A Greenhouse Building is not a Building but a Movable Business Fixture according to Ohio Board of Tax Appeals

By: Stephen D. Richman, Esq. – Senior Counsel, Kohrman, Jackson & Krantz

That old adage, “if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck” holds true for…waterfowl and a host of persons, places and things, but not for greenhouses in the recent Ohio Board of Tax Appeals decision, Viola Associates, LLC v. Lorain County Board of Revision, Case Nos. 2016-1273, 1274 and 1275.                                                                                                                                                          

The facts of the case are simple enough; the law, not so much.

Facts of the Case

Green Circle Growers Inc. and Viola Associates, LLC (collectively, “Green Circle”) own approximately 186 acres of land improved with greenhouses, packing and storage facilities, a residence and barn. Lorain County valued (in 2016) the property for tax purposes at approximately $40 Million. Green Circle filed complaints with the Lorain County Board of Revision (“BOR”) seeking a reduction in value to approximately $22 Million. Shortly thereafter, the appellee, Firelands Local Schools Board of Education (“BOE”) filed a counter complaint in support of maintaining the auditor’s $40 Million value. The primary issue addressed by the BOR (and afterwards, by the Board of Tax Appeals) was whether the greenhouses situated on the property should be treated as real property, and accordingly included in the assessment of the subject property’s total true value; or as personal property that should be excluded from the subject’s value for purposes of real estate taxation.

At the BOR hearing, Green Circle claimed that the greenhouses, while attached to the land, are removable, and therefore constitute personal property that should not be included in the auditor’s valuation. Green Circle presented testimony from several witnesses who testified that “the method by which a greenhouse is affixed to the ground and constructed is similar to an erector set, in that it can be deconstructed and reconstructed with limited damage” and that “there is an active secondary market for the resale of greenhouses, which are deconstructed and then sold to again be used for horticulture.” Green Circle also offered testimony from an appraiser who opined that the greenhouses were personal property and should not be included in the value of the subject real property because they could be removed from the property with relative ease, and would yield little value to anyone other than someone in the horticulture business. The BOE cross-examined Green Circle’s witnesses, but did not offer any independent evidence of value.

In spite of all of the testimony, the BOR ruled that Green Circle presented insufficient evidence to support a reduction in value, and that therefore, the initial assessed valuation of $40 Million was to be maintained. Green Circle then appealed the BOR decision to the Ohio Board of Tax Appeals.

Applicable Law

Distinguishing between personalty and realty is a vexing issue in many real estate and tax related arenas. In landlord-tenant law, for example, the issue usually centers on who is entitled to remove and/or retain the item in question (e.g., a supplemental HVAC system bolted to the roof) at the end of the lease. In a foreclosure, the issue is whether or not the item is realty, and can be foreclosed upon, or personalty, and not part of the property being foreclosed. The distinction in tax law can determine what are qualifying REIT assets, the amount of a taxpayer’s Investment Tax Credit, what gets capitalized and whether or not property qualifies as a 1031 Exchange.

At early common law, the general rule was that everything attached to realty became part of the realty, and therefore was deemed irremovable. Friedman on Leases, Sec. 24.1 at 1414 (2005). In modern times, as is the case with many “general rules,” the exception (removability) seems more general rule than exception. While most would agree that a 20 story office building is realty and a lawn mower is personalty, between the extremes is much more difficult to assess. In other words, how does one classify grain bins, silos, electronic billboards, cold storage cooler rooms, oil tanks and amusement park rides?

Unfortunately, there is no one size fits all definition. In Ohio, the answer for landlord-tenant issues can be found in common law decisions. See, e.g., Perez Bar & Grill v. Schneider, 2012-Ohio-5820; Household Finance Corp. v. The Bank of Ohio, 62 Ohio App. 3d 691, 694 (1989) and Friedman on Leases, Sec. 24.1 at 1414 (2005). The definition of real property for various income tax issues can be found in the U.S. Tax Code and corresponding regulations for the applicable tax issue.

