Home | State Tax Profiles | Tax Calendar | Locations | Client Connect Login

Ohio Supreme Court Rules on Valuation of
Leased-Fee Properties

by Morgan Thomas, Chicago, August 2017

 

In a landmark decision, the Ohio Supreme Court ruled that the purchase price paid for a property in a leased-fee transaction is not necessarily determinative of true market value. This overrides the long-standing mandate in Ohio that a sale price, as long as it is a recent, arms-length transfer, is market value for tax purposes with almost no exceptions. Now, if it can be shown generally through an appraisal, that the leased fee purchase price exceeds the unencumbered fee simple value, the court says fee simple wins.

 

Many of the appeals filed by school boards seeking increases in assessments based on sale prices are leased fee sales so this decision represents a significant new factor for assessing lease-encumbered properties that have been the subject of recent arm’s-length sales.

 

The Court Case

 

In Terraza 8, LLC. v. Franklin County Board of Revision, the subject property was a 54,000-square-foot fitness center in Franklin County. The Franklin County auditor assessed the property at $4.8 million for tax year 2013. The Hilliard City Schools Board of Education complained to the Franklin County Board of Revision that the property should have been valued at $15 million, based on its purchase price.

 

The owner introduced testimony charging the sale price did not represent the fee simple market value of the property. That's because the existing lease in place when Terraza acquired the property called for monthly rental payments above the market rate.

 

The Ruling

 

The Ohio Supreme Court ruled that while a sale price constitutes the best evidence of a property's value, it does not always reflect the value of an unencumbered fee-simple estate. Market rent analysis can refute the usefulness of the sale price in property tax assessments.

 

Justices determined that since the Board of Tax Appeals (BTA) erroneously applied a conclusive presumption in favor of 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.

 

The court sent the case back to the Board of Tax Appeals. "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," the judgment said.