Ohio Tax Ohio Tax & Jobs 2018... Significant Developments in - - PDF document
27th Annual Tuesday & Wednesday, January 2324, 2018 Hya Regency Columbus, Columbus, Ohio Ohio Tax Ohio Tax & Jobs 2018... Significant Developments in Real Property Appraisals, Valuation & Classification David D. Ebersole
27th Annual
Tuesday & Wednesday, January 23‐24, 2018
Hya Regency Columbus, Columbus, Ohio
Ohio Tax & Jobs 2018...
Significant Developments in Real Property Appraisals, Valuation & Classification
David D. Ebersole Attorney McDonald Hopkins LLC Columbus
Tuesday, January 23, 2018 10:00 a.m. to 12:15 p.m.
Biographical Information
David D. Ebersole, Associate, McDonald Hopkins, LLC 250 West St., Suite 550, Columbus, OH 43215 (614) 484-0716 debersole@mcdonaldhopkins.com Dave is an associate attorney in McDonald Hopkins’ Tax and Benefits Group who advises clients on a multitude of tax issues, particularly state and local
Mike DeWine, Dave has defended the Ohio Tax Commissioner in tax litigation before the Ohio Board of Tax Appeals and Ohio courts of appeal, including several cases before the Ohio Supreme Court. He has extensive experience with all types of state and local taxes. These taxes include the income tax, sales and use tax, excise tax, personal and real property tax, and Ohio’s gross receipts tax, the CAT. Dave also advises clients with respect to federal tax matters, including federal tax structuring and analysis for business transactions, federal tax controversies including IRS audits, executive compensation matters, and estate planning. Dave attended The Ohio State University Max M. Fisher College of Business, where he earned his B.S. with honors in Accounting and Finance. He also attended The Ohio State University Moritz College of Law on a full ride merit scholarship and graduated with honors.
McDonald Hopkins LLC 614.484.0716 debersole@mcdonaldhopkins.com
27th Annual Ohio Tax Conference
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– Large commercial structure constructed to user’s specifications
– Either:
– Market includes first generation users, second generation users, and vacant properties
– Is an adjustment to true value needed, or is a recent arm’s length sale conclusive evidence of true value in these situations?
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– Recent arm’s length sale is NOT conclusive evidence of true value under R.C. 5713.03, as amended – Presumptions apply; burden on opponent of sale price – BTA must consider appraisal evidence – Applies to the 2013 tax year and more recent years
7578 (“State Farm” case); Rite Aid of Ohio, 2016- Ohio-371; Lowe’s Home Centers, 2016-Ohio-372
– Cases addressing former R.C. 5713.03
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Burden of Proof and Expert Appraisals
– Taxpayer carries burden to prove claimed value reduction – See, Moskowitz v. Cuy. Cty. Bd. of Rev., 2017-Ohio-4002
– Abuse of discretion standard for the Ohio Supreme Court reviewing the weight the BTA afforded competing appraisals
NWD 300 Spring LLC, 2017-Ohio-7579 – BTA must consider and weigh conflicting evidence when it adopts an appraiser’s opinion of value
Housing, Inc., 2017-Ohio-900
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– In general, BOE may not invoke the auditor’s valuation if BOR reduction “minimally plausible” and based upon competent evidence – See, Dublin City Sch. Bd. of Ed., 2016-Ohio-3025, ¶¶ 9-11 (specifying four criteria to invoke the Bedford Rule).
– BTA may rely on auditor valuation where BOR reasonably upheld auditor valuation (no duty to independently investigate). – See,W. Carrollton City Sch. BOE, 2017-Ohio-4328 (stipulated cost of construction did not “negate” auditor valuation)
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2017-Ohio-2734 (“Network Restorations”)
– Facts: Low-income residential parcels, benefitting from low income housing tax credit (LIHTC) and housing-assistance payments (HAP) through Section 8 of the Housing Act of 1937 – Held:
value government subsidized housing
taken into account so as to increase value
subsidized housing
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2018-Ohio-2
– Facts:
1959; “capital advance” to developer; agreement limits rent to prevent excessive surplus income to owner
– Held: Network Restorations “rule” favoring market rents is presumptive, not conclusive
method used removes “affirmative value” of gov’t subsidies
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– Taxpayer bears the burden to disprove value as reported on the conveyance fee statement – BTA unlawfully excluded admissible business records – See, Buckeye Terminals, LLC, 2017-Ohio-7664 (bulk purchase of 32 facilities in several states)
– Burden on taxpayer claiming value reduction to show propriety of allocated bulk-sale price to goodwill – See, Cincinnati City Sch. Dist. BOE, 2017-Ohio-7650
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denied); 2350 Morse LLC, 2017-Ohio-7800 (exemption granted); Breeze, Inc., 2017-Ohio-7801 (remanded)
to community schools; excess revenue
– Breeze, Inc: for-profit corp may not have “view to profit”
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– The Tax Commissioner’s annual journal entry setting forth CAUV tables are appealable “final determinations” – Landowners have standing to appeal CAUV tables
– The Tax Commissioner’s annual journal entry setting forth CAUV tables are not appealable agency rules – Landowners did not satisfy burden to show that O.A.C. provisions requiring CAUV tables are unreasonable
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– No req’d level, i.e. “quantum”, of unreimbursed care – See, Dialysis Centers of Dayton, LLC v. Testa, 150 Ohio St.3d 208 (2017) (exemption granted)
– Pending: Chagrin Realty, Inc. v. Testa, OSC Case No. 2017-0469 (notice and jurisdictional issues involved) – Decided: Dialysis Clinic, Inc. v. Levin, 127 Ohio St.3d 215 (2010) (denied); Rural Health Collaborative v. Testa, 145 Ohio St.3d 430 (2016), denied on remand to Ohio BTA, Case No. 2012-3421 (Apr. 12, 2016)
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that they prepared and certified
– See, Dauch v. Erie Cty. Bd. of Rev., 2017-Ohio-1412
– BTA notice to owner must be “reasonably calculated” to notify the owner – BTA lacks jurisdiction to vacate its decision after appeal window closes, even if the decision is void
year does not cut off continuation of prior year complaint
– See, Col. City Sch. Bd. of Ed., 2017-Ohio-5823, ¶ 10
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– McDonald Hopkins, LLC – Phone: (614) 484-0716 – Email: debersole@mcdonaldhopkins.com
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Ohio Tax & Jobs 2018: Developments in Real Property Taxation
27th Annual Ohio Tax Conference January 23, 2018 David Ebersole, Esq. McDonald Hopkins, LLC debersole@mcdonaldhopkins.com Sale In Emerson v. Erie Cty. Bd. of Rev., 149 Ohio St.3d 148, 2017-Ohio-865, the Ohio Supreme Court (hereinafter sometimes referred to as “the Court”) affirmed a BTA decision holding that a sale between one party and a related party acting as a trustee for a pension fund may qualify as a recent arm’s length sale under R.C. 5713.03, where the party arguing that the sale reflects true value satisfies his burden to show that through an appraisal. For purposes of its decision, the Court assumed without deciding that the parties are related. In Olentangy Local Sch. Bd. of Ed. v. Delaware Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio- 8347, the Court held that a sale occurring within four months of the tax lien date in 2009 is not “recent” within the meaning of R.C. 5713.03 where in the intervening time period (a) the property was rezoned and (b) a condominium was created for the property. Here, the property
not “recent,” the BTA nonetheless erred in relying on the auditor’s valuation rather than independently determining the value based upon the evidence presented. In Orange City Sch. Dist. Bd. of Ed. v. Cuyahoga Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio- 8817, the Court held that a purchase price arising from a lessee’s purchase of realty through an
in determining the sale price for real property tax valuation purposes. In West Carrollton City Sch. Bd. of Ed. v. Montgomery Cty. Bd. of Rev., 150 Ohio St.3d 215, 2017-Ohio-4328, the Court held that R.C. 5713.03 precludes the use of a sale price of realty for valuation where the property is improved in the intervening time since the sale. The Court further held that actual construction costs do not “affirmatively negate” the auditor’s valuation because costs incurred to improve property do not necessarily reflect market value. In the appeal, the Court affirmed the BTA decision affirming the board of revision decision affirming the auditor’s valuation. The BTA had no independent duty to determine value because the evidence in the record supported the auditor’s valuation. In Terraza 8, LLC v. Franklin Cty. Bd. of Rev., 150 Ohio St.3d 527, 2017-Ohio-4415, the Court held that the BTA must consider appraisal evidence to determine value despite a recent, arm’s length sale of property encumbered by a long-term lease. Due to a 2012 legislative amendment to R.C. 5713.03 (Am. Sub H.B. 487 eff. September 10, 2012), the Court determined that realty must be valued based upon the unencumbered fee simple interest and that a recent arm’s length
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sale is not conclusive evidence of true value. The decision means that the amendment to R.C. 5713.03 legislatively supersedes the Court’s earlier decision in Berea City Sch. Dist. Bd. of Ed. v.
length sale is the best evidence of true value, but that presumption may be rebutted. The board of revision in Terraza 8 increased the auditor’s valuation of a fitness center to the sale price of a recent, arm’s length sale. The property owner purchased the property as part of a sale transaction subject to an existing long-term lease. At the BTA, the property owner presented appraisal evidence and testimony that the sale price overvalued the property because the monthly rental payments under the lease were above market. The BTA admitted the evidence but accorded it little or no weight and affirmed the board of revision. For the reasons discussed above, the Supreme Court remanded the case for the BTA to consider the appraisal evidence. On remand, the BTA adopted the value that the property owner’s appraiser proposed, far lower than the recent, arm’s-length sale price. See, Terraza 8, LLC v. Franklin Cty. Bd. of Rev., BTA Case
10th District Court of Appeals. Terraza 8 then petitioned to transfer to appeal to the Ohio Supreme Court pursuant to the new procedure in R.C. 5717.04. The 10th District appeal is currently stayed pending the resolution of the petition to transfer. See, S.Ct.Prac.R. 10.01(E)(2). In Columbus City Sch. Bd. of Ed. v. Franklin Cty. Bd. of Rev., 151 Ohio St.3d 100, 2017-Ohio- 7578 (“State Farm”), the Court held that “a sale/leaseback transaction inherently involves an
seller negotiating with an unrelated buyer.” There, the BTA adopted property values for tax years 2011 and 2012 that reflected the sales prices from a sale leaseback transaction and a subsequent sale. The Court reversed the BTA and adopted values that the property owner’s appraiser proposed. The sale leaseback transaction at issue was not “arm’s length” and failed to establish a conclusive presumption of true value under former R.C. 5713.03. The Court in this case did not address the current version of R.C. 5713.03 discussed in the Terraza 8 case because the legislative amendment had not yet taken effect for the 2012 tax year at issue. Procedure In Dauch v. Erie Cty. Bd. of Rev., 149 Ohio St.3d 691, 2017-Ohio-1412, the Court affirmed the BTA’s reduction to the auditor’s valuation (affirmed at the board of revision). The property
statements showing a sale alleged as a recent arm’s length sale. The board of revision and county auditor objected to the conveyance fee statements at the Supreme Court, even though the board
attempt to amend its transcript at the BTA. The Court held that the County may not object to evidence that they were responsible for certifying, and affirmed the BTA’s reduction in value based upon such evidence. In Moskowitz v. Cuyahoga Cty. Bd. of Rev., 150 Ohio St.3d 69, 2017-Ohio-4002, the Court explained that “the burden is on the taxpayer to prove his right to a [reduction in value].” The Court held that the BTA reasonably and lawfully affirmed the board of revision’s valuation that
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reduced the auditor’s valuation of residential property. The board of revision reduced the auditor’s valuation after the property owner filed a complaint, but the property owner appealed claiming that he was entitled to further reduction in value. The property owner, however, failed to provide appraisal evidence or other evidence to satisfy his burden of proof. In Huber Heights City Sch. Bd. of Ed. v. Montgomery Cty. Bd. of Rev., __ Ohio St.3d __, 2017- Ohio-8819, the Court held that the BTA acted reasonably and lawfully in relying on a recent arm’s length sale as evidence of true value, despite the property owner asserting a higher
sale was not recent or arm’s length, but failed to carry this burden through discovery or the presentation of evidence obtained elsewhere. In Columbus City Sch. Bd. of Ed. v. Franklin Cty. Bd. of Rev., __ Ohio St. 3d __, 2017-Ohio- 5823, the Court remanded the appeal to the BTA because the BTA failed to independently weigh the evidence before it; instead the BTA affirmed the board of revision without reviewing the evidence that the board of revision considered. In its decision, the BTA affirmed the board of revision’s reduction to the auditor’s valuation because it found “no evidence in the record to counter the decision of the BOR to modify the auditor’s original assessment of the subject property.” In addition, the Court held that “the filing of a jurisdictionally invalid complaint [with the board of revision] does not cut off the continuation of an earlier year’s complaint.” In South-Western City Sch. Dist. Bd. of Ed. v. Franklin Cty. Bd. of Rev., __ Ohio St.3d __, 2017- Ohio-8384, the Court held that the BTA unreasonably and unlawfully failed to independently review, weigh, and evaluate the evidence in the record and make a determination of value, where the evidence did not support the board of revision’s determination of value. In Mann v. Cuyahoga Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio-8820, the Court vacated and remanded a BTA decision affirming the Cuyahoga County Fiscal Officer’s determination of
evidence regarding “a sale price that, if credited as meeting the elements of R.C. 5713.03 as amended by 2012 Am.Sub.H.B. No. 487, constituted the best evidence of value.” In Olentangy Local Sch. Bd. of Ed. v. Del. Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio-8843, the Court affirmed the BTA with respect to reinstating the auditor’s valuation for the same property addressed in Olentangy Local Sch. Bd. of Ed., 2017-Ohio-8347 (discussed above in the “Sale” section) for a later tax year, 2011. Though the BTA has burden of proof as appellant before the BTA, the property owner did not carry its burden to prove value to the board of revision through competent and probative evidence. The Bedford rule did not apply because the board of revision did not base its decision upon probative and competent evidence. See, Dublin City Sch. Bd. of Ed. v. Franklin Cty. Bd. of Rev., 147 Ohio St.3d 38, 2016-Ohio-3025. In North Canton City Sch. Dist. Bd. of Ed. v. Stark Cty. Bd. of Revision, __ Ohio St.3d __, 2018- Ohio-1, the Court held that under R.C. 5713.04 “a forced sale gives rise to a presumption that the sale price is not the property’s true value,” but that the presumption may be rebutted with evidence showing that there was a recent, arm’s length transaction. The property owner rebutted the presumption in this case with evidence showing that: the property was aggressively
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marketed by a qualified marketing professional; at least six potential buyers made offers; the buyer was not aware that the property previously failed to sell at a sheriff’s sale; the highest and best offer was accepted; and a court determined that the sale was “commercially reasonable.” The Court further held that under former R.C. 5713.03 applicable to the 2012 tax year, the value as determined by a recent, arm’s length sale could not be adjusted for repair costs. As an evidentiary matter, the Court held that the school board waived objections to evidence that it not raise during the evidentiary hearing before the BTA. Procedure - Appraisals In Johnston Coca-Cola Bottling Co., Inc. v. Hamilton Cty. Bd. of Rev., 149 Ohio St.3d 155, 2017-Ohio-870, the Court ruled that the BTA did not abuse its discretion in reviewing the evidence in the record and adopting one appraisal as more persuasively showing true value than a competing appraisal. The Court also held that an appraiser’s status as a county employee does not prevent that appraiser from rendering an unbiased appraisal. In Lutheran Social Services of Central Ohio Village Housing, Inc. v. Franklin Cty. Bd. of Rev., 150 Ohio St.3d 125, 2017-Ohio-900, the Court remanded the appeal to BTA because the BTA failed to expressly consider and evaluate competing expert testimony when it adopted another expert’s (appraiser’s) opinion of value. The Court further held that remand was appropriate because the board of revision failed to include in the record the appraiser testimony accompanying the appraisal that the BTA relied upon to determine value. See also, Cannata v.