In determining whether a landowner’s real estate should increase in value for real estate tax purposes (or not be affected because the item in question is personal property), county auditors must look to the statutory definitions of real property and personal property in the Ohio Revised Code. 

R.C. 5701.02 defines “real property” (as used in Title LVII of the Revised Code [Taxation]) as follows:

“(A) 'Real property,' 'realty,' and 'land' include land itself . . . with all things contained therein, and, unless otherwise specified in this section or 5701.03 of the Revised Code, all buildings, structures, improvements, and fixtures of whatever kind on the land…”

The definitions of “buildings”, “fixtures”, “improvements” and “structures” appear in R.C. 5701.02 (B) - (E), respectively.

R.C. 5701.03 defines “personal property” (as used in Title LVII of the Revised Code [Taxation]) as follows:

“(A) ‘Personal property’ includes every tangible thing that is the subject of ownership . . . including a business fixture, and that does not constitute real property as defined in Section 5701.02 of the Revised Code.

(B) ‘Business fixture’ means an item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure, or improvement, and that primarily benefits the business conducted by the occupant on the premises and not the realty. 'Business fixture' includes, but is not limited to, machinery, equipment, signs, storage bins and tanks, whether above or below ground.  ‘Business fixture’ also means those portions of buildings, structures, and improvements that are specially designed, constructed, and used for the business conducted in the building, structure, or improvement, including, but not limited to, foundations and supports for machinery and equipment…”

It is important to note that in 1992, the Ohio General Assembly amended the definition of “personal property” to include “business fixtures.”

Analysis of the BTA’s Decision in Viola

To reach its conclusion that the Green Circle greenhouses were personal property (and that the BOR decision should be overruled), the Board of Tax Appeals (“BTA”) in Viola first felt it necessary to determine if the subject greenhouses could be classified as buildings, structures or improvements. If so, the analysis would end there, and the greenhouses would be taxed as real property. The BTA reasoned that the definition of these items in R.C. 5701.02 (B) - (E) all shared “an element of permanence in their original fabrication or construction” (vs. a “fixture” or “business fixture” that starts out as an item of tangible personal property, that then becomes attached or affixed to the land or to a building, structure, or improvement). The BTA then determined the greenhouses were not buildings, structures or improvements, based upon the testimony presented by Green Circle’s witnesses that described the greenhouses as temporary, built to be removed and often sold on a secondary market following removal. According to the BTA, the greenhouses were a far cry from permanently constructed buildings built to shelter persons or property, or structures defined by the Ohio Revised Code to include bridges, dams and silos. The BTA was not swayed by the appellee’s argument that the greenhouses were permanent because they were attached to concrete. Although the concrete is incorporated into the real estate, according to the BTA, “that does not transform the item to which it is attached [to real estate], such as an… amusement park ride and its shelter, which retains its character as tangible personal property, albeit permanently affixed to the land.”  Moreover, personal property can include foundations and supports pursuant to R.C. 5701.03.

Once determined not to be structures, buildings or improvements, the next threshold question for the BTA to answer was whether or not the Green Circle greenhouses were “fixtures,” and accordingly, real property; or “business fixtures”, and accordingly, personal property.

According to the BTA, the “statutory test” for items not buildings, structures or improvements boils down to whether the item “primarily benefits” the business or the realty. This makes sense as the statutory definitions of “fixture” and “business fixture” are identical, except for the primary benefit language at the end of each definition. In other words, the greenhouses would be classified as “fixtures” and real property if they primarily benefit the realty; or “business fixtures” and personal property if they primarily benefit the business.

The BTA came to the conclusion that the greenhouses in question primarily benefited the business (vs. the realty), based on the evidence presented to the BOR and the BTA. As stated by the BTA in Viola, “Green Circle presented testimony from multiple individuals to demonstrate that the greenhouses in question were designed especially for growing plants…. primarily benefit Green Circle Growers’ horticulture business and would provide little value, if any, to another occupant of the land who was not engaged in the same or very similar business.” Also important to the BTA was the fact that “the greenhouses are outfitted with computer systems, shade cloths, irrigation systems, retractable roofs, and a number of other components that are specific to the sophisticated operation taking place at the property… that would [not] benefit the land or any other occupant of the property that was not engaged in a commercial horticulture business.”

