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Law Change Supports Market-Rate Leases for Tax Values

A 2012 change in state law describing how to tax commercial property was not intended to consider a leased property as vacant, the Ohio Supreme Court ruled today as it rejected an attempt to lower the taxable value of a Lowe’s Home Center by nearly $2.7 million.

A Supreme Court majority explained the change to R.C. 5713.03, which directed that leased property be valued “as if unencumbered,” was established to allow tax assessors to consider appraisals as better evidence than property sales prices. The Court denied a proposed “vacant-at-transfer” rule advanced by Warren County property owners who challenged the $8.48 million 2016 tax-year value of a Lowe’s.

Writing for the Court majority, Justice Michael P. Donnelly noted the Court has been asked several times to interpret the statute since the General Assembly inserted the “as if unencumbered” amendment into the law. The change assists tax assessors when evidence suggests the sale price of real estate or the lease rate does not reflect its actual value. And, in those cases, a leased property could be valued based on “rent from a lease that is a typical lease in the market,” he wrote.

The decision affirmed the ruling of the Twelfth District Court of Appeals, which found the $8.48 million value for the 2016 tax year proposed by the Kings Local School District Board of Education is appropriate for the Lowe’s location.

Chief Justice Maureen O’Connor and Justices Sharon L. Kennedy, Patrick F. Fischer, R. Patrick DeWine, and Jennifer Brunner joined Justice Donnelly’s opinion. Justice Melody J. Stewart concurred in judgment only.

Landowner Challenges Property Value
Rancho Cincinnati Rivers owns and leases 12 acres of Warren County property to Lowe’s. Rancho acquired the property in 2011 for $5.13 million. Lowe’s has a 20-year lease, paying Rancho $375,000 a year.

For tax year 2015, the Warren County auditor assessed the value at just more than $8.49 million. Rancho appealed the valuation to the Warren County Board of Revision. The company presented the report of appraiser Richard Racek Jr., who determined it was worth $5.8 million. The board of revision retained the county auditor’s value, and Rancho appealed to the Warren County Common Pleas Court.

Arguing before a magistrate, Racek maintained the amendment to R.C. 5713.03 ensured a property is valued as if unencumbered by a lease and that meant comparing Rancho’s property as if Lowe’s lease was terminated and the property was vacant. He then compared the property to other “big box” stores that were vacant or sold after being vacated for a long period of time.

An appraiser hired by Kings Local schools argued the change in law was adopted to help in cases where a lease price is not typical, and the value of the property can be determined by examining similar big box stores with leases. This allows the appraiser to determine the “market value” for a typical lease in the area, the expert said. By doing so, the school district’s appraisal was slightly lower than the county auditor’s, at $8.48 million.

The magistrate accepted Racek’s interpretation of the law and proposed adopting Rancho’s $5.8 million value, and the county and school district objected. The common pleas court judge agreed with the school district and adopted the $8.48 million value. Rancho unsuccessfully appealed the decision to the Twelfth District.

The property owner then appealed to the Supreme Court, which agreed to consider the case.

Supreme Court Analyzed Change in Property Tax Law
Justice Donnelly wrote that the crucial language of the disputed statute is the phrase “fee simple estate, as if unencumbered.” He noted that “fee simple” means outright ownership of the land not subject to any other interests in the property and limited in its use only by governmental restrictions.

Rancho argued the change meant the tax assessor assumes an “unencumbered transfer,” as if those leasing the property had vacated and it was sold to a buyer without restrictions. The Court majority referred to Rancho’s theory as a “vacant-at-transfer rule.”

The company argued this was the only way to interpret the “fee simple, as if unencumbered” language in the law. Warren County countered the law does not “explicitly state” the property needs to be valued as if it were vacant at the time of sale and transfer to be considered unencumbered.

The Court agreed with the county because the “express terms” of the law do not state the property should be considered vacant and, at best, “Rancho’s vacant-at-transfer rule gives only a possible interpretation” of the law.

The Court noted that 24 years before lawmakers adopted the “fee simple, as if unencumbered” phrase, the Court used nearly identical language in its 1988 Alliance Towers Ltd. v. Stark County Bd. of Revision decision. The Court used “as if unencumbered” to allow the property value to be assessed as if the landowner were receiving market-rate rents for the property, rather than the actual rate being charged.

The opinion noted several legal disputes regarding property tax valuations have arisen when the property’s value was based on the sale price, but the parties disputed whether the price was an accurate measure. The Court noted counties are instructed by law to consider the recent price of an “arms-length sale between a willing seller and willing buyer” as the true value of a property for taxation purposes.

Because in some cases the sale price or the lease rate might not be the best evidence, the legislature sought a way to allow appraisal evidence to be given greater weight in determining the property value, the opinion noted. The legislature understood the “fee simple, as if unencumbered” had an “acquired meaning” since the Alliance Towers decision, and used it to codify that market-rate rents can be used to value property, rather than relying on the existing lease to determine the property’s worth.

The Court stated the case law establishes a two-part “market-lease rule.” The actual sale price of a property with a lease is the best evidence of the property value. The price becomes its presumed value, but can be challenged. Second, when a property must be valued and there is no evidence a recent sale reflects its value, “an appraisal that takes into account a lease with terms that are typical for the market may be considered and adopted,” the Court concluded.

2020-0643. Rancho Cincinnati Rivers LLC v. Warren Cty. Bd. of Revision, Slip Opinion No. 2021-Ohio-2798.

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