(Supreme Court of Ohio Sides with
Taxpayers in Two Recent Real Estate Taxation Decisions)
By:
Stephen D. Richman, Esq.-Senior Counsel, Kohrman, Jackson & Krantz
I had a law school professor
that would often proffer the following two theories to rationalize court
decisions (especially ones he seemingly did not understand): 1) the justices
did not “get any”…. breakfast that morning; and 2) the government always wins.
I cannot profess to know what the justices of
the Ohio Supreme Court had or did not have the morning of their recent real
estate tax decisions in Terraza 8,
L.L.C. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-4415 and W. Carrollton City Schools Bd. of Edn. v. Montgomery Cty. Bd.of Revision,
Slip Opinion No.
2017-Ohio-4328, but can disprove my law professor’s cynical theory of governmental
favoritism in these cases.
Terraza 8,
L.L.C. v. Franklin Cty. Bd. of Revision
Background
The subject
property in Terraza is a 54,000+SF
fitness center (L.A. Fitness) in
Franklin County, owned by appellant Terraza 8, L.L.C (“Terraza 8”).
The
Franklin County auditor assessed the subject property at $4,850,000 for tax
year 2013. Appellee Hilliard City Schools Board of Education (“BOE”) complained
to appellee Franklin County Board of Revision (“BOR”) that the property should
have been valued at $15.4 Million, based on its sale price in February 2013.
Terraza 8 did not defend the complaint, and the BOR increased the valuation to
$15.4M for tax years 2013 and 2014. Terraza 8 then appealed both years’
valuations to the BTA.
At the BTA hearing,
appellant’s appraiser (Patricia Costello) testified that the sale price did not
represent the fee simple market value of the property because the property was
encumbered by an above-market lease with rents at $22/SF (when market rents
were approximately. $11/SF). The appraiser’s sales comparison valuation of the
property, unencumbered by a lease was approximately $7M.
The BOE objected to the
BTA evidence presented by Costello, arguing that it was inadmissible because
Terraza 8 had not rebutted the recency or arm’s-length nature of the sale.
Terraza 8 countered that the evidence was admissible due to a change in Ohio Revised Code Section 5713.03 (R.C. 5713.03), which, it alleged,
required the county auditor, the BOR, and the BTA to value the fee-simple
estate of the property, unencumbered. The BTA overruled the objection and
admitted the evidence, however, it disregarded Costello’s appraisal and
determined a value closely approximating the $15.4M purchase price for tax year
2013. The BTA did not reconcile the new statutory language with its conclusion,
except to point out that R.C. 5713.03
still permits a property’s recent sale price to be used in determining its
value.
Terraza 8 then appealed
the BTA’s decision upholding the BOR’s sales price valuation to the Ohio
Supreme Court.
The Supreme Court of
Ohio in Terraza reversed (and
remanded) the BTA decision, basically upholding and applying Ohio’s “real
property valuation statute” (R. C.
5713.03), as amended in 2012 as part of Ohio
House Bill 487.
R.
C. 5713.03
Prior to the 2012 amendments to R.C. 5713.03, Ohio county auditors were essentially obligated to consider
the recent sale price of real property to be its true value. You may recall
that the plain “mandatory” language of the original statute regarding recent
sales prices establishing value was reinforced by the Ohio Supreme Court in Berea City School Dist. Bd. of
Edn. v. Cuyahoga Cty. Bd. of Revision (2005), 106 Ohio St.3d. 269. 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 other major change to the statute (via Am.
Sub H.B. 487) regards what type of real property interest is to be valued
by Ohio county auditors. Prior to Am.
Sub H.B. 487, R.C. 5713.03 provided
that each county auditor was to simply determine the “true value” of each real
estate parcel. Revised R.C.
5713.03 now provides that county
auditors are to determine the true value of real property “as if unencumbered". In other words, leases, mortgages and
other encumbrances are not to be taken into consideration when establishing
market value for real property taxation.
Analysis
Both major
changes of the statute (according to the taxpayer and the Supreme Court of
Ohio) were dispositive in Terraza.