What about precedent (prior decisions on point)? In fact, the BOE strongly argued that the Supreme Court of Ohio, in Green Circle Growers, Inc. v. Lorain Cty. Bd. Of Revision, 35 Ohio St. 3d 38 (1988) decided that these very same greenhouses were real property and should be taxed as such (for the applicable tax years in question). The BTA in Viola easily distinguished this case, however, because it was decided prior to the 1992 amendment to R.C. 5701.02 and 5701.03 that revised the definitions of real and personal property for taxation purposes, most notably adding the newly defined “business fixture,” which the Ohio General Assembly specifically excluded from the definition of real property. According to the BTA in Viola, “these definition changes demand reconsideration of the issue and lead to a different result.” Namely, that the greenhouses should be deemed personal property and not part of the real estate.

Adding “insult to injury”, the BTA in Viola also described two cases decided after the 1988 Green Circle case (and after the afore-mentioned 1992 amendments), in which the Supreme Court of Ohio held that the items of property in question were business fixtures and not real property fixtures. See Metamora Elevator Co. v. Fulton Cty. Bd. of Revision, 143 Ohio St.3d 359, 2015-Ohio-2807 (Grain Bins were held to be business fixtures and not real property); and Funtime, Inc. v. Wilkins, 105 Ohio St.3d 74, 2004-Ohio-6890 (amusement park rides and their accoutrements were held to be business fixtures and not real property).

Having found that the greenhouses in Viola are business fixtures and, therefore, should not be taxed as real property, the BTA’s final task was to examine the appraisals of the BOE and Green Circle and determine the appropriate value of the real property. Using the appellant’s cost approach for the residential property, and sales comparison approach for the commercial property, the BTA arrived at a total value of $10,200,000.

With an approximate $30 Million difference between the BOE’s opinion of value and the BTA’s determination of value, the appellee, reportedly has petitioned the Ohio Supreme Court to consider the matter. Only then will we know if what looked like a greenhouse building to the Ohio Supreme Court in 1988 is still a greenhouse building in 2018, or a business fixture as determined by the BTA in Viola.

The Government Does Not Always Win

(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.

Ohio Court: Forced Sale Creates Presumption That Sale Price Is Not The Correct Basis For Property Valuation

By Connie Carr, Partner at Kohrman Jackson & Krantz LLP

On December 28, 2016, the Ohio Supreme Court issued another opinion regarding real property valuation in Utt v. Lorain Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-8402. This case involves the valuation of a single-family home in Elyria, Ohio that was recently the subject of a recent sale.

The property owners had purchased the property from the Federal National Mortgage Association (Fannie Mae), who owned the property as a result of foreclosure, having paid $54,000 to acquire it. Fannie Mae sold the property 3 months later to the current property owners for $20,000.

The county auditor valued the real property at $79,700 for tax year 2012 and the property owner challenged the valuation citing their 2011 purchase as a recent arm’s length sale. The Board of Revision (BOR) upheld the county auditor’s valuation and the Board of Tax Appeals (BTA) reversed it and valued the property at the sale price.   This case illustrates the process and burden of proof on each party challenging a valuation when a recent sale has occurred.

1.    The property owner has the initial burden of proof, to provide evidence of a recent arm’s length sale establishing a lower value. In this instance, the property owners provided the auditor’s parcel report, the conveyance fee statement and documentation of the real estate agent’s listing. Note, in some cases, a copy of the recorded deed and the purchase agreement may also be appropriate to show that the sale transaction was recent to the tax lien date and was arm’s length in nature. [Also note that this case was based on the county’s 2012 valuation. State law in 2012 put more emphasis on sale value. Under RC 5713.03 in 2012, if a property owner proved the facts supporting a recent arm’s length sale, and such evidence was unrebutted, then the auditor was required to use such sale price for the valuation n 2012. RC 5713.03 was later amended and currently provides more latitude to the auditor regarding whether to base a valuation on a recent sales price or not.]

