Columbus City Sch. Bd. of Educ. v. Franklin Cnty. Bd. of Revision, 2014–0807.

• Decision Date: 11 May 2017
• Docket Number: No. 2014–0807.,2014–0807.
• Parties: COLUMBUS CITY SCHOOLS BOARD OF EDUCATION, Appellee, v. FRANKLIN COUNTY BOARD OF REVISION, et al., Appellees; Network Restorations III, L.L.C., Appellant.
• Court: Ohio Supreme Court

151 Ohio St.3d 12

85 N.E.3d 694

2017 Ohio 2734

COLUMBUS CITY SCHOOLS BOARD OF EDUCATION, Appellee,

v.FRANKLIN COUNTY BOARD OF REVISION, et al., Appellees;

Network Restorations III, L.L.C., Appellant.

No. 2014–0807.

Supreme Court of Ohio.

Submitted Feb. 28, 2017.

Decided May 11, 2017.

Rich & Gillis Law Group, L.L.C., Mark H. Gillis, Dublin, and Kimberly G. Allison, for appellee Columbus City Schools Board of Education.

Timothy A. Pirtle, Columbus, for appellant.

PER CURIAM.

{¶ 1} This real-property-valuation case concerns several residential parcels, all part of a government-subsidized low-income-housing project in Franklin County, and their value for 2008, 2009, and 2010. The property owner, Network Restorations III, L.L.C., presented an appraisal that was adopted by the Franklin County Board of Revision ("BOR"), but the Columbus City Schools Board of Education ("BOE") appealed to the Board of Tax Appeals ("BTA"), which reversed and reinstated the county auditor's higher valuations.

{¶ 2} On appeal, the property owner asserts that its appraiser followed the proper principles applicable when valuing government-subsidized housing and that the BTA misinterpreted the applicable case law. The proper legal analysis for the type of property at issue in this case is set forth in Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision, 121 Ohio St.3d 175, 2009-Ohio-762, 902 N.E.2d 984. Because we find that the BTA's rejection of the owner's appraisal rests upon an erroneous interpretation of Woda, we reverse the decision of the BTA.

BACKGROUND

{¶ 3} At issue are 42 parcels scattered throughout Franklin County, some of which have been improved with renovated low-income housing. There are 35 buildings with 150 rental units—a mix of one-bedroom, two-bedroom, and three-bedroom units. For tax year 2008, which was a triennial update year in Franklin County, the county auditor valued the properties individually, combining a cost approach and a "gross rent multiplier" approach to arrive at a value for each parcel, which when combined amounted to $4,456,910.¹ For tax year 2009, the auditor increased the values because some of the properties had been renovated; the aggregate valuation for 2009 was $5,490,700, which was carried over to tax year 2010.

{¶ 4} After filing a complaint that sought a reduced aggregate value of $3,600,000, the owner presented lay testimony and an expert opinion of value at the BOR hearing. The testimony established that to participate in the "low-income-housing tax credit" program, the owner was required to and did execute and record a restrictive covenant. The covenant bound the current owner and its successors to continue to use the property to provide low-income housing on very specific terms over a 30–year period.

{¶ 5} The owner's expert witness was Donald E. Miller II, a member of the Appraisal Institute, who testified in support of his appraisal report before the BOR. Placing primary reliance on an income approach, which he checked using a sales-comparison approach, Miller opined that the aggregate property value was $2,830,000 for 2008. Miller specifically discussed the low-income-housing tax credit and the rent subsidies enjoyed by the properties at issue, which made it possible to renovate the units and to rent the units to low-income persons who could not afford market rents. He then premised his report on those circumstances.

{¶ 6} Miller identified two types of subsidy. The first was acquisition and renovation assistance through the federal low-income-housing tax credit ("LIHTC"), which was enacted in 1986 and codified at 26 U.S.C. 42. The LIHTC is a device for raising capital for low-income-housing projects that by themselves generate little (if any) profits—investors are attracted by federal income tax credits that are tied to the amount of capital invested in the housing projects. Woda, 121 Ohio St.3d 175, 2009-Ohio-762, 902 N.E.2d 984, at ¶ 16–17.

{¶ 7} The second form of subsidy was housing-assistance payments ("HAP"), which were available to tenants through Section 8 of the Housing Act of 1937, as amended. 42 U.S.C. 1437f. We have addressed this subsidy before in the context of real-property-valuation cases. See Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision, 37 Ohio St.3d 16, 20, 523 N.E.2d 826 (1988), fn. 4 (lead opinion); Colonial Village Ltd. v. Washington Cty. Bd. of Revision, 114 Ohio St.3d 493, 2007-Ohio-4641, 873 N.E.2d 298, ¶ 20.

