The “general rule with regard to
determining value of real property (in order to calculate real estate taxes) is
that the purchase price at a recent (within 3 years) “arms length sale” of the
property between a willing buyer and willing seller is dispositive. What better indication of value than the
price someone is willing to pay and actually pays for the property? Of course,
there are exceptions to every rule, but the recent decision of the Supreme
Court of Ohio in Warrensville Hts. City
School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, Slip Opinion No.
2016-Ohio-78 is more clarification than exception.
In Warrensville Hts., the Board of Education of Warrensville Heights
City School District (“Board of Education”) appealed from a decision of the
Board of Tax Appeals (“BTA”) finding the tax year 2010 value of Thistledown
Racetrack in Cuyahoga County to be $13,800,000, not the $43,000,000 purchase
price at a bankruptcy sale six months after the tax-lien date. According to the BTA (affirmed by the
Ohio Supreme Court), “sales conducted under supervision of a court
order are forced sales which are not indicative of true value.”
The facts of this case are simple enough (the
ruling, not so much, in spite of first impressions). The subject property is
Thistledown Racetrack, a thoroughbred-racing facility on 128 acres of land, located
in Cuyahoga County, aka the home of the Ohio Derby. In 2009, the owner of the
property petitioned for Chapter 11 bankruptcy relief and received authority to
sell the racetrack at auction. Harrah’s Ohio Acquisition Company, L.L.C.
(“Harrah’s), submitted the best and highest offer, however, a condition to the
sale did not occur, which prompted a second auction. At the second auction (in
2010), Harrah’s again submitted the winning bid to purchase Thistledown. The
contract basically stated that in exchange for $43,000,000, Harrah’s would
assume ownership of the real property as well as equipment, intellectual
property and other items. The sale was contingent on Harrah’s ability to obtain
Thistledown’s racing license from the racing commission (which would also
enable Harrah’s to operate lucrative video lottery terminals). The bankruptcy
court approved the sale and Harrah’s filed the deed in July, 2010, after it
received the racing license.
For tax year 2010, the Cuyahoga
County Fiscal Officer assigned a total value of $14,264,000 to Thistledown. The
Board of Education filed a complaint with the board of revision (“BOR”),
seeking an increase to the purchase price established at the first auction: $89,500,000.
The property owner requested a reduction to $5,500,000, claiming most of the
value was attributable to the personal property and racing license, not the
real estate. The BOR retained the fiscal officer’s initial valuation of
$14,264,000.
The Board of Education appealed
to the BTA, requesting an increase to $43,000,000, the price Harrah’s paid for
the property at the second auction, and Harrah’s requested a decrease to
$13,800,000. The school board relied on the 2010 sale, arguing that the
$43,000,000 sale price reflected the value of the real property. The property
owner reiterated her prior testimony that the sale price reflected the purchase
of other assets in addition to real property.
The BTA agreed with Harrah’s
valuation of $13,800,000. The BTA rejected the 2010 sale price as evidence of
value, explaining that “[a]lthough it is
clear that the subject property sold recent to [the] tax lien date, we do not
find the sale to have been arm’s-length because it was subject to the approval
of a bankruptcy court.”
The Board of Education appealed
to the Ohio Supreme Court and the court affirmed the BTA’s decision.
In its analysis, the Ohio Supreme
Court first looked at the applicable statute to reiterate the “general rule” at
the time:
“During the tax year at issue, former R.C. 5713.03 sets forth how real
estate is to be valued for tax purposes: ‘In determining the true value of any
tract, lot, or parcel of real estate under this section, if such tract, lot, or
parcel has been the subject of an arm’s length sale between a willing seller
and a willing buyer within a reasonable length of time, either before or after
the tax lien date, the auditor shall consider the sale price of such tract,
lot, or parcel to be the true value for taxation purposes’.” (Note: Pursuant to Ohio Am.
Sub H.B. 487 (H.B. 487) signed into law on June
11, 2012, the revised statutory language of R.C.
5713.03 now provides that an
auditor "may" (vs. shall) consider the price of a recent sale as
value.)
The court then summarized R.C.
5713.04 (“[t]he price for which such real
property would sell at auction or forced sale shall not be taken as the
criterion of its value”)
and concluded that, “the BTA reasonably and lawfully determined
that the sale price did not establish the property’s true value for two reasons…First,
Thistledown Racetrack sold at auction [and]…
Second, reliable and probative evidence in the record supports the finding that
Thistledown sold at a forced sale within the meaning of R.C. 5713.04.”
At first glance, it appears that
the court is establishing R.C. 5713.04 as a clear exception to R.C. 5713.03;
however, upon further review, as well as a quick read of the decision of the
Ohio Supreme Court in Olentangy Local
Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 141 Ohio St.3d 243,
2014-Ohio-4723, 23 N.E.3d 1086…, it is easy to surmise that R.C. 5713.04 is
more clarification of, than exception to R.C. 5713.03. The Olentangy Court specifically addressed
this issue by asking itself: “whether R.C. 5713.04 categorically prohibits
reliance on an auction sale price as evidence of a property’s value, even when
the sale satisfies former R.C. 5713.03’s requirements for a recent, arm’s-length
transaction”; and answering in the affirmative, “in spite of R.C. 5713.04’s proscription, “the sale prices of parcels
sold at auction are nevertheless the best evidence of value when all of the
elements of an arm’s-length transaction are present.”
The court in Warrensville did pay homage to Olentangy
by explaining: “In Olentangy…, we held
that if the underlying transaction is an auction or forced sale, “the proponent
of the sale price bears the burden to prove that the sale was nevertheless an arm’s
length transaction between typically motivated parties and should therefore be
regarded as the best evidence of the property’s value.”
The court in Olentangy, however provided more detailed guidance in determining
what an “arms-length” transaction is. “Three
factors are relevant to deciding whether a transaction occurred at arm’s
length: whether the sale was voluntary; i.e., without compulsion or duress,
whether the sale [took] place in an open market, and whether the buyer and
seller act[ed] in their own self interest.”
In Olentangy (a residential foreclosure case), the auction sale was deemed arms length because of the
following: “open-market elements”: the foreclosing lender listed the property
on the open market for nine months before the auction; the auction was publicly
advertised for a significant period of time, it was well attended, and there
were multiple bidders for the property; the highest bid was 92 percent of the property’s
final MLS list price; and the lender accepted this bid, although it had
retained the right to reject it.
In contrast, according to the Warrensville court, the Thistledown sale was a “hurried sale by a debtor because of
financial hardship or a creditor’s action.” In fact, “Harrah’s bought the racetrack at a bankruptcy sale … which authorizes
sale of property … other than in
the ordinary course of business.” “The bankruptcy court supervising the
sale found ‘compelling circumstances’ to consummate the sale because there is
substantial risk of depreciation of the value of Purchased Assets if the sale
is not consummated quickly. Further, the transaction was not between typically
motivated parties—the bankruptcy court approved the sale after finding that
time was of the essence in order to maximize the value of the bankruptcy
estate’s assets and that it was in the best interests of Magna Entertainment
and its creditors and other parties in interest.”
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