2.    The burden then goes to the Board of Education, county auditor, or other parties objecting to a lower valuation, to rebut the property owner’s facts.  The rebuttal must either show the transfer was not recent to the tax lien date or, more typically, that the sale was not an arm’s length transaction. A presumption that the sale was arm’s length may be rebutted is the challenger can show that the sale was a forced sale under RC 5713.04. (“….The price for which such real property would sell at auction or forced sale shall not be taken as the criterion of its value….”) This is not a difficult burden to meet. Previously, the court held that the sale of foreclosed property by HUD “is generally regarded as a transaction that is not a voluntary sale between typically motivated market participants.” See Schwartz v. Cuyahoga Cty. Bd. of Revision, 143 Ohio St.3d 496, 2015-Ohio-3431, 39 N.E.3d 123.

3.    If the property owner’s facts regarding the sale being arm’s length are initially rebutted, then the burden of proof goes back to the property owner.  The property owner will have to prove that despite the property being purchased through a forced sale, it was nevertheless an “arm’s length transaction between typically motivated parties.” See 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.

In this case, the auditor and BOR presented expert testimony regarding Fannie Mae, its ownership of the property as a result of foreclosure, arguing that the property owners did not pay true value for the property. The expert also stated that at the time of the sale to the property owners, Fannie Mae did not act as a ‘typically motivated’ seller because it was insolvent and in conservatorship. The BTA did not accept the expert’s testimony because he did not have firsthand knowledge of the sale and only provided ‘general market commentary.’ Because none of the parties was disputing the sale price, the BTA reversed the BOR’s decision and set the value at the lower sale price of $20,000.

The court disagreed. It held that the expert’s testimony was in fact sufficient to show that the sale was a forced sale. The burden was then on the property owners to show that “the sale was nevertheless an arm’s-length transaction between typically motivated parties”. See Olentangy at 43. The property owners did not participate in the court hearing, nor the BTA hearing, and the documents they previously provided did not meet their burden.  The court reversed the BTA and reinstated the county’s valuation.

Property owners need to be aware that the sale price for real property, while providing some evidence of a property’s value, is not necessarily controlling and the auditor can consider other evidence; particularly when facts and circumstances indicate it may have been a forced sale.

______________________

Ohio Supreme Court Upholds Valuation of Condominium Development As Separate Units

The Ohio Supreme Court (the Court) recently issued another opinion real property valuations on December 28, 2016 in an appeal of a Board of Tax Appeals (BTA) December.  In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision (Slip Opinion No. 2016-Ohio-8375), the valuation dispute focused on the appropriate valuation of 16 unsold condo units in a 20-unit condominium development for the 2009 tax year.

The county auditor valued the 16 condo units at $5,986,400. The property owner provided an appraisal by an MAI certified appraiser that valued the condo units at $2,900,000.  The auditor valued the units as 16 separate units and the appraiser valued the units as a single economic unit similiar to an apartment complex.  His reasoning was based upon the changing real estate market after the financial meltdown in 2008 that resulted in condo units not selling and rented out instead. He treated the condo complex as a ‘stalled’ condominium development and used an income approach and sales comparisons more in line with an apartment complex. The Board of Revision (BOR) adopted the appraiser’s valuation and the BOE appealed. In the BTA hearing the BOE provided conveyance fee statements for the 4 units that previously sold along with square footage information from the county auditor’s web site.

The BTA overturned the BOR and reinstated the auditor’s higher valuation, resulting in an appeal by the property owner to the Court. The appraiser defended his valuation of the remaining 16 units as ‘one economic unit’ stating that it was the way the market looks at units when sales have stalled at a condo development. The property owner was currently renting out the 16 unsold units. However, only 1 of his 5 sales comparables was a broken condominium complex.

The BTA found that the appraisal was unreliable because it valued the condo units collectively as one would value an apartment complex, which effectively resulted is a discounted value contrary to Ohio law. The BTA also did not consider the appraiser’s sales comparisons to be appropriate to use as comparables because 4 of the 5 were not condo units.  Finally, the BTA found additional fault with the appraisal because the cost approach was not considered in completing the valuation. The property in question was new construction, having been built from 2006-2008, which was less than 12 months prior to the tax lien date.

