The Government Does Not Always Win

July 24, 2017


I had a law school professor that would often proffer the following two theories to rationalize court decisions (especially ones he seemingly did not understand): 1) the justices did not “get any”…. breakfast that morning; and 2) the government always wins.

I cannot profess to know what the justices of the Ohio Supreme Court had or did not have the morning of their recent real estate tax decisions in Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-4415 and W. Carrollton City Schools Bd. of Edn. v. Montgomery Cty. Bd.of Revision, Slip Opinion No. 2017-Ohio-4328, but can disprove my law professor’s cynical theory of governmental favoritism in these cases.

Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision


The subject property in Terraza is a 54,000+SF fitness center (L.A. Fitness) in Franklin County, owned by appellant Terraza 8, L.L.C (“Terraza 8”).

The Franklin County auditor assessed the subject property at $4,850,000 for tax year 2013. Appellee Hilliard City Schools Board of Education (“BOE”) complained to appellee Franklin County Board of Revision (“BOR”) that the property should have been valued at $15.4 Million, based on its sale price in February 2013. Terraza 8 did not defend the complaint, and the BOR increased the valuation to $15.4M for tax years 2013 and 2014. Terraza 8 then appealed both years’ valuations to the BTA.

At the BTA hearing, appellant’s appraiser (Patricia Costello) testified that the sale price did not represent the fee simple market value of the property because the property was encumbered by an above-market lease with rents at $22/SF (when market rents were approximately. $11/SF). The appraiser’s sales comparison valuation of the property, unencumbered by a lease was approximately $7M.

The BOE objected to the BTA evidence presented by Costello, arguing that it was inadmissible because Terraza 8 had not rebutted the recency or arm’s-length nature of the sale. Terraza 8 countered that the evidence was admissible due to a change in Ohio Revised Code Section 5713.03 (R.C. 5713.03), which, it alleged, required the county auditor, the BOR, and the BTA to value the fee-simple estate of the property, unencumbered. The BTA overruled the objection and admitted the evidence, however, it disregarded Costello’s appraisal and determined a value closely approximating the $15.4M purchase price for tax year 2013. The BTA did not reconcile the new statutory language with its conclusion, except to point out that R.C. 5713.03 still permits a property’s recent sale price to be used in determining its value.

Terraza 8 then appealed the BTA’s decision upholding the BOR’s sales price valuation to the Ohio Supreme Court.

The Supreme Court of Ohio in Terraza reversed (and remanded) the BTA decision, basically upholding and applying Ohio’s “real property valuation statute” (R. C. 5713.03), as amended in 2012 as part of Ohio House Bill 487.

C. 5713.03

Prior to the 2012 amendments to R.C. 5713.03, Ohio county auditors were essentially obligated to consider the recent sale price of real property to be its true value. You may recall that the plain “mandatory” language of the original statute regarding recent sales prices establishing value was reinforced by the Ohio Supreme Court in Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision (2005), 106 Ohio St.3d. 269. 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 other major change to the statute (via Am. Sub H.B. 487) regards what type of real property interest is to be valued by Ohio county auditors. Prior to Am. Sub H.B. 487, R.C. 5713.03 provided that each county auditor was to simply determine the “true value” of each real estate parcel. Revised R.C. 5713.03 now provides that county auditors are to determine the true value of real property “as if unencumbered“. In other words, leases, mortgages and other encumbrances are not to be taken into consideration when establishing market value for real property taxation.


Both major changes of the statute (according to the taxpayer and the Supreme Court of Ohio) were dispositive in Terraza.

The Ohio Supreme Court in Terraza first acknowledged that the amendments toR.C. 5713.03 “did not overrule the best-evidence rule of property valuation, which…provides that …the best evidence of the ‘true value in money’ of real property is an actual, recent sale of the property in an arm’s-length transaction.”  The court recognized that the “General Assembly still favors the use of recent arm’s-length sale prices in determining value for taxation purposes.” However, the court in Terraza explained that a recent arm’s-length sale now (after the enactment of the amendments to R.C. 5713.03) creates a rebuttable presumption that the sale price reflects true value, and auditors are no longer required to accept such recent arm’s length sales prices as true value, if such presumption is rebutted.