In NWD 300 Spring LLC v. Franklin Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio-7579, the Court held that the BTA did not abuse its discretion in adopting the value in the board of education’s appraisal despite the property owner’s competing appraisal. The Court also held that it lacked jurisdiction over an issue that the appellant’s notice of appeal to the Court did not raise. In Olentangy Local Sch. Bd. of Ed. v. Delaware Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio- 8385, the Court held that the BTA did not abuse its discretion in relying upon appraisal evidence that took into account deed restrictions that encumbered the property. The Court distinguished this case from Muirfield Assn., Inc. v. Franklin Cty. Bd. of Rev., 73 Ohio St.3d 710 (1995). In Jakobovitch v. Cuyahoga Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio-8818, the Court affirmed the BTA’s retention of the Fiscal Officer’s valuation for the property. The Court ruled that “the party challenging the board of revision’s decision at the BTA has the burden of proof to establish its proposed value as the value of the property.” There, the taxpayer challenging the property of her value did not carry that burden through the evidence presented, namely a financing appraisal dated three years prior to the tax lien date and unaccompanied by expert testimony. Gov’t Subsidized Housing In Columbus City Sch. Bd. of Ed. v. Franklin Cty. Bd. of Rev. __ Ohio St.3d __, 2017-Ohio-2734 (“Network Restorations”), the Court reversed the BTA in restoring the auditor’s valuation for
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government subsidized low-income housing, where the board of revision had reduced the auditor’s value in accordance with an appraiser’s opinion. The Court held that market rents and expenses rather than actual rents and expenses should be applied to determine value under the income approach to valuation. The Court in Network Restorations did not identify the market or explain how market rents and expenses are computed under this approach. The Court further held that government subsidies should not be taken into account in a way that would increase property value under the income approach. The Court also held that the cost approach should not be used to value low-income housing for real property valuation purposes. In Notestine Manor, Inc. v. Logan Cty. Bd. of Rev., __ Ohio St.3d __, 2018-Ohio-2, the Court clarified that the holding in Network Restorations -- that market rents are to be applied to determine the value of government subsidized housing – is limited to federal subsidies in that case that would inflate the property’s value under an income approach. By contrast, the government subsidy program at issue in this appeal, i.e. the Section 202 program, would not inflate the property value under an income approach. The Section 202 program provides a “capital advance” to developers to build rental housing for low-income elderly individuals, with any subsidized rent payments capped to prevent the owner from accumulating surplus income. In addition, the Section 202 program places restrictions on the tenant’s identity (i.e. low-income elderly individuals) and the rent level, thereby creating below-market rent levels. The Court in Notestine held that these “contract rent” levels (as opposed to “market rent”) may be used to determine the value of the property in this case. The Court further explained that “[t]he guiding principle from Alliance Towers [57 Ohio St.3d 16 (1988)], articulated in Woda Ivy Glen [121 Ohio St.3d 175 (2009)] and reiterated in [Network Restorations], is that the valuation method must account for the ‘affirmative value’ of government subsidies, i.e., the tendency of government subsidies to inflate the value above what the market would otherwise bear.” The Court further held that the recent amendment to R.C. 5713.03 that requires the auditor to value the “fee simple estate as if unencumbered” did not apply to the tax year at issue. Even if the law change had applied, the Court stated in dicta that it would not preclude the valuation method used in this appeal because the use restriction was government imposed rather than commercially imposed. Bulk Sales In Cincinnati Sch. Dist. Bd. of Ed. v. Hamilton Cty. Bd. of Rev., 151 Ohio St.3d 109, 2017-Ohio- 7650, the parties to a bulk sale including real estate contractually allocated a large portion of the sale price to personal property and goodwill. The Court affirmed the BTA’s decision allowing a reduction for the personal property but not the goodwill. The Court disallowed the reduction for goodwill because the property owner did not satisfy its burden to substantiate the goodwill. The Court held that “an owner who favors the use of an allocated bulk-sale price to reduce the value assigned to real property must bear the burden of proving the propriety of the allocation.” Here, “the record [did] not substantiate a going-concern or goodwill-type asset as constituting part of the sale agreement” (e.g. consumer lists or existing contracts) and there was only a “modest allocation to real estate” that was not “independently supported.
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In Buckeye Terminals, LLC v. Franklin Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio-7664, the Court held that the BTA unreasonably and unlawfully failed to independently weigh the evidence before it to determine valuation for realty included in a bulk sale. The BTA affirmed the board of revision’s property value “based solely on [a conveyance fee statement.]” The Court held that the property owner bears the burden of demonstrating that the value reported on the conveyance-fee statement does not reflect the property’s true value. The Court further held that the property satisfied that burden in this case through the testimony of its property tax
in refusing to admit a spreadsheet as a business record (which formed the foundation for the property owner tax manager’s testimony); (b) rejecting the property owner’s appraiser’s testimony and appraisal report as evidence; and (c) rejecting witness testimony “based on their lack of involvement prior to consummation of the bulk sale.” The Court remanded the appeal for the BTA to determine value based upon the evidence in the record, where it is currently pending as Case No. 2014-4958. Jurisdiction In Groveport Madison Local Sch. Bd. of Ed. v. Franklin Cty. Bd. of Rev., 149 Ohio St.3d 706, 2017-Ohio-1428, the Court affirmed the BTA in reinstating the auditor’s valuation, pursuant to a BTA notice of appeal filed over four years after the board of revision issued its decision. The board of revision did not provide notice of its decision reducing property value to the board of education at the time the decision was issued in 2007. The board of education only learned of the decision to an email inquiry to the board of revision in 2011. At that time, the board of education appealed to the BTA, asserting lack of notice as the reason for the delay. The board of education’s notice of appeal referenced the current property owner at the time of the BTA appeal, which acquired the land in 2009 after the board of revision issued its decision. The board
appeal, but the board of revision did not provide the current property owner with notice of the
the BTA mailed a copy to the tax escrow agent for the current owner. The current owner claimed that it did not learn of the decision until 2014 and moved the BTA to vacate its decision, which the BTA denied. The Court held that the BTA lacked jurisdiction to vacate the decision and that the notice provided to the current property owner satisfied statutory rules and constitutional due process guarantees because it was “reasonably calculated” to notify the current property owner of the BTA decision in 2012. In Columbus City Sch. Bd. of Ed. v. Franklin Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio- 8844, the Court held that “when jurisdictional facts are challenged, the party claiming jurisdiction bears the burden of demonstrating that the court has jurisdiction over the subject matter.” In this case, a limited liability company filed a complaint seeking to reduce property valuation, but the signature on the complaint was unintelligible and other evidence did not establish who filed the complaint. The school board filed a motion to dismiss for failure to establish that an authorized representative of the property owner filed the complaint. Because the property owner did not establish that an officer, salaried employee, or member signed the complaint, as R.C. 5715.19(A)(1) requires, the Court reversed the BTA’s holding that the complaint was jurisdictionally valid with instructions to dismiss the appeal on remand.
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In John J. Schiff III Foundation v. Testa, Appeal No. C-170230, (1st Dist. 2017), the First District Court of Appeals granted the Tax Commissioner’s motion to dismiss for failure to specify error in the notice of appeal to the court of appeals, as R.C. 5717.04 requires. Collateral Estoppel In Warrensville Hts. City Sch. Dist. Bd. of Ed. v. Cuyahoga Cty. Bd. of Rev., __ Ohio St.3d __, 2017-Ohio-8845, the Court held that the arm’s length character of a recent sale was fully litigated in a previous case and the collateral estoppel doctrine barred re-litigating the issue. The Court affirmed the BTA’s reliance on appraisal evidence despite a forced sale under supervision
Exemption In Dialysis Centers of Dayton, LLC v. Testa, 150 Ohio St.3d 208, 2017-Ohio-4269, the Court held that the BTA unreasonably and unlawfully denied exemption to a nonprofit dialysis center
split-listed the property for one tax year at issue (namely 2007) as taxable, however, because some space leased to private physicians operating a for-profit business was taxable. Similarly, exemption failed for an earlier tax year at issue, 2006, because private physicians with a profit motive were members of the LLC that owned the property. In 2350 Morse LLC v. Testa, __ Ohio St. 3d __, 2017-Ohio-7800, the Court granted exemption under both the public schoolhouse (R.C 5709.07(A)(1)) and charitable (R.C. 5709.121) exemptions for realty that a property owner leased to a nonprofit to operate a charter school. The property owner was a disregarded entity with a sole member, a nonprofit 501(c)(3) entity. The
from the owner to operate charter schools. The property owner’s only activity was to lease the property to its sole member’s nonprofit members. Based upon BTA testimony from the president
property “with a view to profit” and granted exemption. This case contrasts with a 2016 Ohio Supreme Court case addressing an extremely similar fact pattern, in which the Court affirmed the BTA’s finding that the owner leased the property to a charter school with a view to profit. See, 250 Shoup Mill, LLC v. Testa, 147 Ohio St.3d 98 (2016). In Breeze, Inc. v. Testa, __ Ohio St.3d __, 2017-Ohio-7801, the Court addressed a similar fact pattern to those presented in 2350 Morse LLC and 250 Shoup Mill, but this time vacated the BTA’s finding that the property was leased with a view to profit and remanded the case to the BTA to determine whether the property was leased with a view to profit. The property owner was for-profit corporation during the years at issue, such that the Court left open the possibility that exemption may be allowed for property held by a for-profit entity. The appeal is currently pending before the BTA on remand. See, BTA Case No. 2012-2216. In Kinnear Rd. Redevelopment, LLC v. Testa, __ Ohio St.3d __, 2017-Ohio-8816, the Court reversed the BTA and Tax Commissioner to grant exemption pursuant to former R.C. 5709.87
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for a former brownfield site that was remediated and improved with apartment buildings. The Court construed former R.C. 5709.87 to allow exemption for improvements to the land that were constructed after the tax lien date. By contrast, current R.C. 5709.87 provides that exemption is allowed for “the increase in the assessed value of improvements, buildings, fixtures, and structures that are situated on that [remediated] land on the tax lien date of the year in which the remedial activities began.” The Court also determined that the Tax Commissioner waived statutory construction arguments raised for the first time in briefing before the Court. Current Agricultural Use Valuation In Adams v. Testa, __ Ohio St.3d __, 2017-Ohio-8853 (“Adams I”), the Court reversed the BTA and held that the Tax Commissioner’s annual administrative journal entry providing tables for county auditors to use to establish the taxable value of agricultural land for CAUV purposes, is a “final determination” that may be appealed to the BTA under R.C. 5717.02. The Court remanded the appeal to the BTA to determine whether the Tax Commissioner’s tables properly reflect the value of woodland clearing costs. In so holding, the Court further held that the landowners who are taxpayers have standing to file such an appeal. The Court also determined that the Tax Commissioner’s journal entry is not a rule that needed to be promulgated pursuant to Chapter 119 of the Revised Code. In Adams v. Testa, __ Ohio St.3d __, 2017-Ohio-8853 (“Adams II”), the Court held the BTA had jurisdiction to hear and decide landowner’s rule-review appeal under R.C. 5703.14 against the Ohio Administrative Code provisions directing the Tax Commissioner to issue his annual journal entry with CAUV tables for agricultural land. The Court, however, determined that the BTA did not have jurisdiction to hear the landowners rule-review challenges to the tables themselves under R.C. 5703.14. With respect to the landowners’ challenge to the Administrative Code provisions, the Court held that the landowners did not satisfy their burden to show “that the rule is unreasonable.”
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’slength 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, 2005Ohio4979, ¶ 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
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 longterm lease to make arguably “abovemarket” rental payments. At a BTA hearing, the
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
rebuttal evidence to the contrary.
Recent arm's length sale no longer conclusive evidence of true value for tax purposes
DAVID EBERSOLE TAX AND BENEFITS CHALLENGES JUL 12, 2017
DAVID EBERSOLE
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[Cite as Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, 150 Ohio St.3d 527, 2017-Ohio-4415.]
TERRAZA 8, L.L.C., APPELLANT, v. FRANKLIN COUNTY BOARD OF REVISION
ET AL., APPELLEES.
