HIN, L.L.C., APPELLANT, v. CUYAHOGA COUNTY BOARD OF REVISION ET AL., APPELLEES.
No. 2012-0725
Supreme Court of Ohio
Submitted August 20, 2013—Decided February 20, 2014
138 Ohio St.3d 223, 2014-Ohio-523
FRENCH, J.
{¶ 1} In this аppeal, the owner of an office building contests the Board of Tax Appeals’ (“BTA‘s“) decision to adopt the April 2004 sale price of $7.4 million as the property‘s value for tax-year 2006. Because we have previously addressed and rejected the legal arguments the property owner makes, and because the BTA properly determined the value of the property, we affirm the BTA‘s decision.
Facts
{¶ 2} The property at issue is a 34-acre parcel containing a two-story, 78,500-square-foot office building. The property is located in Bedford, Ohio.
{¶ 3} Tops Markets, L.L.C. (“Tops“), owned the property in 2003. U.S. Bank contracted to purchase the property from Tops but later assigned its purchasing rights to JBK Properties, Inc. (“JBK“). As of September 8, 2003, the parties had put together a deal for JBK to purchase the рroperty from Tops for $4.9 million and then lease it to U.S. Bank. In fact, JBK‘s purchase of the property was contingent upon the U.S. Bank lease. JBK and U.S. Bank signed the triple-net lease1 on November 1, 2003. Tops signed over the deed to JBK on December 24, 2003, and JBK recorded the deed with the county auditor on December 30, 2003.
{¶ 4} In January 2004, appellant, HIN, L.L.C. (“HIN“)—a company unaffiliated with Tops, JBK, or U.S. Bank—approached JBK about purchasing the property. HIN was interested in buying a building with a triple-net lease in
{¶ 5} The April 2004 sale was discussed by this court in a previous case. HIN, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 124 Ohio St.3d 481, 2010-Ohio-687, 923 N.E.2d 1144 (”HIN I“). The issue in HIN I concerned the value of the property for tax-year 2004. This court considered the December 2003 sale price of $4.9 million as well as the April 2004 sale price of $7.4 million. Wе determined that the December 2003 sale price was the value of the property because it was closer in time to the tax-lien date. Id. at ¶ 30.
{¶ 6} The same parties are back before this court to argue over the property‘s tax value for 2006. For tax-year 2006, the Cuyahoga County auditor set the value at $8 million. HIN filed a complaint with appellee Cuyahoga County Board of Revision (“BOR“) seeking a deсrease in value to $5 million, an amount very close to the December 2003 sale price. The BOR held a hearing on HIN‘s valuation complaint and reduced the property value from $8 million to the 2004 sale price of $7.4 million. HIN appealed to the BTA, seeking a reduction to the December 2003 sale price of $4.9 million.
{¶ 7} The BTA held a hearing at which HIN offered the testimony of two experts, appraiser Rоger Ritley and real estate investor and attorney Robert Weiler. Both men attempted to distinguish the “leased fee,” which Weiler defined as “ownership of real estate that‘s encumbered with a lease,” from the “fee simple,” which Weiler defined as “ownership of real estate unencumbered.” Both also opined that a lease, such as the one between JBK and U.S. Bank, was an intangible asset that could nоt be considered when determining the fee-simple taxable value of the real property.
{¶ 8} In his appraisal report, Ritley concluded that the $2.5 million increase in price from 2003 to 2004 was due exclusively to the U.S. Bank lease, which he described as “an intangible property component” of the 2004 sale. In his view, the $7.4 million sale represented the sale of the leased fee, while the prior $4.9 million salе represented the sale of the fee simple. Ritley appraised the property
{¶ 9} Appellee Bedford City School District Board of Education did not introduce any appraisal evidence. It submitted only the deed and conveyance statement showing the details of the April 2004 sale for $7.4 million.
