Villa Park Ltd. v. Clark Cty. Bd. of Revision

• Decision Date: 02 February 1994
• Docket Number: No. 92-1488,92-1488
• Citation: 68 Ohio St.3d 215,625 N.E.2d 613
• Parties: VILLA PARK LIMITED, Appellant, v. CLARK COUNTY BOARD OF REVISION et al., Appellees.
• Court: Ohio Supreme Court

Page 215

68 Ohio St.3d 215

625 N.E.2d 613

VILLA PARK LIMITED, Appellant, v. CLARK COUNTY BOARD OF REVISION et al., Appellees.

No. 92-1488.

Supreme Court of Ohio.

Submitted May 27, 1993.

Decided Feb. 2, 1994.

Appellant, Villa Park Limited ("Villa Park"), owns a federally subsidized apartment complex located on 11.56 acres at 1350 Vester Avenue and adjacent addresses in Springfield, Ohio. The complex, an all-electric project, was constructed in two phases in 1977 and 1978. Phase I, for elderly or handicapped persons, is a three-story apartment building with one hundred one units consisting of ninety one-bedroom, one-bath apartments, ten one-bedroom, one-bath apartments designed for residents using wheelchairs, and one two-bedroom, one-bath apartment. Phase II, for low-income families, is fifty townhouse apartments in seven buildings, with thirty three-bedroom units and twenty four-bedroom units. Villa Park pays all the Phase I tenants' utilities, including electricity, and Phase II tenants pay their own utilities, except for water and sewer.

For tax year 1989, the Clark County Auditor assessed the subject property at a true value of $3,986,250. On appeal the board of revision affirmed the value determination. On appeal to the Board of Tax Appeals ("BTA"), Villa Park claimed the correct true value was $2,575,000.

At the hearing before the BTA, Villa Park's appraiser, John R. Garvin, used the income and the cost approaches. Garvin found no comparable sales with a similar apartment mix in the Springfield area, so he did not use the market-data approach. Appellee's appraiser, Gerald Tipton, used all three approaches, but chose a value derived from a market approach that compared properties based on ratios of sales prices to potential gross rental income.

Both appraisers used a five-percent vacancy and credit-loss rate, which reflected rates in nonsubsidized apartments in the Springfield area. In the income approach, the primary disagreement between the appraisers involved calculating expenses. Garvin used economic rents but actual expenses. Garvin stabilized expenses by applying an economic budget that he developed. The budget included reserves for replacements as adjustments, to reflect economic or market expenses. Tipton used economic or market rents, and, for operating expenses, a pro forma forty-percent rate.

The BTA criticized Garvin's expenses, finding that the fifty-four-percent ratio of expenses to gross income was "excessive," and that "$108,500 is excessive for electricity since the market rents used in the income approach presume the tenants will pay electricity."

The BTA found that the parties had not submitted evidence of any sale price of the property to indicate its true value, and that the parties relied on the approaches to value prescribed in Ohio Adm.Code 5705-3-03(D).

The BTA found that the fair market value, or the "true value in money," of the property was $3,281,140.

The cause is now before this court upon an appeal as of right.

Arter & Hadden and Karen H. Bauernschmidt, Cleveland, for appellant.

Stephen A. Schumaker, Clark County Pros. Atty., Kirk D. Ellis and William D. Hoffman, Asst. Pros. Attys., for appellees.

PER CURIAM.

From our review of the record, the decision of the BTA is unreasonable and unlawful. The decision is vacated and the cause is remanded for further consideration.

The BTA found, and neither party disputes, that the best method of valuing subsidized apartments is the income approach.

The second paragraph of the syllabus of Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision (1988), 37 Ohio St.3d 16, 523 N.E.2d 826, one of the three leading cases involving valuation of subsidized apartments, states:

"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." See, also, Canton Towers, Ltd. v. Stark Cty. Bd. of Revision (1983), 3 Ohio St.3d 4, 3 OBR 302, 444 N.E.2d 1027, and Oberlin Manor, Ltd. v. Lorain Cty. Bd. of Revision (1989), 45 Ohio St.3d 56, 543 N.E.2d 768.

While there is no dispute about what kind of rent is applicable (" 'economic rent is a proper consideration in a situation in which contract rent is not truly reflective of true value in money,' " Canton Towers, supra, 3 Ohio St.3d at 7, 3 OBR at 305, 444 N.E.2d at 1030, quoting Wynwood Apts., Inc. v. Cuyahoga Cty. Bd. of Revision [1979], 59 Ohio St.2d 34, 37, 13 O.O.3d 19, 21, 391 N.E.2d 346, 347), none of these cases specifically discusses the appropriate treatment of expenses in determining the value of subsidized apartments.

Villa Park points out that Garvin "reviewed actual expenses and market expenses" and "stabilized operating expenses to reflect 'market expenses.' " Villa Park argues that all apartments (subsidized and nonsubsidized) have expenses for administration, utilities, maintenance, insurance, etc. that can be stabilized to reflect market expenses. We agree.

American Institute of Real Estate Appraisers, The Appraisal of Real Estate (9 Ed.1987) 445, states:

"Operating expenses are the periodic expenditures necessary to maintain the real property and continue the production of the effective gross income.

" * * *

" * * * [A]n appraiser analyzes and reconstructs expense statements to develop a typical expense expectancy for the property on an annual accrual basis.

"Operating expense estimates usually list fixed expenses, variable expenses, and a replacement allowance." (Emphasis sic.)

Garvin reviewed and stabilized expenses and developed an expense budget that included administrative and other operating expenses and reserves for replacement.

The BTA found that Garvin erred in using actual expenses. The question is: Did Garvin use actual expenses improperly or, as he contends, by proper adjustments to actual expenses, did he stabilize them to "reflect market operating expenses"? In other words, did he employ an alternate way of showing expenses that was equivalent to using market operating expenses?

In Oberlin Manor, supra, we criticized the board of revision's appraiser for basing "his opinion on data from other subsidized apartments and actual income, expense, and cost figures from Oberlin Manor." Id., 45 Ohio St.3d at 56, 543 N.E.2d at 768. We accepted the opinion of value expressed by Oberlin Manor's appraiser, based on "information derived from the general apartment market." Id.

Garvin's testimony in the instant appeal may be equivalent to information derived from the general apartment market and, thus, would be likewise acceptable, based as it is on his analysis that adjusted actual expenses to "reflect economic or market expenses" and that included reserves for replacement to compute net rentals. "Such reserves are proper items of expense to be utilized when estimating the true value of real property through an income approach." Freshwater v....