Alliance Towers, Ltd. v. Stark County Bd. of Revision

• Decision Date: 25 May 1988
• Docket Number: Nos. 86-783,86-935 and 86-1069,86-810,87-2,s. 86-783
• Citation: 523 N.E.2d 826,37 Ohio St.3d 16
• Parties: ALLIANCE TOWERS, LTD., Appellant, v. STARK COUNTY BOARD OF REVISION et al., Appellees. SUNSET SQUARE, LTD., Appellee, v. MIAMI COUNTY BOARD OF REVISION et al., Appellants. (Two Cases.) MURRAY COMMONS, LTD., Appellant, v. FRANKLIN COUNTY BOARD OF REVISION et al., Appellees. STAUNTON COMMONS II, LTD., Appellant, v. MIAMI COUNTY BOARD OF REVISION et al., Appellees.
• Court: Ohio Supreme Court

Page 16

37 Ohio St.3d 16

523 N.E.2d 826

ALLIANCE TOWERS, LTD., Appellant, v. STARK COUNTY BOARD OF REVISION et al., Appellees.

SUNSET SQUARE, LTD., Appellee, v. MIAMI COUNTY BOARD OF REVISION et al., Appellants. (Two Cases.)

MURRAY COMMONS, LTD., Appellant, v. FRANKLIN COUNTY BOARD OF REVISION et al., Appellees.

STAUNTON COMMONS II, LTD., Appellant, v. MIAMI COUNTY BOARD OF REVISION et al., Appellees.

Nos. 86-783, 86-810, 87-2, 86-935 and 86-1069.

Supreme Court of Ohio.

Submitted October 14, 1987.

Decided May 25, 1988.

Syllabus by the Court

1. For real property tax purposes, the fee simple estate is to be valued as if it were unencumbered. (Wynwood Apartments, Inc. v. Bd. of Revision [1979], 59 Ohio St.2d 34, 13 O.O.3d 19, 391 N.E.2d 346, approved and followed.)

2. An apartment property built and operated under the auspices of the Department of Housing and Urban Development is to be valued, for real property tax purposes, with due regard for market rent and current returns on mortgages and equities.

The five cases consolidated for decision herein involve appeals from the determinations by the Board of Tax Appeals ("BTA") of the true value, under R.C. 5713.03, of four apartment complexes that are operated with assistance from the Department of Housing and Urban Development ("HUD"). The taxpayers had filed complaints with the boards of revision challenging the county auditor's value in each case. They then filed notices of appeal with the BTA after the boards of revision rendered their decisions. The evidence before the BTA consisted of appraisal reports and other documents and testimony presented by the parties.

Alliance Towers is a one-hundred-and-one-unit, seven-story apartment building occupying 1.91 acres of land in Alliance, Ohio. The Stark County Board of Revision determined its true value as of January 1, 1982, to be $3,225,000.

The taxpayer's appraiser, using what he described as current market rents, an estimated expense budget for the project, and current mortgage rates, estimated the value of Alliance Towers, via the income approach, ¹ to be $790,000. A pro forma cost approach yielded a value of $912,000. His final value was $800,000.

The appraiser for the Stark County Board of Revision valued the property based on two theories. First, he valued it as a federally subsidized property. He used the actual rents and the actual mortgage rate of the property. These projections indicated a true value of $3,225,000. Second, he valued the property as if it were not subsidized, using market rents and market mortgage rates. The appraiser concluded that the true value under this theory was $1,391,200.

The BTA rejected the market rental ² and market mortgage rate considerations and valued the property on the basis of the actual construction costs and the actual subsidized rent being received by the owner. The BTA determined the true value of Alliance Towers to be $2,900,000.

The Sunset Square cases involve the valuation of a two-story apartment building containing thirty one-bedroom, one-bath apartments. It was completed in 1981 and is located on 3.53 acres of land in Piqua, Ohio. It was financed with a below-market mortgage note carrying a 7.5 percent interest rate. The Miami County Board of Revision determined the true value of the property for the tax years 1982 and 1983 to be $551,314 and $728,200, respectively.

The taxpayer's appraiser used market rents, deducted vacancies and expenses, and applied a market-derived capitalization rate to determine that the property should be valued at $438,500. He did not apply the market data approach because he could not find comparable sales, nor did he employ the cost approach, because he could not readily ascertain the functional obsolescence of the apartment complex.

The county board of revision's appraiser estimated a value based upon a cost approach, a "mortgage/sale ratio" market approach, a "reversion/shelter" income approach, and a "mortgage/equity" income approach. ³ He limited his investigation and analysis to the subsidized nature of the property. His data pertained to the actual costs of constructing the building and other comparable buildings, to the actual income and expenses of the property, and to what he believed to be the investment benefit to the owner of the property. For his market data approach, he selected sales of properties that operated under some form of the subsidy program. He valued the property at $1,000,000 as of January 1, 1982 and $1,050,000 as of January 1, 1983.