{¶ 10} Rеlying on recent case law from this court, the BTA rejected HIN‘s contention that the $7.4 million sale price did not reflect the taxable value of the property because of the long-term lease encumbrance. HIN, L.L.C. v. Cuyahoga Cty. Bd. of Revision, BTA No. 2008-K-2386, 2012 WL 1257409, *3 (Mar. 27, 2012). The BTA also held that because the April 2004 sale was a recent arm‘s-length transaction, it would be “inappropriate to consider the alternative evidence of value offered by appellant,” such as Ritley‘s appraisal. Id. at *5. The BTA therefore upheld the $7.4 million sale price as the best evidence of value.
{¶ 11} In this appeal, HIN requests that we reverse the BTA. HIN argues that the $7.4 million sale price does not represent the taxable value of the property, because the property was sold with a lease encumbrance. HIN further argues that the BTA erred in not considering HIN‘s independent appraisal as alternative evidence of value. For the reasons that follow, we affirm the BTA.
Analysis
A Recent Arm‘s-Length Sale Price Establishes the Value of the Property
{¶ 12} Our analysis begins with former
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 of an arm‘s length sale bеtween a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor shall consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes.
{¶ 13} HIN does not dispute that the April 2004 sale was recent and at arm‘s length. Instead, HIN contends that there are “factors other than a sale‘s arm‘s length nature and recency which can render a sale unrepresentative of value.” The factors that HIN identifies here are (1) the existence of the long-term lease and (2) HIN‘s appraisal.
{¶ 14} HIN is mistaken. A salе price is presumed to establish the value of real property. Cincinnati School Dist. Bd. of Edn. v. Hamilton Cty. Bd. of Revision, 78 Ohio St.3d 325, 327, 677 N.E.2d 1197 (1997). The only way a party can show that a sale price is not representative of value is to show that the sale was either not recent or not an arm‘s-length transaction. Cummins at ¶ 13 (“a sale price is deemed to be the value of the property, and the only rebuttal lies in challenging whether the elements of recency and arm‘s-length character * * * are genuinely present“); HIN I, 124 Ohio St.3d 481, 2010-Ohio-687, 923 N.E.2d 1144, at ¶ 27 (“the only considerations articulated in
{¶ 15} The cases HIN relies upon do not support its position. In Cincinnati School Dist. Bd. of Edn., we did not recognize any additional factors—beyond recency and arm‘s-length character—that could render a sale price not representative of value. Indeed, in that case, the only relevant factor was whether the sale at issue was an arm‘s-length transaction. Id. at 327-328. Pingue v. Franklin Cty. Bd. of Revision, 87 Ohio St.3d 62, 717 N.E.2d 293 (1999), is similarly unhelpful to HIN. To the extent that Pingue supports HIN‘s position, Pingue relied on Ratner v. Stark Cty. Bd. of Revision, 23 Ohio St.3d 59, 491 N.E.2d 680 (1986), which was later overruled in Berea, 106 Ohio St.3d 269, 2005-Ohio-4979, 834 N.E.2d 782, at ¶ 13.
{¶ 16} HIN also cites Higbee Co. v. Cuyahoga Cty. Bd. of Revision, 107 Ohio St.3d 325, 2006-Ohio-2, 839 N.E.2d 385, as a case in which “the Court rejected the use of a recent sale price.” HIN cites one sentence from our opinion, which stated that although Higbee had “purchased the land for $10, neither of Higbee‘s appraisers valued the land at $10,” id. at ¶ 45, and thus argues that we ignored the sale price of the property in favor of the appraisal evidence. We disagree with this characterization. Higbee had purchased undeveloped land and then constructed a department store. We attempted to determine whether the BTA
{¶ 17} Next, HIN cites Berea, in which we stated that “[a]ppraisals based upon factors other than sale price are appropriate for use in determining value only when no arm‘s-length sale has taken place, or where it is shown that the sale price is not reflective of the true value.” (Emphasis deleted and added; citation omitted.) Berea at ¶ 15, quoting Columbus Bd. of Edn. v. Fountain Square Assocs., Ltd., 9 Ohio St.3d 218, 219, 459 N.E.2d 894 (1984). Again, this quotation does not support HIN‘s attempt to look beyond the arm‘s-length character or recency of a sale. In Berea, we held that outside appraisals would be appropriate only when (1) there was no sale at all, id., or (2) there was a sale, but it was not indicative of value, either because it was not recent or not at arm‘s length, id. at ¶ 14. Berea does not hold that a recent arm‘s-length sale could somehow not reflect true value. In fact, it explicitly holds that a recent arm‘s-length sale price is always reflective of tax value, regardless of what competing appraisals might say. Id. at ¶ 13-16.