[Cite as Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, 150 Ohio St.3d 527, 2017-Ohio-4415.] Taxation—Real-property valuation—Amendment to R.C. 5713.03 enacted in 2012 Am.Sub.H.B. No. 487 applies to valuations for tax year 2013—Under R.C. 5713.03, as amended by 2012 Am.Sub.H.B. No. 487, a recent, arms-length sale price constitutes the best evidence of a property’s value, but such a sale price no longer conclusively determines that value as it did under prior law—Decision of Board of Tax Appeals vacated and cause remanded. (No. 2015-2063—Submitted April 5, 2017—Decided June 22, 2017.) APPEAL from the Board of Tax Appeals, Nos. 2015-279 and 2015-280. ______________ FISCHER, J. {¶ 1} At issue in this case is whether a recent amendment to R.C. 5713.03 applies to real-property valuations for tax year 2013 and, if so, whether the statutory change affects how taxing authorities must value lease-encumbered properties that have been the subject of recent arm’s-length sales. We conclude that the amendment to R.C. 5713.03 enacted in 2012 Am.Sub.H.B. No. 487 (“H.B. 487”) applies here and that the statutory change requires us to remand this case to the Board of Tax Appeals (“BTA”) for further consideration. Facts and Procedural History {¶ 2} The subject property is a 54,261-square-foot fitness center situated on 3.41 acres in Franklin County and owned by appellant, Terraza 8, L.L.C. (“Terraza”). The building was constructed in 2007.
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{¶ 3} The Franklin County auditor assessed the 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 $15,403,200, based on its assertion that that was the amount Terraza paid for it in February 2013. Terraza did not defend against the complaint, and the BOR increased the valuation to $15,403,200 for tax years 2013 and 2014. Terraza appealed both years’ valuations to the BTA. {¶ 4} At the BTA hearing, Terraza introduced the testimony and appraisal
simple market value of the property.” She used income and sales-comparison approaches to determine a value that she referred to as the property’s “fee simple”
when Terraza acquired the property, which provided for an initial 20-year term ending in 2027 and two 10-year optional renewal periods, called for monthly rental payments above the market rate. She testified that the monthly market-rate rent for comparable properties in 2013 was $11 per square foot while the lease here called for monthly rental payments of $22 per square foot in 2013. Her income-approach valuation was $5,650,000. Her sales-comparison valuation was $7,055,000. She accorded greater weight to the sales-comparison approach, reaching a final valuation of $7,055,000. {¶ 5} The BOE objected to the evidence presented by Costello, arguing that it was inadmissible because Terraza had not rebutted the recency or arm’s-length nature of the sale. Terraza countered that the evidence was admissible due to a change in R.C. 5713.03, which, it alleged, required the county auditor, the BOR, and the BTA to value the unencumbered fee-simple estate of the property. The BTA overruled the objection and admitted the evidence. {¶ 6} The BTA found that an amended version of R.C. 5713.03 applies in this case but concluded that the change did not overrule Berea City School Dist. Bd.
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834 N.E.2d 782, ¶ 13, which held that property must be valued according to the sale price of a recent arm’s-length transfer. The BTA, therefore, disregarded Costello’s appraisal and, after making a slight adjustment to the BOR’s valuation, determined a value of $15,403,120 for tax year 2013. It also found that the BOR lacked jurisdiction to determine value for tax year 2014 and instructed the BOR to vacate its decision for that year. Terraza appealed the determination for tax year 2013 to this court. Standard of Review {¶ 7} We must affirm the BTA’s decision if it was “reasonable and lawful.” R.C. 5717.04. In making this determination, we must consider legal issues de novo, Akron City School Dist. Bd. of Edn. v. Summit Cty. Bd. of Revision, 139 Ohio St.3d 92, 2014-Ohio-1588, 9 N.E.3d 1004, ¶ 10-11, and defer to findings concerning the weight of evidence so long as they are supported by the record, Olmsted Falls Bd.
909 N.E.2d 597, ¶ 27. Recent Arm’s-Length Sales under Ohio Law Ohio Constitution, Article XII, Section 2, and R.C. 5713.01 {¶ 8} The Ohio Constitution provides that “[l]and and improvements thereon shall be taxed by uniform rule according to value.” Ohio Constitution, Article XII, Section 2. In State ex rel. Park Invest. Co. v. Bd. of Tax Appeals, 175 Ohio St. 410, 195 N.E.2d 908 (1964), we held that Article XII, Section 2, along with R.C. 5713.01, establishes the criterion for the assessment of real property in
assess all the real estate situated in the county at its true value in money.” Am.S.B.
R.C. 5713.01 a number of times since then, the statute still requires county auditors to appraise real property “at its true value in money.” R.C. 5713.01(B).
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{¶ 9} “[T]he value or true value in money of real property” refers to “the amount for which that property would sell on the open market by a willing seller to a willing buyer * * *, i.e., the sales price.” Park Invest. Co. at 412. We have explained that “[t]he best method of determining value, when such information is available, is an actual sale of such property between one who is willing to sell but not compelled to do so and one who is willing to buy but not compelled to do so.” Id., citing In re Estate of Sears, 172 Ohio St. 443, 178 N.E.2d 240 (1961), paragraph two of the syllabus. “This, without question, will usually determine the monetary value of the property.” Id. Later, in Conalco, Inc. v. Monroe Cty. Bd. of Revision, 50 Ohio St.2d 129, 363 N.E.2d 722 (1977), we reiterated that “[t]he best evidence
in an arm’s-length transaction.” Id. at paragraph one of the syllabus, quoting R.C. 5713.01. The 1976 amendment to R.C. 5713.03 {¶ 10} When we decided Park Invest. Co. in 1964, R.C. 5713.03 provided that “[t]he county auditor, from the best sources of information available, shall determine, as nearly as practicable, the true value * * * of real property * * * according to the rules prescribed by sections 5713.01 to 5713.21, inclusive, and section 5715.01 of the Revised Code for valuing real property.” 128 Ohio Laws at
{¶ 11} In 1976, the General Assembly amended R.C. 5713.03 by adding now-familiar language: 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
within a reasonable length of time, either before or after the tax lien
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date, the auditor shall consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes. Am.Sub.H.B. No. 920, 136 Ohio Laws, Part II, 3182, 3247. In Cummins Property Servs., L.L.C. v. Franklin Cty. Bd. of Revision, 117 Ohio St.3d 516, 2008-Ohio- 1473, 885 N.E.2d 222, ¶ 23, we stated that this amendment “reinforced” the idea stated in Park Invest. Co.: that the point of every valuation—whether based on a recent sale price or an appraisal—is to determine the price the property would sell for on the open market. {¶ 12} Following the 1976 amendment, we continued to adhere to the best- evidence principle articulated in Conalco when evidence of a recent sale price was
218, 219, 459 N.E.2d 894 (1984). In Fountain Square Assocs., however, we suggested that an appraisal might be used to determine a value different from an actual sale price “where it is shown that the sales price is not reflective of true value.” Id. {¶ 13} Two years later in Ratner v. Stark Cty. Bd. of Revision, 23 Ohio St.3d 59, 491 N.E.2d 680 (1986) (“Ratner I”), we again reaffirmed the best-evidence rule
market value” that establishes the property’s presumptive true value, id. at 61. But this court in Ratner I held that a sale price is “not the only evidence” of true value,
thus rejected “an absolutist interpretation” of R.C. 5713.03 that would require a property to be valued according to a recent sale price. Id. at 61. See also Ratner v. Stark Cty. Bd. of Revision, 35 Ohio St.3d 26, 28, 517 N.E.2d 915 (1988) (“Ratner II”) (“the price paid by the taxpayer is one factor, the best factor, but not the controlling factor”).
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{¶ 14} We overruled Ratner I and Ratner II in Berea, 106 Ohio St.3d 269, 2005-Ohio-4979, 834 N.E.2d 782, at ¶ 13. In doing so, we focused on the language
added in the 1976 amendment, 136 Ohio Laws, Part II, at 3247—“the auditor shall consider the sale price * * * to be the true value for taxation purposes”—and held that it requires property to be valued according to the sale price of a recent arm’s- length transaction. (Emphasis added.) Berea at ¶ 13. We later explained that the statute “reject[s] * * * appraisal evidence of the value of the property whenever a recent, arm’s-length sale price has been offered as evidence of value.” Cummins Property Servs., 117 Ohio St.3d 516, 2008-Ohio-1473, 885 N.E.2d 222, at ¶ 13. Under the former version of R.C. 5713.03 at issue in those cases, a party could avoid a recent sale price only by showing that the sale was not recent to the tax-lien date or was not an arm’s-length transaction. Berea at ¶ 13, 16. The H.B. 487 amendment to R.C. 5713.03 (effective September 10, 2012) {¶ 15} The General Assembly made two significant changes to R.C. 5713.03 in 2012 that are relevant here. First, it required county auditors to determine “the true value of the fee simple estate, as if unencumbered, of each separate tract, lot, or parcel of real property and of buildings, structures, and improvements located thereon.” (Emphasis added to indicate new words inserted.) R.C. 5713.03, as amended by 2012 Am.Sub.H.B. No. 487. And second, concerning recent arm’s-length sales, it replaced shall with may: “the auditor may consider the sale price * * * to be the true value for taxation purposes.” (Emphasis added.) Id. Terraza argues that this version of R.C. 5713.03 applies in this case. The BOE disagrees. The later 2012 amendment to R.C. 5713.03 (effective March 27, 2013) {¶ 16} The General Assembly again amended R.C. 5713.03 in late 2012, making additional changes that are not relevant here but retaining the changes introduced by H.B. 487. See 2012 Am.Sub.H.B. No. 510 (“H.B. 510”). H.B. 510
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went into effect March 27, 2013. Id. No party argues that the H.B. 510 amendment applies here. The H.B. 487 Version Applies Apply the law in effect on the tax-lien date {¶ 17} Because this case involves tax year 2013, the BTA had to determine the property’s value on January 1, 2013, the tax-lien date. See Fawn Lake Apts. v. Cuyahoga Cty. Bd. of Revision, 85 Ohio St.3d 609, 612, 710 N.E.2d 681 (1999); see also R.C. 323.11 (making January 1 of each year the tax-lien date); R.C. 5715.01(C) (preventing the tax commissioner from adopting or enforcing “any rule that requires true value for any tax year to be any value other than the true value in money on the tax lien date of such tax year”). It follows that the taxing authorities should apply the substantive law in effect on that date. See R.C. 1.58(A)(2) and (4). {¶ 18} Because the H.B. 487 amendment went into effect on September 10, 2012, and the H.B. 510 amendment went into effect on March 27, 2013, the H.B. 487 version applies to valuations for tax year 2013. Section 757.51 of H.B. 487 does not prevent application of H.B. 487 {¶ 19} The BOE insists that Section 757.51 of H.B. 487 prevented that amendment from going into effect in Franklin County until tax year 2014. Section 757.51 provides that “[t]he amendment by this act of section 5713.03 of the Revised Code applies to the first tax year, after tax year 2012, to which division (A) or (B)
{¶ 20} R.C. 5715.24 addresses the cycle of real-property valuations undertaken by county auditors, who are to assess the real property within their respective counties according to value. See R.C. 5713.01, 5713.03, and 5715.01(B). R.C. 5715.24 describes the reappraisals conducted by a county auditor every six years (R.C. 5715.24(A)) and the update valuations the auditor performs in the third year after the reappraisals (R.C. 5715.24(B)). See Soyko Kulchystsky,
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L.L.C. v. Cuyahoga Cty. Bd. of Revision, 141 Ohio St.3d 43, 2014-Ohio-4511, 21 N.E.3d 297, ¶ 20. Significantly here, not every county auditor completes reappraisals in the same year; the reappraisals are staggered statewide. See Pike- Delta-York Local School Dist. Bd. of Edn. v. Fulton Cty. Budget Comm., 41 Ohio St.2d 147, 150, 324 N.E.2d 566 (1975). This means that some auditors were in the process of completing sexennial reappraisals or triennial updates just as the H.B. 487 amendment to R.C. 5713.03 was going into effect in September 2012. See R.C. 319.28(A) (requiring auditors to certify values to the county treasurer by October 1 each year). {¶ 21} The BOE argues that Section 757.51 is an effective-date clause that prevented the amendment from going into effect in Franklin County until 2014, when the county auditor next applied R.C. 5715.24 by completing a reappraisal or triennial update. One court has adopted this view, construing Section 757.51 as an effective-date provision applicable to certain counties. See Olentangy Local Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 2015-Ohio-2070, 34 N.E.3d 150, ¶ 38 (5th Dist.). Under this view, the BTA and boards of revision cannot apply the H.B. 487 amendment to the properties in some counties, even if they are considering a valuation complaint for a post-2012 tax year. {¶ 22} The intent of Section 757.51 is not clearly stated, but it is better understood as an instruction to apply the H.B. 487 amendment prospectively but not to valuations for tax year 2012. The section did not prevent the amendment from taking effect in any county or prevent boards of revision or the BTA from applying the amendment when considering post-2012 valuation complaints. {¶ 23} Two aspects of the language used by the General Assembly support this interpretation. First, Section 757.51 directly ties the limitation to an auditor’s application of R.C. 5713.03 when carrying out obligations under R.C. 5715.24(A)
sexennial reappraisals or triennial-update valuations under R.C. 5715.24. And
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second, Section 757.51 twice refers to “appl[ying]” the statutes, while six other sections of H.B. 487 (Sections 812.10, 812.11, 812.12, 812.20, 812.21, and 812.30) refer to when certain parts of the act were to “take effect” or when particular legislation “takes effect.” The General Assembly’s use of different language in Section 757.51 signals that that section does not address the effective date of the
auditors not to use the amended version while completing reappraisals and updates for 2012 while also instructing them to apply the amendment at the next post-2012 reappraisal or update. {¶ 24} Thus, as applicable in this case, R.C. 5713.03 provides that “[t]he county auditor * * * shall determine * * * the true value of the fee simple estate, as if unencumbered, of each separate tract, lot, or parcel of real property and of buildings, structures, and improvements located thereon * * *.” (Emphasis added.) 2012 Am.Sub.H.B. No. 487. The statute further provides that if the property has been the subject of a recent arm’s-length sale, “the auditor may consider the sale price * * * to be the true value for taxation purposes.” (Emphasis added.) Id. Recent Arm’s-Length Sales under R.C. 5713.03, as Amended by H.B. 487 {¶ 25} In its first proposition of law, Terraza argues that amended R.C. 5713.03, as applicable here, significantly changes the way taxing authorities must hear and analyze a case involving the recent arm’s-length sale of a lease- encumbered property. Terraza asserts that Berea, 106 Ohio St.3d 269, 2005-Ohio- 4979, 834 N.E.2d 782, no longer controls this inquiry and that tax valuations involving recent arm’s-length sales now must account for the value of
taxing authorities must consider whether the lease calls for rent at the market rate. With this premise, Terraza contends (1) that the BOE presented “no evidence” that the sale reflected the value of the unencumbered fee-simple estate and (2) that its
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value of the unencumbered fee-simple estate. Legislative override of Berea {¶ 26} Terraza is correct that the statutory amendment overrides Berea. The fundamental question in Berea was whether a property should be valued as if unencumbered even when it was the subject of a recent arm’s-length sale. Id. at ¶ 5-6. Relying on the plain language of former R.C. 5713.03, we held 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.’ ” Id. at ¶ 13, quoting former R.C. 5713.03, 136 Ohio Laws, Part II, at 3247. The former statutory language thus foreclosed an opposing party from introducing appraisal evidence to override a recent arm’s-length sale price. See id. at ¶ 15. {¶ 27} In reaching that holding, we distinguished and declined to apply the first syllabus paragraph of Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision, 37 Ohio St.3d 16, 523 N.E.2d 826 (1988), which stated, “For real property tax purposes, the fee simple estate is to be valued as if it were unencumbered.” See Berea at ¶ 5, 14-15. The H.B. 487 amendment—requiring valuation of “the fee simple estate, as if unencumbered”—now calls for application of that very rule, regardless of whether the property at issue was the subject of a recent sale. The General Assembly reinforced this policy change by modifying in H.B. 487 the mandatory language on which we relied in Berea, directing that the auditor may— not shall—“consider the sale price * * * to be the true value for taxation purposes.” R.C. 5713.03. The statutory amendment thus allows taxing authorities to consider non-sale-price evidence—particularly evidence of encumbrances and their effect
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{¶ 28} The BOE takes a different view of the H.B. 487 amendment. The BOE’s main argument is that if the H.B. 487 amendment applies here, the recent arm’s-length sale price remains the “best evidence” and creates a rebuttable presumption of the property’s value. We will address the merits of this argument
sale price because of the encumbrance” of the lease when the subject property was sold in a recent arm’s-length transaction and that (2) “the appraisal evidence cannot be used to rebut the arm’s-length sale.” The BOE does not explain how the language of amended R.C. 5713.03 supports this view. {¶ 29} And for its part, the BTA concluded that the changes to R.C. 5713.03 “do not overrule the directive consistently set forth by the Supreme Court that this board rely on a recent arm’s-length sale of the property if evidence of such a sale is properly before us.” BTA Nos. 2015-279 and 2015-280, 2015 Ohio Tax LEXIS 4165, *8 (Nov. 30, 2015). But like the BOE, 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. {¶ 30} In the absence of a persuasive argument to the contrary, we hold that H.B. 487 overrode Berea and that a recent arm’s-length sale price is not conclusive evidence of the true value of property under R.C. 5713.03, as amended by H.B. 487. The best-evidence rule of property valuation endures {¶ 31} Terraza argues that the BOE submitted no evidence showing that the February 2013 sale price reflected the value of the unencumbered fee-simple estate. In essence, Terraza contends that evidence of the sale price itself was insufficient— i.e., that a proponent of a recent sale price as indicative of value needs to submit evidence of the sale and affirmative evidence showing that the sale price reflects the value of the unencumbered fee-simple estate. We reject this aspect of Terraza’s argument.
