Woda Ivy Glen Ltd. Partnership v. Bor

Decision Date26 February 2009
Docket NumberNo. 2008-0312.,2008-0312.
Citation121 Ohio St.3d 175,2009 Ohio 762,902 N.E.2d 984
PartiesWODA IVY GLEN LIMITED PARTNERSHIP, Appellant, v. FAYETTE COUNTY BOARD OF REVISION et al., Appellees.
CourtOhio Supreme Court

Karen H. Bauernschmidt, Cleveland, and Sam A. Benson, for appellant.

Rich & Gillis Law Group, L.L.C., and James R. Gorry, Columbus, for appellees Fayette County Auditor and Board of Revision.

Porter, Wright, Morris & Arthur, L.L.P., and Kathleen M. Trafford, Columbus, urging reversal for amici Ohio Capital Corporation for Housing, Coalition on Housing and Homelessness in Ohio, Ohio Community Development Corporation Association, and Council for Rural Housing and Development of Ohio.

PER CURIAM.

{¶ 1} Appellant, Woda Ivy Glen Limited Partnership ("Ivy Glen"), appeals from a decision of the Board of Tax Appeals ("BTA") that affirmed the value that Fayette County assigned to the parcels at issue for the tax year 2004. The parcels are 60 in number and are improved with single-family homes that were built in 2002. The 60 parcels were developed pursuant to the federal low-income housing tax credit ("LIHTC") enacted in 1986 and codified at Section 42, Title 26 of the United States Code ("I.R.C. 42"). The auditor utilized a cost-based valuation for tax year 2004 with respect to each of the 60 individual parcels. The true value computations equaled approximately $80,000 per parcel and aggregated to approximately $4,854,970 for all 60 parcels.

{¶ 2} On March 30, 2005, Ivy Glen filed its complaint against the auditor's valuation with respect to all 60 parcels, alleging a total true value of $2,400,000. At the board of revision ("BOR") and at the BTA, Ivy Glen sought to value the 60 parcels as an economic unit based on rent-income analysis and comparable sales of rental properties, but both those tribunals rejected that approach. In evaluating the appraisal that Ivy Glen prepared for the BTA hearing, the BTA disregarded the effect of use restrictions imposed under the federal tax-credit program and found that Ivy Glen's appraisal report was deficient and not probative in certain crucial respects. This finding led the BTA to adopt the county's cost-based valuation. The BTA regarded the fact that the houses on the lots were only two years old as supporting the cost-based valuation.

{¶ 3} On appeal to this court, Ivy Glen makes two main contentions. First, Ivy Glen asserts that our case law precludes the adoption of a cost-based valuation because the federal tax subsidy induced the investment in the development, and under pure market conditions, the developer would not have expended such amounts. Second, Ivy Glen asserts that the BTA erred by rejecting its appraiser's highest-and-best-use determination, which viewed the development as a single economic unit consisting of 60 individual parcels available for rental.

{¶ 4} In response, the county argues that the court should defer to the BTA's rejection of Ivy Glen's appraisal. The county asserts that reverting to the auditor's cost-based valuation is justified by three circumstances: (1) Ivy Glen's failure to offer probative evidence that satisfied its burden of persuasion, (2) the doctrine that the BTA should ignore any restrictions on the transfer and use of the property that were imposed in connection with the federal tax subsidy, and (3) the recency of the construction of the development.

{¶ 5} We hold that under our case law, the BTA erred by failing to consider the federally mandated use restrictions imposed in connection with the LIHTC. That erroneous exclusion led the BTA to reject the appraiser's highest-and-best-use determination, and as a result, the BTA reverted to the county's cost-based valuation. Because it rests on an erroneous legal premise, the BTA's decision must be vacated and the case remanded for additional proceedings as described below.

Background

{¶ 6} The Ivy Glen development is located in the northwestern portion of Washington Court House in Fayette County near State Route 41. The tract at issue was acquired as two separate parcels, which were then subdivided into 60 individual parcels in connection with the construction and leasing of single-family residences. Ivy Glen includes 59 rental units — modest single-family residential homes with two, three, or four bedrooms — and a manager's unit with an adjoining community building/office.

{¶ 7} At the BTA, Ivy Glen presented the appraisal report and testimony of David E. McConahy. McConahy's report determined that the highest and best use of the property as though vacant is "for residential utilization if special funding is made available," but if such funding were lacking, "then general residential, institutional or secondary commercial utilizations are maximally productive." With the improvements, the highest and best use of the parcels is "[the present] affordable rental housing development, laid out like a detached single-family subdivision." That is so because an "LIHTC or low-income housing tax credit development is predicated on the rents that are affordable to low income residents and the income available is constrained by affordable standards," a fact that "results in a project [that] offers limited direct economic return to the partners."