{¶ 18} Accordingly, the only way HIN could show that thе 2004 sale price was not indicative of value would be to challenge the recency or arm‘s-length character of the sale; HIN challenged neither. Therefore, the 2004 sale price established the value of the property. The extraneous factors HIN cites—the U.S. Bank lease and the Ritley appraisal—are irrelevant.
Neither the Lease Encumbrance Nor the Appraisal Evidence Invalidates the Sale Price
{¶ 19} Nevertheless, HIN attempts to make the lease relevant by arguing that because the property was sold with the lease attached, and because leases are not taxable, the sale price does not reflect the true value of the property for tax purposes. HIN claims that the 2004 sale represents the value of the leased fee, not the unencumbered fee simple. It argues that we must value property in its unencumbered state.
{¶ 20} We have rejected this argument numerous times. In Berea, 106 Ohio St.3d 269, 2005-Ohio-4979, 834 N.E.2d 782, we faced the question of how to value a property subject to two long-term leases. The property had recently been sold in an arm‘s-length transaction. The board of education argued that the BTA should have disregarded the sale price and valued the property as if unencumbered with the leases. The board also presented appraisal evidence of what that unencumbered value would be. We rejected the board‘s arguments and held that when there has been a recent arm‘s-length sale, the taxing authority must
{¶ 21} Not only have we affirmed this rule numerous times, we also have affirmed it in regard to this exact piece of property. HIN I, 124 Ohio St.3d 481, 2010-Ohio-687, 923 N.E.2d 1144, at ¶ 27. In HIN I, we told the parties that former
{¶ 22} HIN attempts to refute this precedent by citing general appraisal principles. The appraisal profession defines “fee simple” as “[a]bsolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.” Appraisal Institute, The Appraisal of Real Estate 114 (13th Ed.2008). By contrast, when a property is encumbered by a lease, appraisers define the property as a “leased fee.” Id. At the BTA hearing, HIN‘s witnesses testified to these terms and distinctions.
{¶ 23} But we have already pointed out that these definitions, though no doubt useful for how appraisers understand their assignments, simply do not define the subjects of taxation under Ohio law:
The distinction between “fee simple” and “leased fee” is onе drawn in the context of appraisal practice. The appraisal industry uses the term “fee simple” to refer to unencumbered property—or to property appraised as if it were unencumbered. This distinction is not one recognized by the law, however. A “fee simple” may be absolute, conditional, or subject to
defeasance, but the mere existence of encumbrances does not affect its status as fee simple.
(Citations omitted.) Meijer Stores Ltd. Partnership v. Franklin Cty. Bd. of Revision, 122 Ohio St.3d 447, 2009-Ohio-3479, 912 N.E.2d 560, ¶ 23, fn. 4. Accordingly, the appraisal-profession standards espoused by HIN‘s experts do not alter our legal analysis.
{¶ 24} Additionally, HIN relies on Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision, 37 Ohio St.3d 16, 523 N.E.2d 826 (1988), in support of its position that we must value the property as if unencumbered by the U.S. Bank lease. In Alliance Towers, we stated that “[f]or real property tax purposes, the fee simple estate is to be valued as if it were unenсumbered.” Id. at paragraph one of the syllabus. In Cummins, however, we distinguished Alliance Towers because it involved a valuation by appraisal, not the validity of a sale price. Cummins, 117 Ohio St.3d 516, 2008-Ohio-1473, 885 N.E.2d 222, at ¶ 15. We found Alliance Towers to be inapposite and affirmed that it would never be proper to adjust a recent arm‘s-length sale price because of an encumbrance. Id. at ¶ 25-26.