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{¶ 32} Terraza’s argument implicates two distinct, yet related, judicially created rebuttable presumptions. The first is the presumption that a submitted sale price “has met all the requirements that characterize true value.” Cincinnati School
N.E.2d 1197 (1997). In Dublin City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 118 Ohio St.3d 45, 2008-Ohio-1588, 885 N.E.2d 934, ¶ 16, we applied Cincinnati School Dist. in the context of encumbrances, stating that “the burden lies upon the party who opposes the use of the sale price to show that the encumbrances on the property constitute a reason to disregard the sale price as an indicator of value.” This supports our conclusion that the proponent of a sale is not required, as an initial matter, to affirmatively demonstrate with extrinsic evidence that a sale price reflects the value of the unencumbered fee-simple estate. Once the BOE provided basic documentation of the sale, Terraza had the burden of going forward with rebuttal evidence showing that the price did not, in fact, reflect the property’s true value. See Cincinnati School Dist. at 327-328. {¶ 33} The second presumption is rooted in the best-evidence rule of property valuation, which, as explained earlier in this opinion, provides that “[t]he best evidence of the ‘true value in money’ of real property is an actual, recent sale
N.E.2d 722, at paragraph one of the syllabus, quoting R.C. 5713.01; Park Invest. Co., 175 Ohio St. at 412, 195 N.E.2d 908. We have said that this rule—which existed before R.C. 5713.03 was amended to refer to recent arm’s-length sales, see 136 Ohio Laws, Part II, at 3247—creates a rebuttable presumption that the sale price reflected true value. See Ratner I, 23 Ohio St.3d at 61, 491 N.E.2d 680. Nothing suggests that the General Assembly intended to depart from this longstanding rule. Indeed, R.C. 5713.03 continues to refer to recent arm’s-length sales by permitting the use of sale prices in determining value. This signals that the
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General Assembly still favors the use of recent arm’s-length sale prices in determining value for taxation purposes. {¶ 34} With this in mind, Terraza’s argument is wrong in two respects. First, it incorrectly states that there is “no evidence” that the sale price reflected the value of the unencumbered fee-simple estate. The February 2013 sale price, which Terraza does not dispute, is the best evidence of the property’s true value, subject to rebuttal. And second, R.C. 5713.03 does not now “require[ ] an inquiry into whether a lease in place reflects market rent at the time of a sale,” as Terraza maintains in its first proposition of law. (Emphasis added.) Market rent becomes relevant only if an opponent presents it as evidence in an attempt to rebut a sale price. Terraza’s rebuttal evidence {¶ 35} Terraza presented evidence—Costello’s appraisal and testimony— in an attempt to show that its arm’s-length purchase price did not reflect the value
unreasonable and unlawful because the BTA did not even consider that evidence. {¶ 36} Terraza is right. Although the BTA overruled the BOE’s evidentiary
applied our holding in Berea, valuing the property according to the sale price without addressing the substance of the appraisal. Because the BTA viewed the sale-price evidence as irrebuttable, its decision contravened R.C. 5713.03, as amended by H.B. 487. The decision, therefore, was unreasonable and unlawful. {¶ 37} We decline to undertake the task that the BTA failed to perform. As would be expected, the parties disagree about the weight that should be afforded to Costello’s opinions. Terraza argues that the appraisal is dispositive because its market-rent analysis refutes the usefulness of the sale price and the BOE offered no
the appraisal, arguing that no one with personal knowledge testified concerning the
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using the sale price as the value of the property, it did not fulfill its role as fact- finder concerning all the evidence before it. We vacate the BTA’s decision and remand this case for the BTA to address and weigh the evidence before it in the first instance. See Bedford Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 132 Ohio St.3d 371, 2012-Ohio-2844, 972 N.E.2d 559, ¶ 3. Ohio Adm.Code 5703-25-07(D)(2) {¶ 38} In its second proposition of law, Terraza argues that Ohio Adm.Code 5703-25-07(D)(2) “requires” taxing authorities to consider whether a lease reflects market rent at the time of a sale. We hold that the administrative rule does not alter the framework outlined above, because it does not mandate a particular methodology for appraising a property’s value. Ohio Adm.Code 5703-25-07(D) instructs county auditors that they “may consider the use of any or all of the recognized three approaches to value,” and Ohio Adm.Code 5703-25-07(D)(2) addresses the income approach. (Emphasis added.) The rule does not require the use of the income approach in every valuation or require the proponent of a sale price to present evidence concerning market rent or the values of the “leasehold” and “leased fee,” terminology Terraza uses in its brief. We therefore reject Terraza’s second proposition of law. Conclusion {¶ 39} The H.B. 487 amendment to R.C. 5713.03 applies in this case. This means that the BTA had to determine the value of the subject property’s unencumbered fee-simple estate. The February 2013 sale—although recent to the tax-lien date and arm’s length in nature—does not conclusively determine that
price did not reflect the value of the unencumbered fee-simple estate in this case. Because the BTA did not properly consider that evidence, we vacate the BTA’s
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decision and remand the case for the BTA to address and weigh the evidence before it. Decision vacated and cause remanded. O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, O’NEILL, and DEWINE, JJ., concur. _________________ Sleggs, Danzinger & Gill, Co., L.P.A., and Todd W. Sleggs, for appellant. Rich & Gillis Law Group, L.L.C., Mark Gillis, and Kimberly G. Allison, for appellee Hilliard City Schools Board of Education. _________________
OHIO BOARD OF TAX APPEALS TERRAZA 8 LLC, (et. al.), Appellant(s), vs. FRANKLIN COUNTY BOARD OF REVISION, (et. al.), Appellee(s). CASE NO(S). 2015-279, 2015-280 (REAL PROPERTY TAX) DECISION AND ORDER APPEARANCES: For the Appellant(s)
Represented by: TODD W. SLEGGS SLEGGS, DANZINGER & GILL, CO., LPA 820 WEST SUPERIOR AVENUE, SEVENTH FLOOR CLEVELAND, OH 44113 For the Appellee(s)
Represented by: WILLIAM J. STEHLE ASSISTANT PROSECUTING ATTORNEY FRANKLIN COUNTY BOARD OF REVISION 373 SOUTH HIGH STREET, 20TH FLOOR COLUMBUS, OH 43215 BOARD OF EDUCATION OF THE HILLIARD CITY SCHOOL DISTRICT Represented by: KIMBERLY G. ALLISON RICH & GILLIS LAW GROUP, LLC 6400 RIVERSIDE DRIVE, SUITE D DUBLIN, OH 43017 Entered Wednesday, November 8, 2017
These matters are again before this board following the Supreme Court’s decision vacating our November 30, 2015 decision and order, and remanding for further consideration. Terraza 8, L.L.C. v. Franklin Cty. , Slip Opinion No. 2017-Ohio-4415. We therefore proceed to consider the matter upon the
notices of appeal, the statutory transcript (“S.T.”) certified pursuant to R.C. 5717.01, the record of the hearing before this board (“H.R.”), the court’s decision, and the parties’ written legal argument. These matters involve the valuation of parcel number 560-280577 for tax years 2013 and 2014. Initially, we note that the Franklin County Board of Revision (“BOR”) issued its decision for tax year 2014 prior to the deadline for filing complaints for that time period, i.e., March 31, 2015, on February 5, 2015.
Accordingly, the BOR lacked jurisdiction to issue a decision finding value for tax year 2014 at that time. We therefore remand these matters as to tax year 2014 with instructions that the BOR vacate its February 5, 2015 decision and take further action as appropriate to determine value for tax year 2014. The BOR did, however, properly have jurisdiction to consider the value of the property for tax year 2013. The auditor had initially valued the property at $4,850,000 for tax year 2013. The appellee Hilliard City Schools Board of Education (“BOE”) filed a complaint against valuation seeking an increase in value to $15,403,200 – the amount for which the property sold in February 2013. At the BOR hearing, counsel for the BOE presented a conveyance fee statement and deed in support of its requested value; the property
BOR issued a decision finding value for tax year 2013 in accordance with the February 2013 sale. Terraza 8 thereafter appealed to this board. At this board’s hearing, Terraza presented the appraisal report and testimony of Patricia Costello, a certified general appraiser in Ohio, who opined a value of $7,055,000 as of January 1, 2013. Although this board, in our November 30, 2015 decision and order, rejected Ms. Costello’s appraisal report in light of the presence of an arm’s-length sale, the Supreme Court vacated our decision and remanded the matter for this board to address and weigh the appraisal evidence, in light of its holding that this board “erroneously applied a conclusive presumption in favor of using the sale price as the value of the property.” , supra, at ¶37. Terraza 8 R.C. 5713.03 provides that “[t]he county auditor *** shall determine *** the true value of the fee simple estate, as if unencumbered, of each separate *** parcel of real property and of buildings, structures, and improvements located thereon ***.” If a property has been the subject of a recent, arm’s-length sale, “the auditor consider the sale price ** to be the true value for taxation purposes.” (Emphasis added.) On may appeal, the Supreme Court held that R.C. 5713.03, as applicable to the tax year before us, overrules the court’s holding in , 106 Ohio St.3d Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision 269, 2005-Ohio-4979 under a prior version of the statute, that “foreclosed an opposing party from , introducing appraisal evidence to override a recent, arm’s-length sale price.” Id. at ¶26. Following amendment of the statute, a recent arm’s-length sale is still presumed the best evidence of a property’s value; however, appraisal evidence may be presented to show that the sale price is not reflective of true
, 23 Ohio St.3d 59 (1986); Ratner v. Stark Cty. Bd. of Revision Columbus Bd. of Edn. , 9 Ohio St.3d 218 (1984).
The parties do not dispute that the subject property transferred in a recent, arm’s-length transaction in February 2013 for $15,403,200. Terraza 8 argues that the sale did not reflect the fee simple value of the property, as the property sold subject to a long-term lease to a national tenant. Initially, we note that the court found the presence of a lease at the time of sale does not per se render the sale an unreliable indication of value. “[T]he burden lies upon the party who opposes the use of the sale price to show that the encumbrances on the property constitute a reason to disregard the sale price as an indicator of value.” , 118 Ohio St.3d 45, 2008-Ohio-1588, ¶16; Dublin City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision , supra, at ¶32. In these matters, the BOE argues that, as an initial matter, Terraza has failed to Terraza establish that the property did, in fact, sell subject to a lease, as no one personally involved with the sale testified before either this board or the board of revision. However, Ms. Costello testified, based on her conversations with individuals associated with the property owner and her review of a lease agreement between P&P Real Estate, LLC and Hilliard Fitness, LLC dated April 1, 2007, that the property did, in fact, sell subject to a lease. H.R. at 16, 19, 21; Ex. 1 at 20, Ex. 2. While Terraza argues that Ms. Costello is competent to testify about the lease, given her review of the lease in appraising the property and developing her expert opinion of value, the BOE responds that such testimony is hearsay. However, proceedings before this board are not strictly bound by the rules of evidence. , 132 Ohio St.3d 55, 2012-Ohio-1871, ¶13. While this board agrees HealthSouth Corp. v. Testa with the BOE that we would certainly prefer to have testimony from an individual personally involved with the sale of the property, here, “the record contains indicia of reliability” for Ms. Costello's testimony.