{¶ 8} The BTA questioned McConahy's economic-unit valuation in light of the principle that property should be valued in its "`unrestricted form of title.'" Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (Jan. 11, 2008), BTA No. 2005-A-749, at 4, quoting Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision (1988), 37 Ohio St.3d 16, 23, 523 N.E.2d 826. The BTA found it significant that in discussing the lack of market-rate rental-unit comparables, the appraiser stated not only "lack of demand" but "the presence of `affordable ownership alternatives.'" Id. at 7. The BTA also noted the admitted availability of sales comparisons if the appraiser had viewed the development as individual single-family units rather than as a single economic unit. Id. at 8. In effect, the BTA regarded Ivy Glen as comparable to a development containing single-family owner-occupied housing and believed that the value of Ivy Glen could be properly determined in that manner.

{¶ 9} Closely related to the economic-unit issue is the propriety of the BTA's reverting to a cost-based valuation. The appraiser opined that the cost approach was not tenable in the present case because "this use is not actually feasible or productive as a market rent property and would not be undertaken by a developer." The BTA stated, "[W]e see no reason why a cost approach could not have been completed for the subject units." Woda Ivy Glen, BTA No. 2005-A-749, at 8.

{¶ 10} The BTA also faulted McConahy's income approach. In particular, the BTA concluded that the vacancy and rent-loss elements of the income approach "treat[ed] the subject as subsidized housing, not in its unrestricted form of title" inasmuch as McConahy "expresses concern over the smaller number of eligible individuals based upon income levels." Woda Ivy Glen, BTA No. 2005-A-749, at 10. In other words, the BTA faulted the income approach for taking into account the use restrictions on the property imposed in connection with the tax subsidy.

{¶ 11} Based on its disagreements with the appraisal and the income studies that Ivy Glen presented to the BOR, the BTA affirmed the county's cost-based valuation of the property.

Analysis
1. The BTA's decision is premised on ignoring LIHTC use restrictions.

{¶ 12} In rejecting Ivy Glen's economic-unit analysis and affirming the auditor's cost-based valuation, the BTA relied on the proposition that when valuing subsidized housing, "`it is the fair market value of the property in its unrestricted form of title which is to be valued.'" Woda Ivy Glen, BTA No. 2005-A-749, at 4, quoting Alliance Towers, Ltd., 37 Ohio St.3d at 23, 523 N.E.2d 826. See also Delhi Estates, Ltd. v. Hamilton Cty. Bd. of Revision (1994), 68 Ohio St.3d 192, 194, 625 N.E.2d 594. Yet by reverting to the cost-based valuation, the BTA arguably contravened the principles of the same cases that it purported to apply. See Colonial Village Ltd. v. Washington Cty. Bd. of Revision, 114 Ohio St.3d 493 2007-Ohio-4641, 873 N.E.2d 298, ¶ 20 ("For subsidized housing, we generally disfavor appraisals based on the cost approach"), citing Canton Towers, Ltd. v. Stark Cty. Bd. of Revision (1983), 3 Ohio St.3d 4, 7, 3 OBR 302, 444 N.E.2d 1027; Alliance Towers, Ltd. at 22, 523 N.E.2d 826; Sunset Square, Ltd. v. Miami Cty. Bd. of Revision (1990), 50 Ohio St.3d 42, 44, 552 N.E.2d 632.

{¶ 13} Ivy Glen relies heavily on the disfavor of the cost approach in the case law. Beyond that, its appraiser echoes the proposition that "[f]or purpose [sic] of real estate tax assessment, as set forth in Oberlin Manor [Ltd.] vs. Lorain County Board of Revision Supreme Court Case (1989) [45 Ohio St.3d 56, 543 N.E.2d 768], the effect of a property's involvement in a low-income housing program cannot be considered." (Boldface sic). Yet in spite of such pronouncements, it strongly appears that the appraiser's valuation of the 60 parcels at issue as an economic unit derives from the use and rent restrictions imposed as a result of the tax credit.1 Without those restrictions, the 60 parcels' highest and best use as improved would, as the BTA found, entail viewing the 60 parcels separately as potential single-family owner-occupied houses.

{¶ 14} Thus, the central legal issue in the present case lies in determining whether the appraisal of the 60 parcels should take into account the use restrictions imposed in connection with the federal tax credit. In making that determination, we first examine the nature of the LIHTC program. Thereafter, we discuss how the holdings of our prior cases apply to a case involving an LIHTC project.

2. I.R.C. 42 conditions the federal tax credit on encumbering the property.

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