Applying the law to the facts, the Supreme Court of Ohio in Terraza determined that Terraza 8 did indeed present evidence (Costello’s appraisal and testimony) in an attempt to show that its arm’s-length purchase price did not reflect the value of the unencumbered fee-simple estate, however, the court determined the BTA’s decision to be unreasonable and unlawful because the BTA did not even consider that evidence. In effect, the BTA viewed the sale-price evidence as irrebuttable. The appellees also argued about the effective date of newly amended R.C. 5713.03, however, the court resolved that argument in favor of the taxpayer.

As a result of the foregoing, the court in Terraza vacated the BTA’s decision and remanded this case for the BTA to address and weigh the evidence previously offered to rebut the presumption that the sale price reflected true value.

Moral of the Story.

As predicted in our earlier blog article on the 2012 amendments to R.C. 5713.03, it seems much more likely that compelling appraiser testimony can now trump the recent sales price as a property’s true value, and even result in lower values for commercial properties that have above market rents but are otherwise comparable to surrounding properties. In other words, in “Johnny Cochran speak”, if your valuation is too high, you should now try (to get same lowered). The flip-side of the amendments, however, is that those with below-market rents in affluent neighborhoods may see their values increased, and no longer have a winning sales price argument to combat the increased valuation.

  1. Carrollton City Schools Bd. of Edn. v. Montgomery Cty. Bd. of Revision,Slip Opinion No. 2017-Ohio-4328


In W. Carrollton, the taxpayer (vs. the government) also won; however, its victory was based upon the interpretation and application of R.C. 5713.03, prior to its 2012 amendments.

The subject property in W. Carrollton comprises two adjacent parcels of vacant land (as of the tax lien date), totaling approximately 15 acres—which were purchased by CarMax for $5,850,000 in 2008.

Sometime after the sale, the W. Carrollton City Schools Bd. of Edn. (“BOE”) filed a complaint seeking an increase in the value (for tax year 2008) of the subject property from its then $578,100 valuation to the $5.8M sales price. The Montgomery Cty. Bd. of Revision (“BOR”) ordered an increase but not to the full amount of the sale price. The BOE then appealed to the Board of Tax Appeals (“BTA”), and the BTA reversed the BOR’s decision based on the fact that the 2008 sale was a recent arm’s-length transaction.

Between 2008 and 2009, CarMax constructed an approximate 45,000 SF used-car sales facility on the property, spending a total of about $7M.

In 2011 (a triennial update year in Montgomery County), the auditor set the value of the subject property at $4.7M, approximately $1.1M less than the property’s 2008 sales price. Thereafter, the BOE filed a complaint seeking an increase to the 2008 sale price of $5,850,000. The BOR retained the auditor’s valuation of $4.7M for the 2011 tax year, and the BOE appealed to the BTA. The BTA rejected using the sale price to value the land because the sale occurred more than 24 months before the January 1, 2011 update valuation, and thus was not a “recent”, arm’s length sale according to the BTA.  Specifically, to justify its ruling, the BTA cited the proposition set forth in Akron City School Dist. Bd. of Edn. v. Summit Cty. Bd. of Revision2014-Ohio-1588, namely that “a sale that occurred more than 24 months before the lien date and that is reflected in the property record maintained by the county auditor or fiscal officer should not be presumed to be recent when a different value has been determined for that lien date as part of the six-year reappraisal.” Finding an absence of competent and probative evidence of value, the BTA retained the auditor’s original value of $4.7M.

The BOE then appealed the BTA’s decision to the Ohio Supreme Court.


The Ohio Supreme Court in W. Carrollton did not need the benefit of the amendments to R.C. 5713.03 as in the Terrazo case (actually, those amendments would not have been applicable as their effective date was after the tax years at issue) in order to affirm the BTA’s decision in favor of the taxpayer. This is because R.C. 5713.03 (in 2008, 2011 and currently) has its own, “built-in” exceptions to the general rule in favor of using a recent, arm’s-length sale price to determine value.