The Ohio Supreme Court in Terraza first acknowledged
that the amendments to R.C. 5713.03 “did not overrule the best-evidence rule of property
valuation, which…provides that …the best evidence of the ‘true value in money’
of real property is an actual, recent sale of the property in an arm’s-length
transaction.” The court recognized
that the “General Assembly still favors
the use of recent arm’s-length sale prices in determining value for taxation
purposes.” However, the court in Terraza
explained that a recent arm’s-length sale now (after the enactment of the
amendments to R.C. 5713.03) creates a
rebuttable presumption that the sale price reflects true value, and auditors
are no longer required to accept such recent arm’s length sales prices as true
value, if such presumption is rebutted.
Applying the law to the
facts, the Supreme Court of Ohio in Terraza
determined that Terraza 8 did indeed present evidence (Costello’s appraisal and
testimony) in an attempt to show that its arm’s-length purchase price did not
reflect the value of the unencumbered fee-simple estate, however, the court
determined the BTA’s decision to be unreasonable and unlawful because the BTA
did not even consider that evidence. In effect, the BTA viewed the sale-price
evidence as irrebuttable. The appellees also argued about the effective date of
newly amended R.C. 5713.03, however,
the court resolved that argument in favor of the taxpayer.
As a result of the
foregoing, the court in Terraza vacated
the BTA’s decision and remanded this case for the BTA to address and weigh the
evidence previously offered to rebut the presumption that the sale price
reflected true value.
Moral of the Story.
As predicted in our earlier blog article on the 2012 amendments to R.C. 5713.03, it seems much more likely
that compelling appraiser testimony can now trump the recent sales price as a
property’s true value, and even result in lower values for commercial
properties that have above market rents but are otherwise comparable to
surrounding properties. In other words, in “Johnny Cochran speak”, if your
valuation is too high, you should now try (to get same lowered). The flip-side
of the amendments, however, is that those with below-market rents in affluent
neighborhoods may see their values increased, and no longer have a winning
sales price argument to combat the increased valuation.
W. Carrollton
City Schools Bd. of Edn. v. Montgomery Cty. Bd. of Revision, Slip
Opinion No. 2017-Ohio-4328
Background
In W. Carrollton, the taxpayer
(vs. the government) also won; however, its victory was based upon the
interpretation and application of R.C.
5713.03, prior to its 2012 amendments.
The subject
property in W. Carrollton
comprises two adjacent parcels of vacant land (as of the tax lien date), totaling
approximately 15 acres—which were purchased by CarMax for $5,850,000 in 2008.
Sometime after the sale,
the W. Carrollton City Schools Bd. of Edn. (“BOE”) filed a
complaint seeking an increase in the value (for tax year 2008) of the subject property
from its then $578,100 valuation to the $5.8M sales price. The Montgomery Cty.
Bd. of Revision (“BOR”) ordered an increase but not to the full amount
of the sale price. The BOE then appealed to the Board of Tax Appeals (“BTA”),
and the BTA reversed the BOR’s decision based on the fact that the 2008 sale
was a recent arm’s-length transaction.
Between 2008 and 2009, CarMax
constructed an approximate 45,000 SF used-car sales facility on the property,
spending a total of about $7M.
In 2011 (a triennial
update year in Montgomery County), the auditor set the value of the subject
property at $4.7M, approximately $1.1M less than the property’s 2008 sales
price. Thereafter, the BOE filed a complaint seeking an increase to the 2008 sale
price of $5,850,000. The BOR retained the auditor’s valuation of $4.7M for the
2011 tax year, and the BOE appealed to the BTA. The BTA rejected using the sale
price to value the land because the sale occurred more than 24 months before
the January 1, 2011 update valuation, and thus was not a “recent”, arm’s length sale according to the BTA. Specifically, to justify its ruling, the BTA
cited the proposition set forth in Akron
City School Dist. Bd. of Edn. v. Summit
Cty. Bd. of Revision, 2014-Ohio-1588,
namely that “a sale that occurred more
than 24 months before the lien date and that is reflected in the property
record maintained by the county auditor or fiscal officer should not be
presumed to be recent when a different value has been determined for that lien
date as part of the six-year reappraisal.” Finding an absence of competent
and probative evidence of value, the BTA retained the auditor’s original value
of $4.7M.
The BOE then appealed
the BTA’s decision to the Ohio Supreme Court.
Analysis
The Ohio Supreme Court
in W. Carrollton did not need the benefit of the amendments to R.C. 5713.03 as in the Terrazo case (actually, those amendments
would not have been applicable as their effective date was after the tax years
at issue) in order to affirm the BTA’s decision in favor of the taxpayer. This
is because R.C. 5713.03 (in 2008,
2011 and currently) has its own, “built-in” exceptions to the general rule in
favor of using a recent, arm’s-length sale price to determine value.
