The Ohio Board of Tax Appeals (BTA) will have to consider whether a national fitness chain’s willingness to pay above the market rate to rent space in Hilliard led Franklin County to improperly increase the property’s tax value.

The Ohio Supreme Court today ruled that a 2012 law change applies to a property owned by Terraza 8 LLC and leased by L.A. Fitness. In a unanimous opinion, Justice Patrick F. Fischer wrote that the law requires taxing authorities to determine the value of the property as if it did not have a tenant that entered a long-term lease and that the most recent sale price of the property is not conclusive evidence of the value.

The Court determined that the most recent sale price of the 2007 property is the best, but not only, evidence of its true value.

The Court instructed the BTA to consider Terraza’s claim that its purchase price does not reflect the true value of the property because Terraza paid about $15.4 million for the 3.41 acres while knowing that the property came with a tenant that had signed a lucrative long-term lease.

Hilliard Schools Contests Value
The Franklin County auditor had assessed the fitness center at $4.85 million for tax year 2013, and the Hilliard City Schools Board of Education appealed the assessment to the Franklin County Board of Revision.

The school board maintained that the property should be valued at the $15.4 million Terraza paid for it in February 2013. Terraza did not contest the appeal and the board of revision increased the value to $15.4 million for tax years 2013 and 2014. Terraza appealed that decision to the BTA.

Before the BTA, Patricia Costello, an appraiser hired by Terraza, testified that the sale price did “not represent the fee simple market value of the property.” When Terraza acquired the property, the purchase included a lease that ended in 2027 with two 10-year optional renewal periods, she stated. The lease called for monthly rents of $22 per square foot in 2013 when the market rate was $11 per square foot. Costello testified that the true value of the property was $7 million.

The school board objected to Costello’s testimony, arguing it was not admissible because Terraza could not dispute that the purchase was an arm’s-length sale. Terraza countered that, in 2012, the Ohio General Assembly amended R.C. 5713.03 so that it required the taxing authorities to determine the value of the property as if there were no tenant committed to leasing the space and not merely ascertain the most recent arm’s-length sale price.

The BTA agreed with Terraza that the new version of the law applied to the assessment, but found the change did not overrule the Supreme Court’s 2005 Berea City School Dist. Bd. of Ed. v. Cuyahoga Cty. Bd. of Revision decision. The BTA found that a property must be valued according to the price of a recent arm’s-length transfer. The BTA rejected Costello’s evidence and maintained a $15.4 million value for tax year 2013. It also found the county board did not have jurisdiction to assess the value for tax year 2014 and vacated its decision. Terraza appealed the 2013 determination to the Supreme Court, which is required to hear appeals of BTA decisions.

Law Changed Arm’s-Length Sale Rule
Justice Fischer explained that the Ohio Constitution’s Article XII, Section 2, requires all property to be taxed by “uniform rule according to value,” and that the legislature has made several adjustments to the law in order to apply the principle. State statute requires county auditors to appraise real estate “at its true value in money,” and after a number of Court interpretations and legislative modifications to R.C. 5713.03, the legislature determined that the auditor may consider the price paid during an arm’s-length transaction between a willing seller and willing buyer.

The Court added that while the arm’s-length sale price was the best evidence of true value, it was necessary for auditors to consider an appraisal if there were evidence that the sale price does not reflect the property’s true value.

In 2012, House Bill 487 amended R.C. 5713.03 in two ways that are significant to the fitness center dispute. The law was changed from determining the value of “any tract, lot or parcel of real estate” to determining the value of “the fee simple estate, as if unencumbered…”.  The change required a determination of the value of the property, including the buildings and structures on it, as though there was no lease. The legislature also replaced the language that indicated an auditor “shall” consider the sale price to “may” consider the sale price.

The Hilliard school board disputed that the law, which took effect in September 2012, impacted the property. The school board noted that shortly after approving HB 487, the legislature acknowledged that the law would be challenging for county auditors to immediately administer because counties undertake a six-year cycle of revaluing every property in its county, and also perform updates every three years. The school board cited a provision of the law that indicated it was not to take effect in Franklin County until the 2014 tax year.

The Court disagreed with the school board and found that the legislature intended to prevent the bill from impacting county auditor valuations for 2012 only so as to not interrupt the work done that year. Since Terraza’s property value was based on the county’s January 2013 assessment, the new law applied.

Law Overrides Court Decision
The Court stated that Terraza correctly argued that the new version of R.C. 5713.03 was amended to override the Berea decision that the BTA used to maintain the $15.4 million value. But the Court also noted that, even though the new law allows the BTA to consider evidence other than the sale price, the “best evidence” of the value is a recent sale price.

Terraza argued that the school board presented no evidence showing the sale price reflected the value of the “unencumbered fee simple estate” as required by the change in the law. The Court ruled that the burden of proof was not on the school board to rebut Costello’s appraisal. Rather, the burden of proof is on the property owner to prove the auditor should consider the effect the lease had on the sale price.

The Court ruled that it was unreasonable for the BTA not to consider Costello’s appraisal and the evidence challenging the $15.4 million valuation. However, the Court declined “to undertake the task that the BTA failed to perform” and remanded the case to the BTA to weigh Costello’s appraisal and the school board’s challenge to her work.

2015-2063. Terraza 8 LLC v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-4415.

View oral argument video of this case.

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