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

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

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 arm’s-length sale for retail space leased to CVS.  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 rates at the time of the sale.  In response, the Court explicitly rejected 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.

In its decision, the BTA confirmed that a recent arm’s-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.

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.

Ohio Board of Tax Appeals Grants Significant Reduction For Assisted Living Facility

HCP EMOH, L.L.C. v. Washington County Board of Revision, (Oct. 28, 2019), BTA No. 2017-1910.

For tax year 2016, the Ohio Board of Tax Appeals granted a reduction in value for an 89-unit assisted living facility, located in rural Marietta, Ohio, adopting the property owner’s appraisal.  For tax year 2016, the auditor originally determined a value of $9.018 million based upon a lease-coverage ratio analysis.  The property owner submitted an appraisal that opined to a value of $3.92 million based upon a cost approach and a sales comparison approach that utilized both traditional apartments and assisted living facility comparables.  The county’s appraiser determined a value of $13.1 million, again utilizing a lease-coverage ratio analysis and attempting to extract the value of the real estate from the business.

In a 2014 case, BTA determined that the property owner’s appraisal was not probative of value.  The property owner appealed the case to the Ohio Supreme Court and the Court found that the county’s evidence relying upon an improper lease coverage ratio analysis was flawed.  In the 2016 case, the BTA found that the methodology utilized by the property owner’s expert was the best indication of value, noting the differences from the 2014 appraisal which included the addition of a cost approach and the use of assisted living facility comparables in the property owner’s appraisal report.

For questions about Ohio tax issues, please contact David Froling at dafroling@vorys.com or 614.464.3022.