The
first, so-called “built-in exception” relevant to this case and recognized by
the Ohio Supreme Court in W. Carrollton (and cases cited
therein) is the exception providing that a sale price “shall not be considered the true value of the property sold if
subsequent to the sale * * * [a]n improvement is added to the property.” R.C.
5713.03(B). Applying this law to the facts, the court
in W. Carrollton easily determined that the “improvement
exception” applied since between CarMax’s 2008 acquisition of the property and
the January 1, 2011 lien date, CarMax spent more than $7 million constructing
their used-car facility on the property. Accordingly, the court held that, “Under the statute’s [R.C. 5713.03(B)] plain terms, the 2008 land sale price shall
not be considered the property’s value as of 2011.”
For those wondering why
improvement costs should not automatically increase a property’s valuation, the
court in W. Carrollton explained that,
“A buyer might not look to his seller’s
actual costs because the seller may have overspent, and the buyer could
therefore conclude that a property of equal utility would cost less.”
Quoting earlier precedent, the court
added that “the prospective purchaser
will not rationally pay $15,000 for a house … if, without serious delay, he can
build or buy equally satisfactory substitutes for $10,000.”
The
second “built-in exception” to R.C.
5713.03 (relevant to and recognized by the BTA and the Ohio Supreme Court
in W. Carrollton) is “recency of the sale”.
R.C. 5713.03 provides that “the best evidence of the true value in money
of real property is an actual, recent [emphasis added] sale of the
property in an arm’s-length transaction.” The court in W. Carrollton, citing precedent (prior court decisions on point)
explained that “the recency rule of R.C.
5713.03 encompasses all factors that would, by changing with the passage of
time, affect the value of the property,” including the improvement
exception, which is itself a factor that relates to the recency of the sale.
As an aside, you may be
wondering, what is considered “recent”? One year, two years, three years?
According to the Supreme Court of Ohio, “[P]roximity
is not the sole factor affecting recency.” Worthington City Schs. Bd. of Educ. v. Franklin County Bd. of Revision,
2009-Ohio-5932. “[G]eneral developments in the marketplace are [also] relevant.” Cummins Property Servs. LLC v. Franklin Cty.
Bd. of Revision, 2008-Ohio-1473.
Recent decisions of the
Ohio Supreme Court cited in the Cummins
and Akron City Schools cases cited
herein include the following examples of “recent sales”: 1) “13-month gap between sale and tax lien date
was prima facie evidence of the recency of the sale”; 2) “Board of Revision correctly adopted purchase
price of sale that occurred 22 months after tax lien date as the property’s
true value”; and 3) “Because the sale
occurred within a year after the tax-lien date, and because [the property
owner] offered no evidence of a change in market conditions between the lien
date and the filing of the conveyance-fee statement, the sale was ‘recent’ for
purposes of R.C. 5713.03.”
According to the court
in W. Carrolton, however, it did not
have to stretch its analysis to negate recency because the improvement
exception of R.C. 5713.03 directly
applied. The court explained that, “Because the improvement exception more
specifically bars direct use of the sale price to value the property, we need
not determine whether the holding of Akron applies here.”
Based upon the
foregoing, the court in W. Carrollton rejected the
BOE’s contentions on appeal and affirmed the decision of the BTA. In the words
of the court: “The 2008 sale price of
$5,850,000 for the land does not ‘affirmatively negate’ the auditor’s 2011
valuation of the land and improvements in the aggregate at $4,716,690. For one
thing, the land-sale price is not recent, for the reasons discussed already.
Second, the actual construction costs that CarMax incurred do not negate the
auditor’s valuation. Although CarMax stipulated to having incurred over $7
million in construction costs for its facility, those historical costs do not
necessarily establish what the property would have sold for in 2011.”
What
is the moral of this story? While the sales price of real
property is still the best evidence of
the value of real property, it is no longer the only evidence auditors and boards
of revision are bound to accept to prove valuation. R.C. 5713.03 contains long-standing “built-in” exceptions, as well as relatively
recent amendments which hindsight may prove to have let “John and Jane Q.
Citizen “ win a few against the government and require my favorite law
professor to revise his theorems.
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