framework of
code templates setting minimum standards aimed at both safeguarding buildings from fires and protecting building occupants when fires occur. Among other things, the IFC addresses
the installation and maintenance of automatic fire alarm and
sprinkler systems and fire safety requirements for new and existing buildings.
States and local jurisdictions are often slow to adopt and
apply the latest building codes to existing properties. So while
the 2015 version of the IFC has been published, many state and
local governments are still coming to grips with the 2009 version, which incorporated retroactive requirements regarding
the installation of fire alarms into existing buildings. For property owners, significant concerns arise when governmental officials adopt an IFC version that retroactively imposes new
requirements.
For example, the 2009 IFC included several potentially
expensive retrofit requirements for existing buildings. Chapter
46 of the IFC recommended the installation of smoke detectors in each bedroom for existing structures. For buildings
that are more than three stories high or contain more than 16
multifamily units, the IFC imposes retroactive requirements,
including installing manual or automatic fire alarm notification systems; installing audible fire alarms in each unit; and
wiring all units to ensure visual fire alarms may be installed for
the hearing impaired.
Retroactive application of new requirements creates issues
for owners of existing properties. Modifications to meet new
regulations for existing buildings can cost thousands of dollars
per unit, and failure to make required upgrades can have serious consequences, including fines, possible insurance and liability problems not to mention that violation of local building
codes generally constitutes an event of default under standard
loan documents such as the Freddie Mac form loan agreement.
Moreover, the capital reserves that most permanent lenders
require borrowers to maintain for building maintenance are
seldom adequate to fund fire-safety retrofits, since borrowers
and lenders could not reasonably anticipate the nature and cost
of these improvements when establishing reserves. Most apart-
ment complexes are owned by single purpose entities. Their
loan documents strictly limit obtaining new loans. If cash flow is
tight, these owners face financial challenges in funding retroac-
tive code-mandated improvements.
Increases in property taxes represent an additional hidden
risk to property owners in jurisdictions where statutory caps
limit property tax increases,
such as Florida and South
Carolina. Caps limit
increases in taxable value for
properties subject to reas-
sessment that would other-
wise rise to reflect the mar-
ket. Florida, for example,
generally limits annual
increases in taxable value to
10% of the prior year’s assess-
ment. South Carolina limits
increases to 15% of the prop-
erty’s prior assessed value
unless there has been a prop-
erty improvement, owner-
ship change, or assessable
transfer of interest.
Caps can be removed if an
existing project undergoes
renovations, adding a sub-
stantially heavier tax burden
atop the renovation expense.
For that reason, property
owners who are required to
make IFC-mandated improvements must determine whether
the renovated properties will run afoul of the statutory cap limi-
tations, and prepare accordingly.
There is no problem in California where the law protects
properties from reassessment unless renovations make the
property “substantially equivalent to new.”
IFC compliance measures are more likely to jeopardize
assessment caps in states such as South Carolina where state
law requires taxing authorities to include the value of new con-
struction when valuing properties. South Carolina excludes
minor construction or repairs from taxation, but does not
define these terms and interpretation is often left to local tax-
ing authorities.
No one advocates ignoring fire safety, but multifamily owners
must investigate all potential costs—both obvious and hidden—
of bringing their properties into compliance.
Morris A. Ellison, Esq., is a partner in the Charleston, SC office of the
law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South
Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at mellison@wcsr.com.
The views expressed here are the author’s own.
By Morris A. Ellison
Sounding the Alarm on Code Compliance Costs
Although the 2015
version of the
International Fire
Code has been
published, many
state and local
governments are still
coming to grips with
the 2009 version of
the code.
TAX MATTERS
