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OH Sup. Ct. Concludes Property Tax Value Based on Market Factors, Not Specifics of Subject Property

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  • Uniformity of property values is necessary and, therefore, the market matters more than the actual property’s lease, or lack thereof

Ohio law states that the value of real property, for property tax purposes, is to be determined with reference to the value of the real property “as if unencumbered.” The Ohio Supreme Court was asked by a taxpayer, Rancho Cincinnati Rivers LLC, to decide whether that “as if unencumbered” language meant that an appraiser could value a particular property as though the property was vacant, without any lease in place, for tax purposes. The Court denied the taxpayer’s contention that a “vacant-at-transfer” rule should be permitted to value the Tax Year 2016 value of a building leased to Lowe’s.

The Court explained that the language of R.C. 5713.03 that directed that leased property be valued “as if unencumbered” was intended to allow tax assessors to consider appraisals as better evidence than property sales prices in certain circumstances and did not mean that the property should be considered “vacant-at-transfer.”

  • Article XII, Section 2 – “Land and improvements thereon shall be taxed by uniform rule according to value * * *”

Ohio’s tax valuation statutes are premised upon the idea that similar properties should be valued similarly for real property tax purposes. This is largely grounded in the Uniformity Clause of the Ohio Constitution, quoted above. In practice, what this means is that appraisers, and the County auditors and appellate tribunals reviewing those values, must look to the market of what properties sell for, and look to the market of what properties lease for, as well as other market factors, and then make adjustments to derive the value of the subject property being appraised.

In some instances, this can theoretically result in a fully leased office building being valued the same as an empty office building, even where the economics for the two buildings and their owners are completely different. The idea of the use of the phrase “as if unencumbered” is to throw out the actual lease that is in place, and instead measure what a market lease would raise.

The taxpayer in Rancho Cincinnati Rivers LLC v. Warren Cty. Bd. of Revision, Slip Opinion No. 2021-Ohio-2798, asserted that the tax assessor should assume an “unencumbered transfer,” as if those leasing the property had vacated and it was sold to a buyer without restrictions. The County, however, asserted that 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 found that the “as if unencumbered” language permits 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. Because in some cases the sale price or the lease rate might not be the best evidence, the law was modified to allow appraisal evidence to be given greater weight in determining the property value. The Court essentially states 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. That price becomes its presumed value, but it 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.”

Our attorneys have experience in practice before county boards of revision, the Ohio Board of Tax Appeals, Ohio’s appellate courts, and the Ohio Supreme Court on Ohio real estate tax matters and other state and local tax matters. If you wish to discuss real property tax valuation issues, or any other tax issue, please contact Steve Hall, or any of our professionals.

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