Initially, the BTA approved the analysis by the county's appraiser. The BTA regarded the reversion/shelter approach to be a legitimate methodology to consider along with the traditional income, cost, and market data approaches. The BTA decided that the fair market value of the Sunset Square property for 1982 was $1,000,000.

Thereafter, the BTA granted the taxpayer's motion for reconsideration and issued a decision in which it stated that it had "engaged in further research and study of other court decisions, treatises, trade articles and books concerning the reversion/shelter approach. * * * [This] additional study compels the conclusion that the mathematical computations and figures relied on by the * * * [board of revision's] expert were sometimes deflated, inflated or otherwise distorted. Such a fact requires us to modify our previous judgment."

Upon reconsideration, the BTA found that the fair market value of the Sunset Square property for 1982 was $540,000 rather than $1,000,000. For 1983, the BTA determined that the fair market value of the property was $548,500.

Murray Commons is a three-story brick apartment building located on 1.476 acres of land in Columbus, Ohio, containing fifty one-bedroom apartments and one two-bedroom apartment. The Franklin County Board of Revision determined its true value as of January 1, 1982 to be $1,304,000.

The taxpayer's appraiser, a member of the American Institute of Real Estate Appraisers, concluded that the market value of the property was $830,000 based essentially upon market data relating to conventional apartments. The board of revision's appraiser valued the property at $1,642,200 based upon data relating to government subsidized properties. The taxpayer's appraiser sought to determine the market value of the fee as if unencumbered, whereas the board of revision's appraiser considered the value of the property as encumbered by the HUD program.

The BTA concluded that the property would sell only as an encumbered property under the existing mortgage and subsidy program. It criticized the taxpayer's appraiser for disregarding the mortgage note, the tax shelter value of the property, and some actual costs. The BTA emphasized that if the property were sold, the sale price would be an amount that covered at least the mortgage to be assumed by a purchaser. Apparently believing that the remaining mortgage debt was $1,554,000, the BTA adopted this amount as the true value of the property. This figure instead appears to be the approximate amount certified by the mortgagor as the actual cost of construction, which included financing and inspection costs. The board of revision's appraiser, however, stated that the mortgage balance as of January 1, 1982, was actually $1,470,700.

Staunton Commons II is a two-story apartment building containing twenty-eight one-bedroom apartments. It is located on 1.62 acres of land in Troy, Ohio. The building was constructed in 1978. The Miami County Board of Revision determined the true value of the property as of January 1, 1982, to be $561,320.

The taxpayer's appraiser estimated a value of $395,000 based on market rents. The board of revision's appraiser based his valuation of $854,000 on data relating primarily to subsidized housing projects, the actual cost of constructing the subject property, and the actual income and expenses necessary for the operation of the property.

Although the BTA discussed the evidence before it, it did not state what evidence it used to reach its decision. The true value determined by the BTA, $624,500, was exactly the average of the two estimates of the appraisers.

The appraisal expert for the board of revision in Murray Commons, Sunset Square and Staunton Commons II presented essentially the same market information in his reports. The data included sales of apartment projects that were subject to the government regulations and subsidies. His cost and income approaches used information specific to the property without resort to cost manuals (although he did include construction costs for other subsidized projects) and actual income and expenses for the properties in the income approach. As noted previously, the appraiser for the county in Alliance Towers valued the property on a subsidized and an unsubsidized basis. All the taxpayers, on the other hand, presented evidence of market rentals available in the community and market-derived capitalization rates.

The BTA decided in Alliance Towers, Staunton Commons II and Sunset Square that the values of the properties were somewhere between the extremes of the competing appraisals. In iMurray Commons, the BTA valued the property at what it thought was the existing mortgage balance upon the property.

The causes are now before this court upon appeals as of right.

Fred Siegel Co., L.P.A., Fred Siegel, Wayne E. Petkovic, Columbus, and Karen Bauernschmidt, Cleveland, for appellants, Alliance Towers, Ltd., Murray Commons, Ltd., and Staunton Commons II, Ltd., and for appellee Sunset Square, Ltd.

Robert D. Horowitz, Pros. Atty., John B. Wirtz and Gary D. Cerrone, Canton, for appellee Stark County Bd. of Revision et al.

Teaford, Rich, Belskis, Coffman & Wheeler and Jeffrey A. Rich, Columbus, for appellant and appellee, Miami County Bd. of Revision et al., for appellee, South-Western City Schools Bd. of Educ., and urging affirmance for amici curiae, Miami County Auditor and Miami County Bd. of Revision in...