, 130 Ohio St.3d 230, 2011-Ohio-3362, Plain Local Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision ¶21. Terraza presented at this board’s hearing a copy of a lease agreement for the subject property dated April 1, 2007. H.R., Ex. 2. The terms of that agreement indicate that, during the initial term which would include 2013, the base rent amount was $90,435 per month, or $20 per square foot on an annual basis. Although Ms. Costello indicates in her appraisal report that the lease rate was fixed for ten years at $22 per square foot, H.R., Ex. 1 at 20, we find such discrepancy immaterial to our analysis. We find the evidence presented, i.e., the April 1, 2007 lease and Ms. Costello’s testimony, sufficient to establish that the property was subject to a lease at the time of the February 2013 sale. We therefore turn to whether the actual rent was at, above, or below market rent. Ms. Costello, in appraising the property, prepared a market rent analysis using four lease comparables, and concluded to a market rent (at the top of the range) of $11 per square foot. H.R., Ex. 1 at 31. The BOE argues that Ms. Costello’s choice of “second-generation” lease comparables, rather than “first-generation,” and of comparables dissimilar in terms of location and amenities, i.e., indoor pool and locker rooms, renders her analysis not probative of the subject’s market rent. As to the latter, Ms. Costello noted that the subject, unlike any of her comparables, had an indoor pool – a “unique space.” Id. at 18. She did not adjust her comparables for this space, as potential tenants/owners could use the space for employees or an outside
In prior cases, this board has determined “that the existence of comparable first-generation sales and leases successfully refutes any evidence that suggests that the subject is marketable only to second-generation users.” (May 27, 2008), BTA Nos. Meijer Stores Ltd. Partnership v. Franklin Cty. Bd. of Revision 2005-T-441, 443, unreported, at 19-20, affirmed 122 Ohio St.3d 447, 2009-Ohio-3479. However, where no evidence of such first-generation sales and leases have been presented, we have declined to speculate about their existence. See, e.g., (July 15, Wal-Mart Real Estate Business Trust v. Fulton Cty. Bd. of Revision 2005), BTA No. 2003-T-913, unreported. Here, Ms. Costello testified that the subject’s lease was not at a market rate due to its length, i.e., 20 years initial term, and it being with a national tenant. H.R. at 19; Ex. 1 at 2. However, she did include in her appraisal report a comparable sale with the same criteria, i.e., long term and national tenant. Comparable sale 5 was reported to have been “purchased on the strength of the existing lease rate of $10.15 per square foot, effective as of February 2, 2015,” to a national tenant for a term of seven years. H.R. at 39, 49; Ex. 1 at 48. In the absence of any evidence of “first-generation” leases demonstrating a different market in which the subject operates, as the BOE suggests, we must conclude from the record before us that Terraza has sufficiently demonstrated that the actual rent in place for the subject property at the time of the sale was above market. Accordingly, we find the sale is not reflective of the property’s fair market value on tax lien date. Turning to the remainder of Ms. Costello’s report, we review the data therein and her opinion of value in determining the value of the subject property as of January 1, 2013. Ms. Costello gave greatest weight to her sales comparison approach, “as the majority of these facilities sell on a fee simple basis as vacant buildings.” H.R., Ex. 1 at 51. Using five comparable sales in Franklin, Delaware, and Fairfield counties that occurred between August 2012 and June 2015 for unadjusted prices of $77.39 to $174.33 per square foot, Ms. Costello concluded to a value of $130 per square foot for the subject, or $7,055,000 rounded. She also gave some weight to her income capitalization approach as support for her overall value. In her income approach, she utilized four lease comparables to conclude to a market lease rate of $11 per square foot, a vacancy and collection loss of 5.5%, and expenses and replacement allowance of $3.67 per square foot, to arrive at a net operating income of $546,937. She then capitalized that net operating income at 9.68% to conclude to an overall value of $5,650,000 rounded. Relying primarily on the value under the sales comparison approach, she reconciled to a value of $7,055,000 for the subject property as of January 1, 2013. Upon review of Ms. Costello’s report and testimony, we find her value conclusion reasonable and well-supported. We find her opinion of value to be the best evidence of value in the record before us in these matters.
It is therefore the order of this board that the true and taxable values of the subject property as of January 1, 2013, were as follows: TRUE VALUE $7,055,000 TAXABLE VALUE $2,469,250 BOARD OF TAX APPEALS
RESULT OF VOTE YES NO
I hereby certify the foregoing to be a true and complete copy of the action taken by the Board of Tax Appeals of the State of Ohio and entered upon its journal this day, with respect to the captioned matter. _____________________________ Kathleen M. Crowley, Board Secretary
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 2350 Morse, L.L.C. v. Testa, Slip Opinion No. 2017-Ohio-7800.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2017-OHIO-7800 2350 MORSE, L.L.C., APPELLANT, v. TESTA, TAX COMMR., ET AL., APPELLEES. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 2350 Morse, L.L.C. v. Testa, Slip Opinion No. 2017-Ohio-7800.] Taxation—Real property—“Public schoolhouse” exemption—Former R.C. 5709.07(A)(1)—View to profit—Exclusive-charitable-use exemption—R.C. 5709.12(B) and 5709.121—Record does not support Board of Tax Appeals’ finding of a view to profit—Decision denying claims for exemption reversed. (No. 2015-0342—Submitted February 28, 2017—Decided September 26, 2017.) APPEAL from the Board of Tax Appeals, Nos. 2012-1934 and 2012-2214. __________________ Per Curiam. {¶ 1} 2350 Morse, L.L.C., appeals the decision of the Board of Tax Appeals affirming the tax commissioner’s denial of its application for tax exemption of real property leased to a community school. The Board of Tax Appeals (“BTA”)
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rejected 2350 Morse’s claim that it was entitled to either the public-schoolhouse exemption codified at former R.C. 5709.07(A)(1), 2005 Am.Sub.H.B. No. 66, 151 Ohio Laws, Part II, 2868, and Part III, 4397, or the expanded charitable-or-public- use exemption under R.C. 5709.12, as clarified in R.C. 5709.121. {¶ 2} This appeal presents the same overall corporate structure and the same claims for exemption as those at issue in 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016-Ohio-5012, 60 N.E.3d 1254, and Breeze, Inc. v. Testa, ___ Ohio St.3d ___, 2017-Ohio-7801, ___ N.E.3d ___. In all three cases, the BTA found a “view to profit” in the leasing arrangement that defeated the claims for exemption. In Shoup Mill, we determined that the record supported that finding and affirmed.
remanded for further proceedings. Id. at ¶ 1. In the present appeal, we hold that the BTA unreasonably ignored evidence of 2350 Morse’s intent in leasing the
no view to profit. We therefore reverse the decision of the BTA. Factual Background {¶ 3} 2350 Morse is part of the arrangement of community schools and related entities that we described more fully in Breeze. Id. at ¶ 2. As part of this arrangement, 2350 Morse holds title to property used by a community school referred to as Horizon Science Academy–Columbus Middle School (“Horizon Middle School”). The property is made up of several contiguous parcels that are located in the Columbus City School District and in the Westerville City School
a nonprofit corporation at the head of the arrangement, for use in support of all the affiliated community schools. In this case, according to New Plan’s financial statements, the monthly mortgage payment for the property was $26,002. The record also shows that Horizon Middle School paid $30,000 a month in rent—an
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amount set at the lender’s insistence that rental income be 15 percent greater than the loan-payment amount. {¶ 4} 2350 Morse sought an exemption for the property for tax year 2010 under both R.C. 5709.07 and 5709.121.1 The tax commissioner’s final determination, however, addressed only R.C. 5709.07. As in Breeze, the tax commissioner determined that because 2350 Morse had collected “substantial market-rate rent,” the property had been leased “with a view to profit” for purposes
2350 Morse appealed to the BTA, which affirmed the denial of the exemption. The Statutory Provisions {¶ 5} Former R.C. 5709.07(A)(1) provided a tax exemption for “[p]ublic schoolhouses, the books and furniture in them, and the ground attached to them necessary for the proper occupancy, use, and enjoyment of the schoolhouses, and not leased or otherwise used with a view to profit.” 151 Ohio Laws, Part III, at
is exempt from taxation. And R.C. 5709.121(A)(2) provides that real property “belonging to a charitable or educational institution * * * shall be considered as used exclusively for charitable or public purposes by such institution,” if the property “is made available under the direction or control of such institution * * * for use in furtherance of or incidental to its charitable, educational, or public purposes and not with the view to profit.” “[T]he key inquiry in determining whether property is leased with a view to profit focuses on the aim or intention of the lessor.” Breeze, ___ Ohio St.3d ___, 2017-Ohio-7801, ___ N.E.3d ___, at ¶ 8.
1 2350 Morse indicated that it was seeking an exemption under R.C. 5709.121, but that statute simplyprovides definitions for the phrase “used exclusively for charitable or public purposes.” The actual source of the charitable-or-public-use exemption is R.C. 5709.12.
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Analysis {¶ 6} 2350 Morse contends that it did not intend to generate a profit from the lease. Murat Arabaci, New Plan’s president and chief financial officer, explained that the amount of rent charged to Horizon Middle School was dictated by the lender. According to Arabaci, a lender normally would require a 20 to 25 percent “cushion” of rental income over expenses, but New Plan was able to negotiate that cushion to 15 percent. The goal, Arabaci maintained, was to minimize the rent paid by the school. In fact, New Plan had a practice of deferring
problems and was unable to pay. {¶ 7} As in Breeze, this evidence was virtually ignored. As it did in that case, the BTA concluded that 2350 Morse’s lease had been done with a view to profit because there was an “excess of rental income over expenses” that was distributed to all the schools in the arrangement. BTA Nos. 2012-1934 and 2012- 2214, 2015 WL 731779, *2 (Jan. 28, 2015). But as we explained in Breeze, although the fact that rental income exceeds expenses may be relevant in determining whether property was leased with a view to profit, the “overriding focus—as prescribed by the language of the statutes—must be on the intent of the lessor.” Breeze at ¶ 13. The BTA’s singular focus on the excess of rental income to the exclusion of 2350 Morse’s undisputed evidence about the intent behind the lease was unreasonable. We therefore reverse its decision. See R.C. 5717.04. {¶ 8} In Breeze, we remanded the case and instructed the BTA to focus on the lessor’s intent under the lease. Breeze at ¶ 16. Here, a remand is not necessary: No reasonable reading of the record could support a finding that 2350 Morse leased the property with a view to profit. The only fact relied upon by the BTA—the modest excess of rental income over expenses—resulted not from an intent to profit from the lease but from compliance with a precondition set by the lender. 2350 Morse’s evidence that it did not intend to profit was uncontradicted.
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Conclusion {¶ 9} For the foregoing reasons, we reverse the decision of the BTA and
Decision reversed. O’DONNELL, KENNEDY, FISCHER, and DEWINE, JJ., concur. O’CONNOR, C.J., concurs in judgment only, with an opinion. FRENCH, J., concurs in judgment only. O’NEILL, J., dissents, with an opinion. _________________ O’CONNOR, C.J., concurring in judgment only. {¶ 10} I concur in judgment only. For the reasons set forth in my dissenting
___, announced today, I disagree with the majority’s analysis to the extent that a majority of this court has overruled 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016-Ohio-5012, 60 N.E.3d 1254, without acknowledging that it has done so. However, in this case, I concur in the judgment reversing the decision of the BTA. {¶ 11} Testimony at the BTA hearing specifically established that the mortgage lender for appellant, 2350 Morse, L.L.C., insisted that the rental income for the property at issue in this case be 15 percent above the loan-payment amount, $26,002 per month, which would have set the rental payment at $29,902.30 per
excess of the amount required by the lender is de minimis for purposes of applying Shoup Mill. {¶ 12} Accordingly, although I agree with the majority’s judgment, I disagree with its rationale and I concur in judgment only. _________________ O’NEILL, J., dissenting.
