America's Property Tax Advisor

Ohio Supreme Court Clarifies
"As If Unencumbered"

BY ROBERT BOXLEY, MBA, CMI, CHICAGO, JANUARY 2022

Ohio real property must be valued fee simple as if unencumbered. The Ohio Supreme Court has defined this requirement to mean that at the time of an appraisal the property is valued as if it were free from an encumbrance such as a lease, not that the property is vacant at the time of transfer.

 

Background

 

Through the years, there have been many legal disputes regarding tax valuations based on a property’s sales price.

 

Since the sales price or lease rate might not be the best evidence in some cases, the Ohio Legislature sought a way to allow appraisal evidence to be given greater weight in determining property value. In a 2012 change in state law, officials adopted the “fee simple, as if unencumbered” approach.

 

The Case

 

Rancho Cincinnati Rivers owns 12 acres of property in Warren County that it leases to Lowe’s. Rancho acquired the property in 2011 for $5.13 million. Lowe’s has a 20-year lease and pays Rancho $375,00 a year.

 

For tax year 2015, the Warren County auditor assessed the value at just more than $8.49 million. Rancho appealed arguing that the amendment to Ohio Revised Code 5713.03 ensures a property should be valued as if unencumbered by a lease. Rancho compared the property to other big box stores that were vacant or were sold after being vacant for an extended period.

 

An appraiser for the local school district 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 assessed by examining similar big box stores with leases. This allows the appraiser to determine the market value for a typical lease in the area. By doing so, the school district’s appraisal was slightly lower than the county auditor’s at $8.48 million. Rancho unsuccessfully appealed the decision and took the case to the Ohio Supreme Court.

 

The Ruling

 

In Rancho Cincinnati Rivers LLC v. Warren City Board of Revision, the high Court ruled that the critical language of the disputed statute is the phrase “fee simple estate as if unencumbered,” noting that “fee simple” means outright ownership of the land not subject to any other interests.

 

The Court explained that the case law establishes a two-part market-lease rule. First, the leased fee sales price remains the best evidence of value but is subject to rebuttal. Second, appraisals that account for lease terms that are typical of market may be considered and adopted.

 

Justices added that by using the phrase fee simple as if unencumbered, the legislature codified its agreement with the requirement that property should be valued using market rent, rather than the actual rent from an existing lease encumbering the property at the time of a sale and transfer.