Stating that ‘common ownership doesn’t transform condominium units into an apartment complex’, particularly when the ‘complex’ doesn’t include all of the units (emphasis added), the BTA held that the evidence was not sufficient to support a lower valuation and reinstated the auditor’s valuation.

The property owner argued to the Court that the BTA erred in characterizing the appraiser’s valuation as an improper ‘bulk discount’ but the Court, referencing R.C. 5311.11, disagreed, finding that the appraiser’s method was a back-door approach to an improper discount.

The property owner also claimed that the BOE did not submit evidence to contradict the BOR’s adoption of the appraiser’s valuation and therefore the BTA was acting unreasonably and unlawfully in restating the auditor’s valuation.  In making this argument the property owner was invoking what is known as the “Bedford” rule, which provides that once a board of revision has reduced the value of a property based on owner’s evidence, that new value eclipses the auditor’s original valuation, and the board of education cannot rely on it as a default valuation. (See Worthington City Schools Bd. of Edn. vFranklin Cty. Bd. of Revision, 140 Ohio St.3d 248, 2014-Ohio-3620, 17 N.E.3d 537; and Dublin City Schools Bd.of Edn. v. Franklin Cty. Bd. of Revision, 147 Ohio St. 3d 38, 2016 Ohio-3025).

The Court held that the Bedford rule does not require adoption of the BOR valuation because there was a legal error in the BOR’s determination.

Finally, the property owner argued that the BOE had a burden to present evidence of value and that it failed to do so, and therefore the BTA should have adopted the appraiser’s valuation. The Court disagreed, finding that the BOE had submitted the conveyance fee information and deeds for the 4 units which previously sold, and this information was sufficient to permit an independent valuation by the BTA.

To finally resolve matters in this dispute, the Court held that the record contained sufficient information to overturn the BOR’s adoption of the appraisal value and contained sufficient information for the BTA to perform an independent valuation of the units. The Court then remanded the case back to the BTA instructing it to determine the value of each individual unit based upon sales price and other evidence in the record.

This decision provides some needed clarity  but is not good news for condo developers who are still struggling to sell units in their developments.

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Ohio Supreme Court Upholds Broad Discretion of BTA in the Valuation of Real Property

On October 27, 2016, the Ohio Supreme Court (the court) issued its decision in Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, Slip Opinion no. 2016-Ohio-7466, which stemmed from an appeal of a Board of Tax Appeal (BTA), no. 2011-3590. The court’s decision involved  real property valuation case and concerns the proper valuation of a 240-unit apartment complex in Northeast Franklin County for tax year 2005.

The property at the center of this case was originally valued at $13,600,000 and the property owner sought a reduction in the valuation t $9,720,000. The Board of Revision (BoR) ultimately adopted (in a 2-1 vote) a valuation of $9,338,000 proposed by an MAI certified appraise. The BTA affirmed the BoR decision.

The board of education (BoE) appealed arguing that the absence of market data and other flaws in the appraisal made it unreasonable and unlawful for the BoR and BTA to accept the appraisal.

There are 3 approaches used in appraising property—income, cost and sales comparisons.  For an income producing property, the income stream is critical for determining its value. When a property is new, the cost basis of the property may make more sense. Because the variables affecting each property, such as unit size, floor plans, amenities, access to transportation, etc. differ so much from one property to the next, sale comps may have limited utility.

The appraiser in this case relied primarily (but not exclusively) on the income stream produced by the property. It was a newly constructed property so the appraiser averaged the 2004 and 2005 numbers since the property was leased up by 2005. He reasoned that an arm’s length purchase price would typically be based upon the income stream and therefore a more accurate valuation should rely on the income approach.  The appraiser also looked at 10 sales comparisons, taking into consideration the range of cap rates an price per unit to serve as a check on his estimated value and to determine the best cap rate to use in his income valuation.