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{¶ 13} I must respectfully dissent. While the facts here might be slightly different from those in 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016- Ohio-5012, 60 N.E.3d 1254, the same analysis is applicable. We have appellant, 2350 Morse, L.L.C., a company that was a real-estate title-holding company in the business of owning property that was being leased to a charter school. Despite 2350 Morse’s nonprofit tax status, it was not a charitable or educational
{¶ 14} For one thing, as this court stated in Shoup at ¶ 20, if [the landowner] cannot demonstrate that its own use of the property as lessor is charitable, it cannot qualify as a “charitable institution” under R.C. 5709.121 because the ownership and leasing
Ohio Psych. [Inst. v. Levin, 121 Ohio St.3d 292, 2009-Ohio-583, 903 N.E.2d 1188] at ¶ 14; Rural Health Collaborative of S. Ohio,
¶ 23 (“The determination whether a property owner qualifies as a charitable institution under R.C. 5709.121 requires examination of the ‘core activity’ of the institution and determining whether that activity qualifies as charitable for property-tax purposes”). {¶ 15} In the present case, it is undisputed that the sole activity of 2350 Morse was to operate as a landlord. The company was set up to make money, it was making money, and the fact that a schoolhouse was its only tenant is legally irrelevant. {¶ 16} The majority has decided to reverse the decision of the Board of Tax Appeals (“BTA”) in this case primarily on the basis that 2350 Morse’s mortgage payment was 87 percent of the amount it was charging for rent on the property. In
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my view, whether that number was 87 percent or 67 percent as it was in Shoup, see 147 Ohio St.3d 98, 2016-Ohio-5012, 60 N.E.3d 1254, at ¶ 22, does not change the fact that 2350 Morse was not acting as a charitable organization and, therefore, is not entitled to treatment as a charitable organization. Profits are profits. 2350 Morse was earning about $48,000 per year strictly in its role as landlord. Facts are facts, and the motives of the principals here do not convert hard cash into charity. And let’s not be naïve here. Rent payments that retire a mortgage result in a commercial building that is mortgage free. There is no logic that supports the conclusion that this scenario is anything but a very profitable venture for the owner
{¶ 17} Additionally, it is well established that the BTA’s finding of a view to profit should be treated as “a determination of fact that merits our deference.” Cuyahoga Cty. v. Testa, 145 Ohio St.3d 157, 2016-Ohio-134, 47 N.E.3d 814, ¶ 32. The BTA determines the facts, and we defer to its wisdom in a situation such as
it is entitled to an exception to the general rule that all property owners must pay
meet its burden. I see no reason to reverse. {¶ 18} I must dissent. _________________ Eastman & Smith, Ltd., M. Charles Collins, and Graham A. Bluhm, for appellant. Michael DeWine, Attorney General, and Sophia Hussain and Melissa Baldwin, Assistant Attorneys General, for appellee Tax Commissioner. Rich & Gillis Law Group, L.L.C., Karol C. Fox, and Richelle L. Thoburn, for appellee Westerville City School District Board of Education. _________________
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Breeze, Inc. v. Testa, Slip Opinion No. 2017-Ohio-7801.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2017-OHIO-7801 BREEZE, INC., APPELLANT, v. TESTA, TAX COMMR., APPELLEE. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Breeze, Inc. v. Testa, Slip Opinion No. 2017-Ohio-7801.] Taxation—Real property—Public-schoolhouse exemption—Former R.C. 5709.07(A)(1)—View to profit—Exclusive-charitable-use exemption—R.C. 5709.12(B) and 5709.121—Decision of Board of Tax Appeals denying tax exemption vacated and cause remanded for further consideration. (No. 2015-0341—Submitted February 28, 2017—Decided September 26, 2017.) APPEAL from the Board of Tax Appeals, No. 2012-2216. _________________ DEWINE, J. {¶ 1} This is an appeal from a decision of the Board of Tax Appeals that denied a tax exemption for real property leased to a community school. Relevant to this appeal are the public-schoolhouse exemption found in former R.C. 5709.07(A)(1), 2005 Am.Sub.H.B. No. 66, 151 Ohio Laws, Part II, 2868, and Part III, 4397, and the charitable-or-public-use exemption in R.C. 5709.12. Under both
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statutes, no exemption is available if the property is leased with a “view to profit.” Former R.C. 5709.07(A)(1); R.C. 5709.121(A)(2) (defining the scope of R.C. 5709.12). The Board of Tax Appeals (“BTA”) affirmed the tax commissioner’s denial of an exemption on the sole basis that the school’s rental payments exceeded the lessor’s expenses under the lease. In the BTA’s view, the fact that there was any excess of rental income over expenses required the denial of the exemption. We disagree. The focus should be on the plain meaning of “view to profit”; that is, whether the lease was intended to generate a profit for the lessor. Because the BTA unreasonably ignored evidence of the lessor’s intent, we vacate its decision and remand the case to the BTA. Background {¶ 2} The property owner, Breeze, Inc., is part of a complex arrangement of community schools and related entities. At the head of the arrangement is a nonprofit corporation, New Plan Learning, Inc. (“New Plan”). New Plan is the sole
community schools. According to Murat Arabaci, who was Breeze’s president and chief financial officer from 2007 to 2009 and who then became New Plan’s president and chief financial officer, when a community school receives authorization to operate in an area, New Plan identifies an available facility in the area and works to facilitate the purchase of the facility. The property is then held by one of the title-holding entities, such as Breeze, which, in turn, leases the property to the community school. The title-holding entity—here Breeze—collects rent from the school. The rental income is used to pay the mortgage for the
all the affiliated community schools. {¶ 3} In this case, 1.87 acres of real property that included a building that was formerly a furniture store was identified for use as a community school that would become known as Horizon Science Academy–Columbus High School
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(“Horizon”). The seller of the property wanted to deal only with for-profit entities, so New Plan formed Breeze as a for-profit corporation. Breeze then purchased the property and leased it to Horizon. Eventually, by 2011, Breeze was converted to a nonprofit corporation. {¶ 4} Breeze sought an exemption for the property for tax year 2011 and remission of taxes it had paid for tax years 2008, 2009, and 2010. Although Breeze’s application indicated that it was seeking exemption under both R.C. 5709.07 and 5709.121,1 the tax commissioner’s final determination addressed only R.C. 5709.07. He determined that for tax years 2008 through 2010, because Breeze had collected “substantial market-rate rent,” the property was leased “with a view to profit” for purposes of former R.C. 5709.07(A)(1). Thus, Breeze was not entitled to an exemption for those years. For tax year 2011, however, the tax commissioner concluded that Breeze was entitled to an exemption, because R.C. 5709.07(A)(1) had been revised to provide for exemption of property used for educational purposes, regardless of whether there was an intent to profit. See 2011 Am.Sub.H.B. No. 153. The tax commissioner’s determination as to tax year 2011 is not at issue in this case. {¶ 5} Breeze appealed to the BTA, which affirmed the denial of the exemption based on the “view to profit” finding. BTA No. 2012-2216, 2015 WL 731788 (Jan. 29, 2015). The Statutory Provisions {¶ 6} Former R.C. 5709.07(A)(1) provided a tax exemption for “[p]ublic schoolhouses, the books and furniture in them, and the ground attached to them necessary for the proper occupancy, use, and enjoyment of the schoolhouses, and not leased or otherwise used with a view to profit.” 151 Ohio Laws, Part III, at
1 Breeze indicated that it was seeking an exemption under R.C. 5709.121, but that statute simplyprovides definitions for the phrase “used exclusively for charitable or public purposes.” The actual source of the charitable-or-public-use exemption is R.C. 5709.12.
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is exempt from taxation. And R.C. 5709.121(A)(2) provides that real property “belonging to a charitable or educational institution * * * shall be considered as used exclusively for charitable or public purposes by such institution,” if the property “is made available under the direction or control of such institution * * * for use in furtherance of or incidental to its charitable, educational, or public purposes and not with the view to profit.” The Plain Meaning of “With a View to Profit” {¶ 7} There can be no ambiguity about the meaning of the phrase “with a view to profit.” Merriam-Webster’s Collegiate Dictionary 1394 (11th Ed.2003) defines “with a view to” as “with the object of.” The Oxford English Dictionary provides this similar definition: “with the aim or object of attaining, effecting, or accomplishing something.” 19 Oxford English Dictionary 621 (2d Ed.1989). {¶ 8} We have construed “with a view to profit” in line with the plain meaning of the phrase: “If the lease is intended to generate profit for the lessor, the property does not qualify for exemption.” (Emphasis added.) Anderson/Maltbie Partnership v. Levin, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, ¶ 33. Thus, the key inquiry in determining whether property is leased with a view to profit focuses on the aim or intention of the lessor. Breeze’s Evidence of its Intent {¶ 9} Breeze maintains that it did not intend to generate a profit with its lease to Horizon. Instead, as Arabaci explained, the amount of the rental payment for a number of community-school properties, including the property at issue in this case, was dictated by the lending bank: [The bank] agreed to give us a loan to convert the building into a school use.
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They gave us a term sheet commitment letter. We sat down with the school board. We said that these are the terms; this is the interest rate; this is the mortgage; this is the debt service coverage ratio; and according to these offers, * * * if you’re accepting this from this bank, this is how much the rent is going to be. In the end, we compared this rent amount to the school projections and what percent of the school revenue is going to go for the facility. When we did our analysis with the school board, we concluded that the school can afford to pay this interest rent. I have to underline that we selected the rent at the minimum possible amount. (Emphasis added.) {¶ 10} According to Arabaci, the point was to minimize the rent so the school would “have more money to serve the kids.” Consistent with this purpose, the rent payment was adjusted on occasion in light of the school’s budgetary needs. Further, when the school was unable to pay, rent was deferred and sometimes written off completely. The BTA Unreasonably Ignored Breeze’s Evidence {¶ 11} Despite the statutes’ plain language making both the public- schoolhouse exemption and the charitable-or-public-use exemption hinge on the intent underlying the lease arrangement, neither the tax commissioner nor the BTA appears to have paid much heed to Arabaci’s testimony. Instead, the tax commissioner concluded, without explanation, that Breeze had collected “substantial market-rate rent” and so had “clearly” entered the lease with a view to
was an “excess of rental income over expenses” that was distributed not only to
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Horizon but to other charter schools, the lease had been done with a view to profit. 2015 WL 731788 at *2. {¶ 12} We considered the impact of an excess of rental income over expenses in 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016-Ohio-5012, 60 N.E.3d 1254, which involved another title-holding company owned by New
rental-income amounts for the property for the tax year at issue, which was 2010.
than 80 percent of the rental income for the property during 2010. Id. Based on
commissioner could reasonably have found a view to profit in the leasing arrangement as to tax year 2010. Id. at ¶ 23-24. {¶ 13} As in Shoup Mill, the fact that rental income exceeded expenses may have some relevance to the question whether the property was leased with a view to profit. But the overriding focus—as prescribed by the language of the statutes— must be on the intent of the lessor. Evidence of an excess of rental income over expenses is relevant only to the extent that it sheds light on the lessor’s intention regarding the lease. {¶ 14} Here, Arabaci’s testimony about the purpose of Breeze’s lease to the school was not disputed. His testimony was bolstered by other evidence about Breeze’s relationship with the school, including that it adjusted rent to help the school’s budget and sometimes deferred or wrote off rent that was due. The BTA, however, ignored this evidence of the lessor’s intent. {¶ 15} We will reverse BTA’s decisions that are “unreasonable or unlawful.” R.C. 5717.04. It was unreasonable for the BTA to ignore Breeze’s evidence of its intent regarding its lease with Horizon and focus solely on the excess
BTA can consider the purpose of the lease.
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{¶ 16} On remand, we instruct the BTA that although the fact that rental income exceeded expenses is not completely without relevance, that fact should not be given undue significance. Instead, the focus must be on whether Breeze intended to profit from the lease. In making its determination whether there was a “view to profit” in the lease, the BTA must consider Arabaci’s undisputed testimony about how the rental-payment amount was established. And the BTA should determine the significance of Breeze’s adjusting rental payments and not collecting rent for some of the periods at issue. Conclusion {¶ 17} To determine whether a property owner leased the property with a view to profit, the inquiry must focus on whether the lessor intended to generate a profit through the lease. Because the BTA unreasonably ignored the evidence of Breeze’s intent, we vacate its decision. On remand, the BTA shall consider, as set forth above, whether the property qualifies for exemption under the public- schoolhouse exemption of former R.C. 5709.07(A)(1) as well as under the charitable-or-public-use exemption of R.C. 5709.12, as clarified in R.C. 5709.121. Decision vacated and cause remanded. O’DONNELL, KENNEDY, and FISCHER, JJ., concur. FRENCH, J., concurs in judgment only. O’CONNOR, C.J., dissents, with an opinion joined by O’NEILL, J. _________________ O’CONNOR, C.J., dissenting. {¶ 18} The majority opinion vacates the decision of the Board of Tax Appeals (“BTA”) and remands the case for the BTA to make findings of fact concerning the purpose of the lease for the property at issue in this case and whether it was made with a “view to profit.” Majority opinion at ¶ 1. Because the majority’s
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decision contravenes our holding in 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016-Ohio-5012, 60 N.E.3d 1254, I dissent. {¶ 19} The majority acknowledges that we have already decided the precise issue herein, the impact of excess rental income over expenses in determining whether a taxpayer had a view to profit, in Shoup Mill. But what the majority fails to acknowledge is that it is effectively overruling the standard we established in Shoup Mill. Indeed, appellant, Breeze, Inc., noted in its merit brief that “[t]he underlying hearing in this case at the BTA level was conducted at the same session as the hearings in the related cases involving 2350 Morse LLC * * * and 250 Shoup Mill LLC” and “the parties’ BTA counsel in both this case and the Shoup Mill appeal specified their intention to incorporate the hearing record from the Morse matter into these respective cases.” Yet the majority inexplicably fails to appreciate that it is dealing with substantially the same record as in Shoup Mill. It is exactly this record, relevant for purposes here across all three cases (Shoup Mill; 2350 Morse, L.L.C. v. Testa, case No. 2015-0342; and this case), that the majority instructs the BTA to examine to determine whether Breeze had a view to profit from the lease, ordering the BTA to “consider [Murat] Arabaci’s undisputed testimony about how the rental-payment amount was established” and “determine the significance of Breeze’s adjusting rental payments and not collecting rent for some of the periods at issue.” Majority opinion at ¶ 16. This evidence was part of the record before this court in Shoup Mill, in which we declared that “[d]espite Shoup’s statements disclaiming an intent to profit, the BTA is entitled to draw reasonable inferences from the evidence before it.” Shoup Mill at ¶ 31. {¶ 20} In this case, like in Shoup Mill, the BTA relied on Breeze’s excess
Mill, we affirmed the BTA’s decision “[b]ecause the findings of fact lie within the BTA’s discretion, and because the record contains sufficient support for its view- to-profit finding.” 147 Ohio St.3d 98, 2016-Ohio-5012, 60 N.E.3d 1254, at ¶ 4.
