A 2004 law that allows property within a tax-increment financing (TIF) district to qualify for a complete exemption from both property taxes and service payments applies to a Butler County church, the Ohio Supreme Court ruled today.

In a unanimous per curiam opinion, the Court rejected a claim from the Fairfield Township Board of Trustees that the Tri-City Church of God owed service payments in lieu of taxes for the remaining years of a 20-year TIF agreement. The church had purchased property from a developer during the TIF period. The TIF supports public improvement for road and bridge construction, traffic signals, and public utility extensions.

The church had obtained a new exemption for the property as a house of public worship. Under the 2004 law, the later exemption took priority because the township failed to take steps to preserve its right to collect service payments from the church, the Supreme Court ruled.

Although the law provided that the beneficiary of TIF service payments could take steps to preserve its right to receive the payments, the township did not take advantage of those provisions, the Court concluded. The Court’s ruling affirmed a decision by the Ohio Board of Tax Appeals (BTA).

Covenant Trumps Exemption, Township Argues
A TIF is a method to finance property development by redirecting the revenue associated with increased property value to the specific purpose of defraying the cost of improvements, particularly infrastructure. Once the value of the property is increased, the property owners do not pay increased property tax, but rather agree to make “service payments” in lieu of increased taxes that go into a special fund to cover the costs of constructing roads, bridges, and other land improvements.

Fairfield Township obtained an agreement with the Fairfield City School District and Butler County Joint Vocational School to enter into a 20-year TIF with DPR Properties, the county, and a bank, which operated from 1998 to 2018. DPR consented to apply for a TIF exemption, make service payments in lieu of increased taxes, and record a covenant, which is an agreement found within a real estate contract, addressing the service-payment obligation to make it binding on those to whom it sold the properties in the TIF district.

DPR sold a parcel to W.M.M. Partnership in 1999 that was used for an insurance office. When the property was vacated, W.M.M. conveyed the property to Tri-City Church of God. In 2013, the church filed for a house of worship property exemption under R.C. 5709.07(A)(2), which was granted by the Ohio tax commissioner. After the exemption was granted, Fairfield Township filed a complaint against its continuation, arguing that the church purchased the property subject to the covenant to make service payments and that the covenant controlled over the new exemption. The tax commissioner disagreed, and the township appealed to the BTA, which affirmed the tax commissioner’s decision. The township appealed to the Supreme Court, which was required to hear the case.

Law Changed to Clarify TIF Obligations
The Supreme Court’s opinion explained that under the township’s original agreement, the developer was obligated to file an application to “effect and maintain” the TIF exemption during the period of the agreement, which began in 1998. Before 2004, the law was unclear about whether a later owner of a parcel could obtain a different exemption based on the property’s use that would relieve the later owner from making the TIF service payments.

In 2004, the Ohio legislature passed House Bill 427, which addressed the priority of exemptions. The law subordinated TIF agreements made prior to the new law to property tax exemptions granted later, such as the house of worship exemption. House Bill 427 also provided steps the township could have taken to preserve its rights. The parties stipulated in this case that the township did not take those steps.

“The township does not contest the tax commissioner’s argument that by failing to perform one or the other of these acts, the township failed to exercise its options under H.B. 427 to preserve priority of the TIF exemption over the public worship exemption,” the opinion stated.

Township Argues Contractual Agreement Applies
Fairfield Township maintained that regardless of H.B. 427, the law of contract and real estate covenants govern the agreement, and that when the church purchased the insurance company property, it was bound to make the TIF service payments regardless whether it would otherwise qualify for full exemption as a house of public worship.

The Court disagreed. Citing its 2012 Drees Co. v. Hamilton Twp. decision, the Court stated that townships are not permitted to enforce a tax or payment-in-lieu-of-tax agreement if a statute no longer authorizes it. The opinion also noted the legal principles that guide the enforcement of covenants that run with the land indicate the restrictions in a covenant cannot be against public policy. Because the legislature dictated that TIF exemptions are to be subordinate to other exemptions, then R.C. 5709.911 bars the enforcement of a real covenant that requires a TIF service payment from an otherwise exempt property.

The township also argued that enforcing the exemption as against making service payments impaired the obligation of contract. The township argued doing so violated Article II, Section 28, of the Ohio Constitution, which prohibits legislation that impairs the obligations of contract. The Court ruled that the township lacked standing to raise the constitutional challenge because it had not availed itself of the provisions of H.B. 427 that would have allowed it to preserve its right to service payments.

“The township in this appeal was injured by its own failure to take the prescribed steps to preserve its rights under the very law it challenges, and the township did not establish why it could not have done so,” the Court concluded.

2016-0995. Fairfield Twp. Bd. of Trustees v. Testa, Slip Opinion No. 2018-Ohio-2381.

Listen to oral argument audio of this case.

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