{¶ 8} Miller's opinion of value rested on his finding of highest and best use. Noting the blight in the neighborhoods in which the parcels at issue are located, Miller found that the highest and best use would be "intensive residential if special funding is made available." Under the income approach, Miller noted that the properties at issue operate as LIHTC properties and that the owner receives HAP-subsidized rents, as the residents are unable to afford the LIHTC rents. Miller stated that "[g]iven the subsidized rents and the reality that this appraisal may be used in a real estate assessment (tax) appeal, the subject is being appraised under the hypothetical assumption that it receives market rents."

{¶ 9} For 2008, the BOR adopted the $2,830,000 value in accordance with the appraiser's opinion, but in light of the renovations completed during 2008, it raised the aggregate value for 2009 and 2010 to $3,867,300. The increase reflected the "contributing value" of the renovations and was based on the auditor's determination of increase in value from 2008 to 2009.

{¶ 10} On appeal to the BTA, the BOE presented evidence showing that the owner had spent $13.7 million renovating the properties.

{¶ 11} The BTA reversed the BOR's decision, restoring the auditor's higher aggregate value. With respect to tax year 2008, the BTA looked to Woda's twin principles that LIHTC use restrictions " ‘must be taken into account when determining the value of LIHTC property’ " and that government-subsidized low-income housing should be valued " ‘in accordance with methods that disregarded the affirmative value of the subsidies conferred by the federal government.’ " BTA No. 2011–714, 2014 Ohio Tax LEXIS 2505, at *4 (Apr. 21, 2014), quoting Woda, 121 Ohio St.3d 175, 2009-Ohio-762, 902 N.E.2d 984, at ¶ 30, 28. The BTA found that those principles were "directly contrary to the approach taken by Mr. Miller," based on its theory that using market rents involves ignoring the restrictive covenants. Id. The BTA also restored the auditor's increased valuation for 2009 and 2010.

ANALYSIS

Standard of Review

{¶ 12} Ordinarily, the determination of value is "a question of fact, the determination of which is primarily within the province of the taxing authorities." Cuyahoga Cty. Bd. of Revision v. Fodor, 15 Ohio St.2d 52, 239 N.E.2d 25 (1968), syllabus. Therefore, "this court will not disturb a decision of the Board of Tax Appeals with respect to such valuation unless it affirmatively appears from the record that such decision is unreasonable or unlawful." Id.

{¶ 13} In this appeal, however, we review the BTA's determination that Miller did not appraise the property in compliance with the legal standards set forth in earlier cases. This is a legal issue, and thus, our de novo review is invoked. See Lunn v. Lorain Cty. Bd. of Revision, 149 Ohio St.3d 137, 2016-Ohio-8075, 73 N.E.3d 486, ¶ 13.

Tax Valuation of Low–Income Housing

{¶ 14} R.C. 5713.01 requires county auditors to appraise real property "at its true value in money," which we have construed to equate in most situations with the amount for which the property would sell on the open market. State ex rel. Park Invest. Co. v. Bd. of Tax Appeals, 175 Ohio St. 410, 412, 195 N.E.2d 908 (1964). We have further explained that "market value" means the price arrived at when the buyer and the seller act as "typically motivated market participants" who are acting "in their own self-interest." Hilliard City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 139 Ohio St.3d 1, 2014-Ohio-853, 9 N.E.3d 920, ¶ 31, citing International Association of Assessing Officers, Property Assessment Valuation 17–19 (2d Ed.1996). Accordingly, when considering whether a sale price paid for the subject property constitutes its true value, we have acknowledged that "the typical motivation of the seller and the buyer constitutes an element in determining whether a transaction constitutes an arm's-length sale." FirstCal Indus. 2 Acquisitions, L.L.C. v. Franklin Cty. Bd. of Revision, 125 Ohio St.3d 485, 2010-Ohio-1921, 929 N.E.2d 426, ¶ 9, fn. 4.

{¶ 15} Determining the value of government-subsidized low-income housing presents the tax assessor with a problem in the application of the typically-motived-party principle. For one thing, when government subsidies (including income tax credits, which help finance construction and renovation, and rent subsidies, which help tenants pay the restricted rent) are involved, the circumstances attending the use of the property are not typical of the real-estate market generally. Additionally, a question arises as to which benefits associated with owning the real estate and running the housing complex count as real-estate value.

{¶ 16} Broadly speaking, the case law resolves this problem by establishing three rules for valuing low-income housing. The first rule is that in applying the income approach, market rents and expenses, as opposed to the actual rents of the properties at issue, are used. Delhi Estates, Ltd. v. Hamilton Cty. Bd. of Revision, 68 Ohio St.3d 192, 194, 625 N.E.2d 594 (1994). The main reasons for this rule are that the rents actually generated by the property reflect government subsidies that are atypical of the rental market generally and, because of government mortgage guarantees, the expenses incurred are atypical of what the unsubsidized market would bear. Quite simply, the rule of Delhi Estates calls for removing those aspects of property value that are atypical of the market due to government subsidies; the...