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But the majority chooses to send this case back to the BTA for a closer look and mandates that “the inquiry must focus on whether the lessor intended to generate a profit through the lease,” majority opinion at ¶ 17, despite the same record being available in both cases to determine the same legal question. {¶ 21} In fact, the only additional evidence Breeze produced in this case that is not also applicable to the other two cases is material that offered little to indicate that Breeze did not intend “to generate a profit through the lease,” including financial statements, mortgage-related documents, a deed, lease-related documents, articles of incorporation, and other governing documents. The information gleaned from these records does not meet Breeze’s burden, under Shoup Mill, to establish that Breeze’s rental income did not exceed its expenses to the extent necessary to refute the BTA’s conclusion. {¶ 22} And two facts indicated by the additional evidence filed in this case militate in favor of finding that Breeze had a view to profit. First, in a document titled “Notes to Financial Statements for the Years Ended June 30, 2008 and 2007,” Breeze admitted that “portions of one owned property were rented to parties who are not exempt from income tax.” Second, Breeze, by its own admission, did not achieve federal-tax-exempt status until July 14, 2009 (and as the majority recognizes, Breeze was a for-profit corporation until 2011, majority opinion at ¶ 3). This evidence, which differentiates this case in those respects from Shoup Mill, weighs even more heavily in favor of finding that Breeze had a view to profit, at least during the 2008 and 2009 tax years. But instead of applying this court’s previously established standard to the taxpayer here, the majority modifies the standard we announced in Shoup Mill, thereby applying a more favorable standard to Breeze without explanation. {¶ 23} The bottom line here is that the majority is overruling Shoup Mill’s holding that the BTA is justified in requiring a taxpayer seeking an exemption under R.C. 5709.12(B) and former R.C. 5709.07(A)(1), 2005 Am.Sub.H.B. No. 66, 151
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Ohio Laws, Part II, 2868, and Part III, 4397, to “show with specificity that the rent did not typically generate a surplus over expenses.” Shoup Mill at ¶ 24. In doing so, the majority decides that a surplus of rental income has only “some relevance” and it creates a new standard that requires the focus in determining whether the property was leased with a view to profit to be on the intent of the lessor. Majority
nothing to promote stability and predictability in our legal system. {¶ 24} To be true to precedent, the only plausible result in this case is to simply apply Shoup Mill and find that Breeze failed to meet its burden of establishing that it had no view to profit. I would therefore affirm the BTA’s decision that Breeze is not entitled to a tax exemption. {¶ 25} Accordingly, I dissent. O’NEILL, J., concurs in the foregoing opinion. _________________ Eastman & Smith, Ltd., M. Charles Collins, and Graham A. Bluhm, for appellant. Michael DeWine, Attorney General, and Sophia Hussain and Melissa Baldwin, Assistant Attorneys General, for appellee. _________________
[Cite as 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016-Ohio-5012.]
250 SHOUP MILL, L.L.C., APPELLANT, v. TESTA, TAX COMMR., APPELLEE. [Cite as 250 Shoup Mill, L.L.C. v. Testa, 147 Ohio St.3d 98, 2016-Ohio-5012.] Taxation―Real property―“Public schoolhouse” exemption―Former R.C. 5709.07(A)(1) ―Exclusive-charitable-use exemption―R.C. 5709.12(B) and 5709.121―Taxpayer-lessor cannot claim vicarious exemption based on nature of activities of lessee community school―Record shows evidence of view to profit in form of surpluses realized through leases―Denial of claims for exemption affirmed. (No. 2015-0340—Submitted April 19, 2016—Decided July 20, 2016.) APPEAL from the Board of Tax Appeals, No. 2011-2226. ____________________ O’NEILL, J. {¶ 1} The appellant property owner, 250 Shoup Mill, L.L.C. (“Shoup”), applied to exempt real property used as a public “community school” for tax year
affirmed the tax commissioner’s denial of exemption to the property that Shoup leased to the community school. Shoup itself is wholly owned by a 501(c)(3) nonprofit corporation whose members include the very community school to whom the property is leased. Shoup argues that the nonprofit and charitable character of the ownership arrangement decisively distinguishes this case from Anderson- Maltbie v. Levin, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, and that that arrangement should qualify the property for exemption under the public- schoolhouse exemption in former R.C. 5709.07(A)(1). Shoup additionally claims exemption for exclusive charitable use under R.C. 5709.12(B) and 5709.121. {¶ 2} Both the tax commissioner and the BTA rejected the exemption claims primarily on the grounds that the record showed a “view to profit” on the
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part of the lessor. The gravamen of Shoup’s argument on appeal is based on the financial arrangement involving Shoup, New Plan Learning, Inc., and the various community schools supported by New Plan that have similar leases on other
the operations of those community schools. Thus, the argument goes, Shoup and New Plan, the sole member of Shoup’s L.L.C., are nonprofit entities that function as nothing more than instrumentalities of the community schools that they serve. Because the income realized by Shoup and New Plan consists of nothing but payments from the very community schools on whose behalf those funds are expended, or to whom they are later distributed, this scheme does not involve a “view to profit.” Through its corporate affiliation and financial interconnection with the community school, Shoup seeks to derive a tax benefit from the public educational nature of its lessee. {¶ 3} To accept this argument would require us to view the landlord as an adjunct of the community-school tenant. The argument thereby runs into an insuperable legal barrier: the case law that bars a claim of “vicarious exemption,” meaning that the property owner’s entitlement to the exemption must be judged by its own activities, and not by the activities engaged in by the lessee of the property. Under our case law, Shoup is a lessor and nothing more and must be judged on the basis of that activity alone. {¶ 4} Although Shoup contends that the surpluses realized through the leases should not be viewed as profit and that no intent to profit has been shown, the BTA, in light of the record that is now before us, found that a view to profit was indeed in evidence. Because the findings of fact lie within the BTA’s discretion, and because the record contains sufficient support for its view-to-profit finding, we affirm the decision of the BTA.
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THE PUBLIC-SCHOOLHOUSE AND EXCLUSIVE-CHARITABLE-USE EXEMPTIONS {¶ 5} The first statute at issue here is former R.C. 5709.07(A)(1), which provided as follows: (A) The following property shall be exempt from taxation: (1) Public schoolhouses, the books and furniture in them, and the ground attached to them necessary for the proper occupancy, use, and enjoyment of the schoolhouses, and not leased or otherwise used with a view to profit. 2006 Am.Sub.S.B. No. 66, 151 Ohio Laws, Part II, 2868, and Part III, 4397. “Public schoolhouses” was undefined. {¶ 6} In 2011, the General Assembly amended the exemption extensively. 2011 Am.Sub.H.B. No. 153. The amendment (1) eliminated the phrase “[p]ublic schoolhouses,” opting instead for language exempting “[r]eal property used by a school for primary or secondary education purposes,” R.C. 5709.07(A)(1), (2) defined “school” as a public or nonpublic school and explicitly included community schools in the definition of “public school,” R.C. 5709.07(A)(1)(a) and (b), and (3) eliminated the reference to a “view to profit.” But the new language was not in effect for tax year 2010, which is the tax year before the court in this appeal. {¶ 7} Shoup also claims entitlement to the expanded scope of exemption for exclusive charitable use of the property under R.C. 5709.12(B) and 5709.121. Whereas R.C. 5709.12(B) provides exemption for property “belonging to institutions that is used exclusively for charitable purposes,” R.C. 5709.121(A) provides a broader scope of exemption when the property owner qualifies as a charitable or educational institution.
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FACTUAL BACKGROUND The property’s ownership and use {¶ 8} The property at issue is a 41,000-square-foot building located on a 3.7-acre parcel, which was acquired and renovated for use as the Horizon Science Academy-Dayton High School, Inc., an Ohio community (i.e., charter) school. Under a routine arrangement for the Horizon schools, the property is owned by a nonprofit limited-liability company named after the street address: 250 Shoup Mill, L.L.C., in this instance. Shoup itself had a single member, New Plan, which itself is a nonprofit, 501(c)(3) qualified corporation. Shoup qualified as a “disregarded entity” for purposes of federal taxation. See 26 C.F.R. 301.7701-2(c)(2). As a result, Shoup did not separately obtain 501(c)(3) status or file IRS returns separately from the sole member, New Plan; instead, Shoup’s activity as lessor appeared on the Form 990 tax returns for exempt organizations filed by New Plan as the activity
{¶ 9} The community school itself is also a nonprofit 501(c)(3) entity. It, along with the other community schools who are tenants of limited-liability companies similar to Shoup, control New Plan as its directors. Thus, the community school/tenants and their landlords are part of a nonprofit, 501(c)(3) “loop” whereby the landlords provide real estate services on behalf of the community schools. Those services include identifying sites for the community schools, qualifying and arranging for construction or renovation loans for the projected schools, and collecting rent in amounts sufficient to make loan payments. {¶ 10} New Plan’s president explained the arrangement as follows: We are forming a new charter school. A charter school gets their authorization from the sponsor authorizer. This is a brand new
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need this facility. * * * If they go and talk to the banks, lenders, financial institutions, they ask for three years’ of tax returns. They ask for a down payment. The school doesn’t have neither [sic]. * * * * * * They need somebody to help them out. New Plan Learning is an organization. It is controlled by―the charter school tenants comes [sic] into play here. {¶ 11} In seeking out facilities for a projected community school, New Plan would arrange for loans and supervise construction. It would enter into a lease under which the rent was computed to cover the real estate costs, particularly of paying the loan with a surplus amount, the debt coverage ratio, demanded by the
into financial difficulty, New Plan deferred rent payments. No tenant was ever notified of past-due rent, hit with a late charge, or evicted for nonpayment. The contrary is true: New Plan would provide affirmative assistance during a troubled
made a cash donation to help with financial difficulties. {¶ 12} The lease between Shoup and Horizon Science Academy-Dayton High School, Inc., has a ten-year term with options for three five-year renewals. It provides for a base rent of $33,806.25 per month, with a 3 percent escalation per
payment-default provisions. {¶ 13} The record contains financial statements as well. The “gross rental income” of New Plan (from all six properties leased to community schools) for
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fiscal year 2011 was $2,921,965. The tax commissioner asserts a surplus of $150,412 for Shoup for 2011, but a review of the financial statement indicates that the number is a sum of certain expense amounts, not a net surplus figure. {¶ 14} The balance sheet indicates a modest surplus overall. The revenue/expense statement for fiscal year 2010 showed an upward “change in net assets” of $168,119, while the 2011 statement showed an upward change of $342,402. Those numbers relate to all of New Plan’s holdings of community- school properties, a total of six properties with a total land value in 2011 of $3,100,288 and a total building value of $19,004,889. The financial statements show modest salary expenses for New Plan’s employees: a total for fiscal year 2010 of $64,980 and for 2011 of $114,432. For tax year 2011 (New Plan’s fiscal year 2012), the Form 990 tax return shows that New Plan’s president’s salary was $80,833. Tax commissioner proceedings {¶ 15} Shoup filed its application for exemption on December 10, 2010, seeking exemption with regard to school use beginning August 31, 2009. The application cited R.C. 5709.121 as the proposed basis for exemption, but the tax commissioner’s final determination considered not only a charitable-use exemption but also a public-schoolhouse exemption under former R.C. 5709.07(A)(1). As for the charitable-use exemption, the commissioner rejected the claim based on his finding that the property was used “with a view to profit through leasing at a substantial rent,” and the property owner could not itself be deemed a “charitable institution” for purposes of applying R.C. 5709.121. By the same token, Shoup could not qualify the property for exemption as a public schoolhouse under former R.C. 5709.07(A)(1) because, under the holding of Anderson/Maltbie, the fact that Shoup, “though nominally nonprofit, is primarily acting as a landlord collecting substantial market-rate rent” defeated the claim for exemption.
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BTA proceedings {¶ 16} Shoup appealed to the BTA. The BTA held a hearing in conjunction with two other hearings in related cases involving properties leased to Horizon community schools. At the hearing, Shoup presented the testimony of New Plan’s president along with numerous exhibits. {¶ 17} In its January 27, 2015 decision, the BTA agreed with the commissioner and rejected the charitable and public-schoolhouse claims of
leasing to a charitable institution did not constitute a charitable use by the property
rejected the claim that Shoup could qualify as an “educational institution” based on the activities of the lessee, the community school that conducted its educational activity on the property. Id. {¶ 18} Finally, the BTA sustained the tax commissioner’s rejection of the public-schoolhouse exemption claim on the grounds that the schoolhouse property was leased with a view to profit. Although the BTA acknowledged the testimony
expected to cover the mortgage payments, construction costs, soft costs, debt service coverage ratio, and operating expenses,” the BTA nonetheless found that New Plan “does profit from its leases.” Id. at *1, 3. The BTA stated that “[w]hile [New Plan] appears to use the profits to subsidize the operations of other tenant charter schools, it is not the use of any profits that determines the exempt status of the subject properties.” Id. at *3, citing Hubbard Press v. Tracy, 67 Ohio St.3d 564, 566, 621 N.E.2d 396 (1993). The board found it significant that “[i]t does not appear that any excess revenues from a single charter school are held for the future benefit of that certain school,” but rather that “excess revenues are distributed among all of New Plan’s tenant schools,” with the result that the property’s use was
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“with a view to profit.” Id. For these reasons, the BTA concurred in denying exemption under former R.C. 5709.07(A)(1). STANDARD OF REVIEW {¶ 19} In reviewing a decision of the BTA, we do not sit as “a super BTA
Revision, 106 Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d 686, ¶ 17, citing Youngstown Sheet & Tube Co. v. Mahoning Cty. Bd. of Revision, 66 Ohio St.2d 398, 400, 422 N.E.2d 846 (1981). “The BTA is responsible for determining factual issues and, if the record contains reliable and probative support for [the BTA’s] determinations,” we will affirm them. Am. Natl. Can Co. v. Tracy, 72 Ohio St.3d 150, 152, 648 N.E.2d 483 (1995). A VIEW TO PROFIT DEFEATS A CLAIM OF EXEMPTION UNDER THE PUBLIC- SCHOOLHOUSE AND CHARITABLE-USE PROVISIONS {¶ 20} As a matter of law, the existence of a “view to profit” in leasing the property to the community schools defeats Shoup’s claim for exemption under any
schoolhouse exemption under the express terms of former R.C. 5709.07(A)(1). Anderson/Maltbie, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547. Second, a “view to profit” in connection with the lease forecloses any claim that Shoup’s property use can qualify as an exclusive charitable use directly under R.C. 5709.12(B). Benjamin Rose Inst. v. Myers, 92 Ohio St. 252, 110 N.E. 924 (1915), syllabus (real estate belonging to a charitable institution that is “rented for commercial and residence purposes” is not exempt, although the income arising from such use is devoted wholly to the purpose of the charity); Northeast Ohio
¶ 15-16. Third, if Shoup cannot demonstrate that its own use of the property as lessor is charitable, it cannot qualify as a “charitable institution” under R.C. 5709.121 because the ownership and leasing of the property is Shoup’s only
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determination whether a property owner qualifies as a charitable institution under R.C. 5709.121 requires examination of the ‘core activity’ of the institution and determining whether that activity qualifies as charitable for property-tax purposes”). {¶ 21} In a case like the present one, we consider the BTA’s finding of a view to profit “primarily a determination of fact that merits our deference.” Cuyahoga Cty. v. Testa, 145 Ohio St.3d 157, 2016-Ohio-134, 47 N.E.3d 814, ¶ 32. The BTA acknowledged the testimony of New Plan’s president that rent amounts were calculated to cover expenses, but a cursory review of the financial statements confirms that the rent at the Shoup Mill location, and presumably the other locations as well, exceeded the monthly expenses associated with the property. {¶ 22} Specifically, the financial statements in the record reveal that Shoup Mill was the payor on a 25-year note for a principal amount of $3,375,000 and that the monthly rent for the Shoup property started at $33,806.25 and amounted during fiscal year 2011 to $34,651.42 per month. For fiscal year 2011, the monthly mortgage-loan payment was $22,979. Even if we assume a debt-service coverage requirement imposed by the lender of 1.2, the total mortgage-loan-related expense per month is no more than 80 percent of the rent amount. Although New Plan incurred additional expenses, the allocation of such expenses to the Shoup Mill property on a monthly basis adds at most a few thousand dollars to the expense side
the financial statements indicate a steady increase in “net assets” from year to year for New Plan. {¶ 23} It is well settled that in the context of a claim for a charitable exemption, profit is defined as the excess of price over cost. Am. Soc. for Metals
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Schools v. Kinney, 28 Ohio St.3d 186, 187-188, 503 N.E.2d 163 (1986), quoting Webster’s New International Dictionary 1976 (2d Ed.1960) (profit is the “ ‘excess
given period of time’ ”). This case law plainly construes as “profit” the revenue generated by a nonprofit entity from one activity in order to fund another, distinctly charitable, activity. {¶ 24} Given that it was Shoup’s burden to prove its entitlement to an exemption, Newman v. Levin, 120 Ohio St.3d 127, 2008-Ohio-5202, 896 N.E.2d 995, ¶ 30, the BTA was justified in requiring Shoup to show with specificity that the rent did not typically generate a surplus over expenses. And it was neither unreasonable nor unlawful for the BTA to find a view to profit under these circumstances. {¶ 25} A finding of a view to profit in this case is consistent with this court’s decision in Anderson/Maltbie, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d
qualify for exemption; similarly, the property does not qualify for exemption if the lessee’s use is intended to generate profit.” Id. at ¶ 33. It follows that in applying the public-schoolhouse exemption, the BTA properly looked at whether the lessor conducted its operations with a view to profit as a separate issue from whether the community school itself did so. {¶ 26} Our analysis receives support from the case law that bars a claim of “vicarious exemption,” meaning that the applicant for exemption must prove that its own activities qualify as exempt; it may not rely upon the activities of its customers or, as here, its lessees. See OCLC Online Computer Library Ctr., Inc. v. Kinney, 11 Ohio St.3d 198, 200-201, 464 N.E.2d 572 (1984), citing Joint Hosp.