The BoE objected and the case advanced to the court where the BoE advanced the following proposition of law: “An appraisal that fails to include relevant market data and the specific adjustments made thereto is inherently unreliable and cannot be used to determine the true value of real property for tax purposes.” It argued that the BTA erred is relying on the appraisal because the report did not include sufficient data under its market and income approaches and further did not include a cost approach, all of which was unlawful. It should be noted that additional data was provided by the appraiser in testimony.

When tax appeals come before the court, it is often held that when the court reviews the BTA’s disposition of the factual issues in a property valuation case, the court “does not sit either as a super BTA or as a trier of fact de novo.” The BTA is given wide discretion in determining the weight to give evidence and the credibility of witnesses before it. The BoE in its appeal must demonstrate that the BTA’s and BoR’s weighing of evidence and the force it applied to such evidence was unreasonable or unlawful, and the standard the BoE must meet is that the BTA and BoR abused their discretion. This is a difficult standard to meet. It means that the BoE must prove that the BTA exhibited an unreasonable, arbitrary or unconscionable attitude.

The court found that while the BoE pointed to matters that definitely relate to the probative force of the appraisal, it failed to establish unlawfulness or an arbitrary or unconscionable attitude on the part of the BTA in adopting the appraisal.

During testimony, the appraiser provided his reasons for using the approach that he did and for why he did not use the cost approach. It was in within the discretion of the trier of fact, i.e., the BoR and the BTA, to credit the appraiser’s testimony and report.

When evaluating the merits of whether to appeal the decision of the BTA in a property valuation, we need to keep in mind that the court will not disturb the BTA’s decision merely because a different expert might have found merit in using another approach.

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Real Estate Tax Valuations -- A Recent Sales Price Does Not Always Control

A prior sale price is typically the basis for a real property valuation but not always. A couple of recent decisions issued by the Ohio Supreme Court.

In Warrensville Hts. City School Dist Bd of Edn. V. Cuyahoga Cty Bd. of Revision, Slip Opinion No. 2016-Ohio-78, the property at issue was Thistledown Racetrack.  Harrah’s Ohio Acquisition Company, L.L.C. bought the property out of bankruptcy for $43,000,000. The purchase included equipment, inventory, deposits, advertising and marketing materials transferable permits intellectual property rights, goodwill, and insurance proceeds, among other things.  The sale was also contingent on Harrah’s ability to obtain Thistledown’s racing license from the racing commission.

The board of education argued that the entire $43,000,000 from the bankruptcy sale was the appropriate value for the property. Harrah’s argued that the sales price reflected the purchase of other assets in addition to real property and that Harrah’s bought Thistledown hoping to obtain a license to operating video lottery terminals. It offered testimony and appraisal evidence that $13,800,000 was the appropriate value for the real property portion of its purchase. The Board of Tax Appeals agreed.  The Ohio Supreme Court, citing that the sale used by the board of education was through a bankruptcy court and therefore not arm’s length, and upheld the board of tax appeals, stating that it properly used the appraisal evidence wit valuing the property.

 In Columbus City School Bd. of Edn. V. Franklin Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-757,  the property was a Comfort Inn hotel owned by Buckeye Hospitality, Inc. (“Buckeye”). Buckeye filed a complaint seeking a reduction of the value assigned to its property and the Board of Revision, along with the Board of Tax Appeals, agreed, with an adjustment. The board of education appealed, arguing that the purchase price from 2007 sale was the appropriate value. 

Buckeye used a state certified appraiser with extensive experience appraising hotel properties. The appraiser testified at the hearings and cited the substantially and continually declining income stream as his reason for not using the sale price as indicative of the hotel property’s value. While everyone recalls that the economic crash occurred in the fall of 2008, the softening of the real estate market preceded that crash and was a factor in the lower appraisal amount. The Ohio Supreme Court agreed, holding that evidence rebutting a sale price’s prima facie indication of value may be contained in an appraisal report and an appraiser’s testimony.

As these two cases illustrate, while a recent sales price may be strong evidence of a property’s value it is not always controlling and other evidence, such as an appraisal, can overcome that presumption.

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Bankruptcy Sale of Thistledown Racetrack Held not an “Arms-Length” Transaction

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.”