Recent arm's length sale no longer conclusive evidence of true value for tax purposes
Blog Post
On June 22, 2017, the Ohio Supreme Court handed down an important decision that significantly affects property valuation for real property tax purposes. In Terraza 8 LLC v. Franklin Cty. Bd. of Revision, the court unanimously held that a recent arm’s length sale is not conclusive evidence as to the true value of property where it is encumbered by a lease. (See, Slip Opinion 2017-Ohio-4415.) By contrast, the court previously held in 2005 that “when the property has been the subject of a recent arm’s-length sale between a willing seller and a willing buyer, the sale price of the property shall be ‘the true value for taxation purposes.’” (See, Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 269, 2005-Ohio-4979, ¶ 13.)
The word “shall” in the court’s Berea decision was mandatory language that required a recent arm’s length sale to be the true value for tax purposes. Key to the court’s decision in Terraza 8, however, was a legislative amendment to Ohio Revised Code Section (R.C.) 5713.03 that directs how to value realty for tax purposes. In 2012, the Ohio General Assembly amended R.C. 5713.03 such that the statute no longer directed that a recent arm’s length sale “shall” be the true value. Instead, the General Assembly used the permissive language “may” to describe the significance of a recent arm’s length sale.
The court ruled in Terraza 8 that this “may” amendment to R.C. 5713.03 superseded the Berea case where the court addressed the former version of the statute that used the word “shall.” Under current law, a recent arm’s length sale is not conclusive evidence of true value, but instead creates only a rebuttable presumption of true value. The presumption may be rebutted through evidence presented to county boards of revision and the Ohio Board of Tax Appeals (BTA).
At issue in Terraza 8 was the value of a 54,261-square-foot fitness center for tax years 2013 and 2014. Terraza 8 purchased the fitness center in February 2013 for about $15.4 million, knowing that a tenant had signed a long-term lease to make arguably “above-market” rental payments. At a BTA hearing, the owner’s appraiser testified that the sales price did “not represent the fee simple market value of the property.” The appraiser further testified that, under an income-producing or sales-comparison approach, the realty would have a dramatically lower value. Her income-approach valuation was $5.65 million and her sales comparison approach yielded roughly a $7.1 million value. After discussing the significance of the law change to R.C. 5713.03, the court remanded the case to the BTA to consider the appraiser’s evidence and determine the true of value of the “unencumbered fee simple estate.” It remains to be seen how the BTA will weigh and evaluate the evidence on remand.
Terraza 8 is certainly a big change for Ohio real property valuation because appraisal evidence must now be considered to determine true value even if there is a recent arm’s length sale. For realty encumbered by a lease, particularly in some sale-leaseback financing transactions, the case could represent a sea change. Still, the Terraza 8 case should not be overstated. A recent arm’s length sale is still the best evidence as to the true value of realty in the absence of rebuttal evidence to the contrary.
The word “shall” in the court’s Berea decision was mandatory language that required a recent arm’s length sale to be the true value for tax purposes. Key to the court’s decision in Terraza 8, however, was a legislative amendment to Ohio Revised Code Section (R.C.) 5713.03 that directs how to value realty for tax purposes. In 2012, the Ohio General Assembly amended R.C. 5713.03 such that the statute no longer directed that a recent arm’s length sale “shall” be the true value. Instead, the General Assembly used the permissive language “may” to describe the significance of a recent arm’s length sale.
The court ruled in Terraza 8 that this “may” amendment to R.C. 5713.03 superseded the Berea case where the court addressed the former version of the statute that used the word “shall.” Under current law, a recent arm’s length sale is not conclusive evidence of true value, but instead creates only a rebuttable presumption of true value. The presumption may be rebutted through evidence presented to county boards of revision and the Ohio Board of Tax Appeals (BTA).
At issue in Terraza 8 was the value of a 54,261-square-foot fitness center for tax years 2013 and 2014. Terraza 8 purchased the fitness center in February 2013 for about $15.4 million, knowing that a tenant had signed a long-term lease to make arguably “above-market” rental payments. At a BTA hearing, the owner’s appraiser testified that the sales price did “not represent the fee simple market value of the property.” The appraiser further testified that, under an income-producing or sales-comparison approach, the realty would have a dramatically lower value. Her income-approach valuation was $5.65 million and her sales comparison approach yielded roughly a $7.1 million value. After discussing the significance of the law change to R.C. 5713.03, the court remanded the case to the BTA to consider the appraiser’s evidence and determine the true of value of the “unencumbered fee simple estate.” It remains to be seen how the BTA will weigh and evaluate the evidence on remand.
Terraza 8 is certainly a big change for Ohio real property valuation because appraisal evidence must now be considered to determine true value even if there is a recent arm’s length sale. For realty encumbered by a lease, particularly in some sale-leaseback financing transactions, the case could represent a sea change. Still, the Terraza 8 case should not be overstated. A recent arm’s length sale is still the best evidence as to the true value of realty in the absence of rebuttal evidence to the contrary.