Ohio Appeals Court Affirms BTA’s Reliance on Recent Sale Price to Set Value for Retail Space Leased to National Retailer

Menlo Realty Income Properties 28, LLC v. Franklin Cty. Bd. of Revision, 2019-Ohio-4872.

Taxpayer Had Argued Vacancy Rate Must Automatically Discount Sale Price of Leased Property

The 10th District Court of Appeals affirmed a decision of the Ohio Board of Tax Appeals (BTA) that rejected a taxpayer’s attempt to discount the price it recently paid in an arms-length sale for retail space leased to a national retailer. The taxpayer argued that the sale price of any leased property must be automatically discounted based solely on the vacancy rate in the area without consideration of whether the lease in question was above, below, or at market terms at the time of the sale. In response, the Court explicitly rejected the application of any such blanket rule, holding instead that it was appropriate for the BTA to consider if the lease was at market terms and a number of other non-sale factors, including the creditworthiness of the tenant, in addition to vacancy rates.

Arms-Length Sale Can Be Rebutted As True Value by Evidence of Encumbrances

In its decision, the Court affirmed the BTA’s finding that a recent arms-length sale presumptively represents the value of the unencumbered fee-simple estate, but noted that such presumption can be rebutted with evidence of encumbrances, including leases, and their effect on the sale price. The BTA further acknowledged that appraisal evidence can serve to rebut the presumption created by a sale price. However, the BTA was unconvinced by the taxpayer’s appraisal, as it focused solely on background vacancy rates and provided no evidence specific to the terms of the subject lease.

Taxpayer Did Not Present Sufficient Evidence

Overall, both the BTA and the Court faulted the taxpayer for its “highly generalized” argument and evidence. In affirming the BTA, the Court emphasized the fact that the taxpayer had failed to make any arguments related to the particular duration of the lease, the monthly rental amount, or the character of the tenant. Specifically, the Court noted, the taxpayer’s argument did not focus on whether the lease in place reflected market terms, as it should have, but merely on the fact that the lease existed at all.

With its holding, the Court made clear that the mere existence of a lease is not, on its own, sufficient to rebut a recent arm’s-length sale price.  Instead, the opponent of a sale price must present a lease-specific rationale, based on the lease itself, to successfully show the lease’s impact on the sale price. 

About the Authors:

Nicholas Ray is a partner in the Vorys Columbus office.  His practice focuses on real property tax valuation disputes and appeals.  Nicholas has assisted clients in over 40 states in managing real property tax assessments including contesting assessments where appropriate.  Nicholas can be reached at 614.464.5640 or at nmray@vorys.com.

Dave Froling is a partner in the Vorys Columbus office and he leads the firm’s state and local tax group.  He has extensive experience with all types of state and local tax issues and in particular, matters involving commercial activity tax, personal income tax, municipal income tax, corporation income/franchise tax, pass-through entity tax,  financial institutions tax, real property tax, sales and use tax, trust tax, dealers in intangibles tax, severance tax and unclaimed funds (escheat). He can be reached at 614.464.3022 or at dafroling@vorys.com.

Andrew DeBord is an associate in the Vorys Cincinnati office. His practice is focused on real property tax valuation disputes and appeals.  Andrew has appeared before the Ohio Board of Tax Appeals, more than 25 county boards of revision in Ohio, and numerous other state and local tax appeal boards throughout the United States. Andrew can be reached at 513.723.4024 or at aedebord@vorys.com.

Lauren Johnson is an associate in the Vorys Columbus office. Her practice is focused on state and local taxes, with an emphasis on real property tax valuation disputes and appeals. She can be reached at 614.464.5418 or at lmjohnson@vorys.com.