The first, so-called “built-in exception” relevant to this case and recognized by the Ohio Supreme Court in W. Carrollton (and cases cited therein) is the exception providing that a sale price “shall not be considered the true value of the property sold if subsequent to the sale * * * [a]n improvement is added to the property.” R.C. 5713.03(B). Applying this law to the facts, the court in W. Carrollton easily determined that the “improvement exception” applied since between CarMax’s 2008 acquisition of the property and the January 1, 2011 lien date, CarMax spent more than $7 million constructing their used-car facility on the property. Accordingly, the court held that, “Under the statute’s [R.C. 5713.03(B)] plain terms, the 2008 land sale price shall not be considered the property’s value as of 2011.”

 For those wondering why improvement costs should not automatically increase a property’s valuation, the court in W. Carrollton explained that, “A buyer might not look to his seller’s actual costs because the seller may have overspent, and the buyer could therefore conclude that a property of equal utility would cost less.” Quoting earlier precedent, the court added that “the prospective purchaser will not rationally pay $15,000 for a house … if, without serious delay, he can build or buy equally satisfactory substitutes for $10,000.”

The second “built-in exception” to R.C. 5713.03 (relevant to and recognized by the BTA and the Ohio Supreme Court in W. Carrollton) is “recency of the sale”R.C. 5713.03 provides that “the best evidence of the true value in money of real property is an actual, recent [emphasis added] sale of the property in an arm’s-length transaction.” The court in W. Carrollton, citing precedent (prior court decisions on point) explained that “the recency rule of R.C. 5713.03 encompasses all factors that would, by changing with the passage of time, affect the value of the property,” including the improvement exception, which is itself a factor that relates to the recency of the sale.

As an aside, you may be wondering, what is considered “recent”? One year, two years, three years? According to the Supreme Court of Ohio, “[P]roximity is not the sole factor affecting recency.” Worthington City Schs. Bd. of Educ. v. Franklin County Bd. of Revision2009-Ohio-5932“[G]eneral developments in the marketplace are [also] relevant.” Cummins Property Servs. LLC v. Franklin Cty. Bd. of Revision, 2008-Ohio-1473.

Recent decisions of the Ohio Supreme Court cited in the Cummins and Akron City Schools cases cited herein include the following examples of “recent sales”: 1) “13-month gap between sale and tax lien date was prima facie evidence of the recency of the sale”; 2) “Board of Revision correctly adopted purchase price of sale that occurred 22 months after tax lien date as the property’s true value”; and 3) “Because the sale occurred within a year after the tax-lien date, and because [the property owner] offered no evidence of a change in market conditions between the lien date and the filing of the conveyance-fee statement, the sale was ‘recent’ for purposes of R.C. 5713.03.”

According to the court in W. Carrolton, however, it did not have to stretch its analysis to negate recency because the improvement exception of R.C. 5713.03directly applied.  The court explained that, “Because the improvement exception more specifically bars direct use of the sale price to value the property, we need not determine whether the holding of Akron applies here.”

Based upon the foregoing, the court in W. Carrollton rejected the BOE’s contentions on appeal and affirmed the decision of the BTA. In the words of the court: “The 2008 sale price of $5,850,000 for the land does not ‘affirmatively negate’ the auditor’s 2011 valuation of the land and improvements in the aggregate at $4,716,690. For one thing, the land-sale price is not recent, for the reasons discussed already. Second, the actual construction costs that CarMax incurred do not negate the auditor’s valuation. Although CarMax stipulated to having incurred over $7 million in construction costs for its facility, those historical costs do not necessarily establish what the property would have sold for in 2011.”

What is the moral of this story? While the sales price of real property is still the best evidence of the value of real property, it is no longer the only evidence auditors and boards of revision are bound to accept to prove valuation. R.C.5713.03 contains long-standing “built-in” exceptions, as well as relatively recent amendments which hindsight may prove to have let “John and Jane Q. Citizen “ win a few against the government and require my favorite law professor to revise his theorems.