{¶ 25} Finally, even if the lease encumbrance were legally relevant, it would not be factually relevant in this case. HIN claims that the leasе inflated the 2004 sale price and that the $2.5 million increase in price between 2003 and 2004 was due exclusively to the lease. We rejected this argument in HIN I, 124 Ohio St.3d 481, 2010-Ohio-687, 923 N.E.2d 1144, at ¶ 26, and we reject it again here. The lease was not a new condition that sprang up after the 2003 sale. The lease existed prior to, and was a condition of, the 2003 sale. It was contemplated, negotiated, and signed before the 2003 sale, and the parties had already factored the lease into the $4.9 million transaction. As we wrote in HIN I:
[The] position that the [December 2003] sale does not reflect any property value increase attributed to the long-term U.S. Bank lease is also not well taken. We recognize that the parties to sales factor the value of encumbrances into the selling price of the property. We therefore assume that both Tops Markets and JBK Cuyahoga considered the value of the long-term lease when they agreed to the [$4.9 million] sale price, as both parties anticipated the subsequent lease of the property to U.S. Bank.
Id. at ¶ 26. We went on to explain that the price increase actually resulted “from the serendipity of HIN‘s purchase, as HIN contemplated a 1031 exchange and spеcifically sought a property with a triple-net lease.” Id. at ¶ 28. Thus, HIN cannot argue that the price increase was due to the lease or that the $4.9 million price represents a separate, unencumbered valuation.
{¶ 27} HIN did not dispute either the arm‘s-length character or the recency of the April 2004 sale. These were the only measures that mattered. Both the lease encumbrance and the appraisal evidence were irrelevant. Therefore, we must accept the $7.4 million sale price as the conclusive value of thе property for tax purposes.
Using the Sale Price to Value the Property Does Not Violate the Constitutional Requirement of Taxation by Uniform Rule
{¶ 28} Finally, HIN argues that using the 2004 sale price amounts to a nonuniform assessment in violation of the
Conclusion
{¶ 29} For the foregoing reasons, we find that the BTA‘s decision to adopt thе $7.4 million sale price from April 2004 as the property‘s value for tax-year 2006 was not unreasonable or unlawful. We therefore affirm the decision of the BTA.
Decision affirmed.
O‘CONNOR, C.J., and O‘DONNELL, LANZINGER, KENNEDY, and O‘NEILL, JJ., concur.
PFEIFER, J., dissents.
{¶ 30} I continue to believe that “[b]lind reliance on purchase price to determine fair market value of real estate is simplistic and naïve.” Dublin-Sawmill Properties v. Franklin Cty. Bd. of Revision, 67 Ohio St.3d 575, 578, 621 N.E.2d 693 (1993) (Pfeifer, J., dissenting). Unfortunately, a majority of this court continues to adhere to the unnecessarily rigid standard that forms the basis of its opinion in this case. Fortunately, based on recent changes to the statutory scheme, entities involved in the valuation of real estate for taxation purposes, including this court, will be required to adopt a more nuanced approach. As of 2012,
{¶ 31} Our court is not required to adhere to the rigid standard that we unnecessarily adopted and have slavishly followed. Thе statutory scheme that governs this case is not as rigid as this court‘s approach has been, as I explained in my dissent in Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 269, 2005-Ohio-4979, 834 N.E.2d 782. It is possible to allow evidence of facts and circumstances that affect true value, including the effect of encumbrances and the impact of a 1031 exchange. I would allow HIN to present evidence of the true value of its real estate. I dissent.
Siegel Jennings Co., L.P.A., J. Kieran Jennings, and Jason P. Lindholm, for appellant.
Kolick & Kondzer, Thomas A. Kondzer, and John P. Desimone, for appellee Bedford Board of Education.