{¶ 27} In OCLC, the applicant sought to exempt its real estate, relying in part upon the assertion that its fee-paying customers were public libraries that
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benefited from the purchase of its services, which in turn benefited the general
attempt by OCLC to obtain a vicarious charitable exemption by virtue of the activities of its customers.” Id. at 200. {¶ 28} In Joint Hosp. Servs., we addressed a claim for a sales-tax charitable exemption in which several nonprofit hospitals pooled their resources to create a separate nonprofit entity that provided laundry and linen service for the hospitals and several other nonprofit charitable organizations, such as nursing homes. The jointly controlled entity sought exemption for its own purchases on the theory that it qualified as a nonprofit operated exclusively for charitable purposes on account
relationship being “so immediate, intertwined and necessary, that it effectively engages in the alleviation of illness, disease, or injury.” 52 Ohio St.2d at 155, 370 N.E.2d 474. We rejected the claim, holding that “[a]ppellant’s own functions fail the [charitable purpose] test” inasmuch as the “laundry and linen service in itself neither improves health through alleviating illness, disease or injury, nor constitutes managing a home for the aged.” Id. {¶ 29} The resemblance of Joint Hosp. Servs. to Shoup’s claim is indisputable; here, the community schools in some sense pool their resources so that excess revenues may be used by New Plan to subsidize all of its tenant schools. Under OCLC and Joint Hosp. Servs., however, Shoup cannot qualify as charitable based on New Plan’s activities, and under Anderson/Maltbie, Shoup cannot qualify for public-schoolhouse exemption so long as it is operated with a view to profit. {¶ 30} Shoup also argues that any surpluses attained through the leases do not establish the Shoup Mill property as being held with a “view to profit,” because the rent is held to a minimum level. But as discussed, the BTA plainly exercised its discretion as the finder of fact and found Shoup’s proof insufficient.
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{¶ 31} Nor can Shoup salvage its claim by drawing the distinction between an “intent to profit” on the one hand and surpluses that occur “unexpectedly and fortuitously” on the other hand. Despite Shoup’s statements disclaiming an intent to profit, the BTA is entitled to draw reasonable inferences from the evidence before it, and we will reverse its findings of fact “only when there is a total absence
St.3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 14. As we have noted, the record before us contains evidence of a view to profit. Shoup lays great store by New Plan’s ability and willingness to grant rent deferral or rent forgiveness to the community schools, but in the end its ability to do so depends upon the very excess
{¶ 32} The same body of case law leads us to reject the claim that Shoup may qualify as an “educational institution” for purposes of availing itself of the expanded scope of the charitable-use exemption under R.C. 5709.121. Quite simply, Shoup itself is a lessor and does not engage in educational activity. The prohibition of “vicarious exemptions” bars Shoup from relying on the activities of its lessee as a basis for claiming an exemption of its own. {¶ 33} Finally, the ownership of the property will vest, after the acquisition and renovation loans are paid off, the mortgages are released, and the leases have expired, in New Plan and Shoup, its limited-liability company, rather than in the community school itself. This fact also supports the BTA’s finding of a view to profit in the lease transaction. CONCLUSION {¶ 34} For the foregoing reasons, we affirm the decision of the BTA. Decision affirmed. O’CONNOR, C.J., and PFEIFER and LANZINGER, JJ., concur. O’DONNELL, J., dissents, with an opinion.
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KENNEDY, J., dissents, with an opinion joined by O’DONNELL and FRENCH, JJ. _________________ O’DONNELL, J., dissenting. {¶ 35} Respectfully, I dissent. {¶ 36} I would reverse the decision of the Board of Tax Appeals because it errantly denied the public schoolhouse exemption because the property was not leased with a view to profit. _________________ KENNEDY, J., dissenting. {¶ 37} I respectfully dissent. Our case law and the record in this matter support a finding that the lease of the property by 250 Shoup Mill, L.L.C., to a community school is not intended to generate a profit and, therefore, is not inconsistent with the public-schoolhouse exemption as discussed by this court in Anderson/Maltbie Partnership v. Levin, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547. Therefore, the Board of Tax Appeals (“BTA”) erred in affirming the denial of exemption under the public-schoolhouse exemption, former R.C. 5709.07(A)(1). 2005 Am.Sub.H.B. No. 66, 151 Ohio Laws, Part II, 2868, and Part III, 4397. Moreover, the majority is improperly extending case law regarding the so-called “vicarious exemption” in the realm of charitable use to the public- schoolhouse exemption without support in our precedents. Accordingly, I would conclude that the property is entitled to exemption under the public-schoolhouse exemption under former R.C. 5709.07(A)(1) and reverse. {¶ 38} In reviewing a BTA decision, this court considers whether the decision was “reasonable and lawful.” R.C. 5717.04. Under this standard, we acknowledge that “ ‘[t]he BTA is responsible for determining factual issues and, if the record contains reliable and probative support for these BTA determinations,’ ” we will affirm them. (Brackets sic.) Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-
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Ohio-5856, 856 N.E.2d 954, ¶ 14, quoting Am. Natl. Can Co. v. Tracy, 72 Ohio St.3d 150, 152, 648 N.E.2d 483 (1995). On the other hand, we “ ‘will not hesitate to reverse a BTA decision that is based on an incorrect legal conclusion.’ ” Id., quoting Gahanna-Jefferson Local School Dist. Bd. of Edn. v. Zaino, 93 Ohio St.3d 231, 232, 754 N.E.2d 789 (2001). {¶ 39} Contrary to the majority’s assertion, the BTA’s decision was not “reasonable and lawful.” While findings of fact lie within the BTA’s discretion, we are not to blindly rubberstamp them. Instead, we are to ensure that the record contains reliable and probative support for the BTA’s determinations. Here, the record does not support the BTA’s factual findings, and its determination was based
{¶ 40} In Anderson/Maltbie, we stated that “property ‘appropriated to the support of education for the benefit of the public without any view to profit’ qualifies for [the public-schoolhouse] exemption.” 127 Ohio St.3d 178, 2010- Ohio-4904, 937 N.E.2d 547, at ¶ 30, quoting Gerke v. Purcell, 25 Ohio St. 229, 247 (1874). When the property at issue is subject to a commercial for-profit lease, whether the exemption applies despite the restriction that the property may not be used with a view to profit requires examination of both lessor and lessee. Id. at ¶ 33. “If the lease is intended to generate profit for the lessor, the property does not qualify for exemption; similarly, the property does not qualify if the lessee’s use is intended to generate profit.” Id. {¶ 41} Accordingly, in the current matter, the focus is on whether Shoup Mill intended for the lease to generate a profit. The record reveals that it did not, and the factual and legal determinations reaching the contrary conclusion are unreasonable and unlawful. {¶ 42} First, the tax commissioner’s finding that Shoup Mill was collecting substantial market-rate rent is devoid of any evidentiary basis. In fact, the president
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Plan or Shoup Mill had “scrutinized the market” to determine the rent. Instead, he testified that “we are driven by the school’s needs and what the lender is offering.” {¶ 43} Second, the BTA’s finding that the mere existence of a surplus establishes the intent to realize a profit is a legal error. While the record does support that some net surplus was realized during a couple of years for which documentation was supplied, such surpluses qualify as de minimus; even the majority recognizes it as a “modest surplus.” Majority opinion at ¶ 14. {¶ 44} In concluding that the mere fact that any profit is realized qualifies as an intent to generate a profit, the majority disregards our case law in which we have recognized that when the overriding purpose of a property is charitable or public, minor surpluses do not defeat the exemption for charitable and/or public use, particularly when those surpluses merely help finance the very activity that is public or charitable in character. See Cincinnati v. Testa, 143 Ohio St.3d 371, 2015- Ohio-1775, 38 N.E.3d 847, ¶ 24 (minor surplus in fund for city golf course “does not constitute ‘profit’ that would violate the limitation of R.C. 5709.121(A)(2)”); South-Western City Schools Bd. of Edn. v. Kinney, 24 Ohio St.3d 184, 186, 494 N.E.2d 1109 (1986) (renting of apartment on public golf course, operation of pro shop, and operation of snack shop did not violate “view to profit” limitation); Girl Scouts-Great Trail Council v. Levin, 113 Ohio St.3d 24, 2007-Ohio-972, 862 N.E.2d 493, ¶ 17-18 (store in Girl Scout headquarters selling scout-related items at slight profit did not violate “view to profit” criterion). {¶ 45} Instructive here is the discussion in Girl Scouts of Bowers v Akron City Hosp., 16 Ohio St.2d 94, 243 N.E.2d 95 (1968), in support of its holding that the mere generation of a profit does not necessarily defeat the claim of exemption. In Bowers, a nonprofit charitable hospital owned an adjacent parking lot that charged a fee to help defray the cost of maintaining it; the court held that the generation of a profit by the lot “does not remove it from the statutory category of exempt property” because “the evidence shows that the parking lot is an essential
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and integral part of the hospital’s function and not property used mainly for income purposes.” Id. at 96. {¶ 46} Likewise, the real property acquisition, financing, construction, and management functions that New Plan and its subsidiaries perform for the community schools constitute an “essential and integral part” of the community schools’ own operations; accordingly, the surpluses generated through rental income do not violate the “view to profit” criterion for the same reason that similar income did not in the earlier cases. After all, fiscal prudence dictates that New Plan must maintain its own solvency in order to perform its function of developing and managing the real estate assets on behalf of its director/clients. {¶ 47} Moreover, the majority’s reliance on “case law that bars a claim of ‘vicarious exemption’ ” to support the denial of the public-schoolhouse exemption is inappropriate. An examination of the majority’s supporting authority reveals that the claims for exemption in those cases were not made under former R.C. 5709.07. In OCLC Online Computer Library Ctr., Inc. v. Kinney, 11 Ohio St.3d 198, 199, 464 N.E.2d 572 (1984), the taxpayer abandoned its claim for exemption under R.C. 5709.07 and contested only the BTA’s rejection of its claim under R.C. 5709.12. And in Joint Hosp. Servs., Inc. v. Lindley, 52 Ohio St.2d 153, 370 N.E.2d 474 (1977), the claim for exemption was made under R.C. 5739.02(B)(12). Both of these cases involved exemptions for charitable institutions, not public schoolhouses, and both involved taxpayers who sought exemptions based upon the charitable status of their customers. We rejected the claims, finding that the taxpayers were not entitled to a vicarious charitable exemption. In neither OCLC nor Joint Hosp. Servs. did the taxpayer itself qualify as a charitable organization. See OCLC at 201; Joint Hosp. Servs. at 155. {¶ 48} In contrast, former R.C. 5709.07(A)(1) limited the schoolhouse exemption to property “necessary for the proper occupancy, use, and enjoyment of the schoolhouses, and not leased or otherwise used with a view to profit.” There is
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no “used exclusively” language. Instead, the property may not be “used with a view to a profit.” In a lease situation such as the one at bar, we are required to examine whether “the lease is intended to generate profit for the lessor.” Anderson/Maltbie, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, at ¶ 33. Accordingly, since the focus is on the intention of the lessor, who is the one claiming the exemption, there is no basis for extending the “vicarious exemption” analysis to the public- schoolhouse claim in this case. {¶ 49} Therefore, I would reverse the BTA’s decision and grant the public- schoolhouse exemption. Accordingly, I respectfully dissent. O’DONNELL and FRENCH, JJ., concur in the foregoing opinion. _________________ Eastman & Smith, Ltd., M. Charles Collins, and Graham A. Bluhm, for appellant. Michael DeWine, Attorney General, and Melissa Baldwin and Sophia Hussain, Assistant Attorneys General, for appellee. _________________