Bankruptcy Sale of Thistledown Racetrack Held not an “Arms-Length” Transaction
February 1, 2016
The “general rule with regard to determining value of real property (in order to calculate real estate taxes) is that the purchase price at a recent (within 3 years) “arms length sale” of the property between a willing buyer and willing seller is dispositive. What better indication of value than the price someone is willing to pay and actually pays for the property? Of course, there are exceptions to every rule, but the recent decision of the Supreme Court of Ohio in Warrensville Hts. City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-78 is more clarification than exception.
In Warrensville Hts., the Board of Education of Warrensville Heights City School District (“Board of Education”) appealed from a decision of the Board of Tax Appeals (“BTA”) finding the tax year 2010 value of Thistledown Racetrack in Cuyahoga County to be $13,800,000, not the $43,000,000 purchase price at a bankruptcy sale six months after the tax-lien date. According to the BTA (affirmed by the Ohio Supreme Court), “sales conducted under supervision of a court order are forced sales which are not indicative of true value.”
The facts of this case are simple enough (the ruling, not so much, in spite of first impressions). The subject property is Thistledown Racetrack, a thoroughbred-racing facility on 128 acres of land, located in Cuyahoga County, aka the home of the Ohio Derby. In 2009, the owner of the property petitioned for Chapter 11 bankruptcy relief and received authority to sell the racetrack at auction. Harrah’s Ohio Acquisition Company, L.L.C. (“Harrah’s), submitted the best and highest offer, however, a condition to the sale did not occur, which prompted a second auction. At the second auction (in 2010), Harrah’s again submitted the winning bid to purchase Thistledown. The contract basically stated that in exchange for $43,000,000, Harrah’s would assume ownership of the real property as well as equipment, intellectual property and other items. The sale was contingent on Harrah’s ability to obtain Thistledown’s racing license from the racing commission (which would also enable Harrah’s to operate lucrative video lottery terminals). The bankruptcy court approved the sale and Harrah’s filed the deed in July, 2010, after it received the racing license.
For tax year 2010, the Cuyahoga County Fiscal Officer assigned a total value of $14,264,000 to Thistledown. The Board of Education filed a complaint with the board of revision (“BOR”), seeking an increase to the purchase price established at the first auction: $89,500,000. The property owner requested a reduction to $5,500,000, claiming most of the value was attributable to the personal property and racing license, not the real estate. The BOR retained the fiscal officer’s initial valuation of $14,264,000.
The Board of Education appealed to the BTA, requesting an increase to $43,000,000, the price Harrah’s paid for the property at the second auction, and Harrah’s requested a decrease to $13,800,000. The school board relied on the 2010 sale, arguing that the $43,000,000 sale price reflected the value of the real property. The property owner reiterated her prior testimony that the sale price reflected the purchase of other assets in addition to real property.
The BTA agreed with Harrah’s valuation of $13,800,000. The BTA rejected the 2010 sale price as evidence of value, explaining that “[a]lthough it is clear that the subject property sold recent to [the] tax lien date, we do not find the sale to have been arm’s-length because it was subject to the approval of a bankruptcy court.”
The Board of Education appealed to the Ohio Supreme Court and the court affirmed the BTA’s decision.
In its analysis, the Ohio Supreme Court first looked at the applicable statute to reiterate the “general rule” at the time:
“During the tax year at issue, former R.C. 5713.03 sets forth how real estate is to be valued for tax purposes: ‘In determining the true value of any tract, lot, or parcel of real estate under this section, if such tract, lot, or parcel has been the subject of an arm’s length sale between a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor shall consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes’.” (Note: Pursuant to Ohio Am. Sub H.B. 487 (H.B. 487) signed into law on June 11, 2012, the revised statutory language of R.C. 5713.03 now provides that an auditor “may” (vs. shall) consider the price of a recent sale as value.)
The court then summarized R.C. 5713.04 (“[t]he price for which such real property would sell at auction or forced sale shall not be taken as the criterion of its value”)
and concluded that, “the BTA reasonably and lawfully determined that the sale price did not establish the property’s true value for two reasons…First, Thistledown Racetrack sold at auction [and]… Second, reliable and probative evidence in the record supports the finding that Thistledown sold at a forced sale within the meaning of R.C. 5713.04.”
At first glance, it appears that the court is establishing R.C. 5713.04 as a clear exception to R.C. 5713.03; however, upon further review, as well as a quick read of the decision of the Ohio Supreme Court in Olentangy Local Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 141 Ohio St.3d 243, 2014-Ohio-4723, 23 N.E.3d 1086…, it is easy to surmise that R.C. 5713.04 is more clarification of, than exception to R.C. 5713.03. The Olentangy Court specifically addressed this issue by asking itself: “whether R.C. 5713.04 categorically prohibits reliance on an auction sale price as evidence of a property’s value, even when the sale satisfies former R.C. 5713.03’s requirements for a recent, arm’s-length transaction”; and answering in the affirmative, “in spite of R.C. 5713.04’s proscription, “the sale prices of parcels sold at auction are nevertheless the best evidence of value when all of the elements of an arm’s-length transaction are present.”
The court in Warrensville did pay homage to Olentangy by explaining: “In Olentangy…, we held that if the underlying transaction is an auction or forced sale, “the proponent of the sale price bears the burden to prove that the sale was nevertheless an arm’s length transaction between typically motivated parties and should therefore be regarded as the best evidence of the property’s value.”
The court in Olentangy, however provided more detailed guidance in determining what an “arms-length” transaction is. “Three factors are relevant to deciding whether a transaction occurred at arm’s length: whether the sale was voluntary; i.e., without compulsion or duress, whether the sale [took] place in an open market, and whether the buyer and seller act[ed] in their own self interest.”
In Olentangy (a residential foreclosure case), the auction sale was deemed arms length because of the following: “open-market elements”: the foreclosing lender listed the property on the open market for nine months before the auction; the auction was publicly advertised for a significant period of time, it was well attended, and there were multiple bidders for the property; the highest bid was 92 percent of the property’s final MLS list price; and the lender accepted this bid, although it had retained the right to reject it.
In contrast, according to the Warrensville court, the Thistledown sale was a “hurried sale by a debtor because of financial hardship or a creditor’s action.” In fact, “Harrah’s bought the racetrack at a bankruptcy sale … which authorizes sale of property … other than in the ordinary course of business.” “The bankruptcy court supervising the sale found ‘compelling circumstances’ to consummate the sale because there is substantial risk of depreciation of the value of Purchased Assets if the sale is not consummated quickly. Further, the transaction was not between typically motivated parties—the bankruptcy court approved the sale after finding that time was of the essence in order to maximize the value of the bankruptcy estate’s assets and that it was in the best interests of Magna Entertainment and its creditors and other parties in interest.”