A property tax reform effort that originally commenced in 2018 in the Ohio House of Representatives has been signed into law by Governor Mike DeWine and will go into effect in mid-to-late July 2022. House Bill 126 (HB 126) was sponsored by Representative Derrick Merrin and focused on ensuring that Ohio’s board of revision process is fair, transparent and accountable to citizens. To summarize HB 126’s major changes, the bill limits the ability of government authorities to file assessment increase complaints, proscribes private payment agreements between property taxpayers and government authorities, generally prohibits taxing subdivisions from appealing board of revision (BOR) decisions and requires government authorities to adopt resolutions to initiate appeals and that property owners receive notifications of the vote on such resolutions.
Complaints Against Value Initiated by Boards of Education Curtailed
Going forward, governmental authority complaints to increase property assessments are limited to situations where:
- The property transfers in an arm’s length transaction before the tax lien date for the tax year in which the complaint is to be filed
- The transaction price for the real property exceeds the assessor’s listed fair market value for the tax year by both ten percent (10%) and $500,000, an amount which will be adjusted for inflation.
School districts would now only be able to file a complaint to increase a property’s value in the calendar year after the tax year in which the property transfers. For example, assume a property listed on the tax roll for $1,000,000 sells on Feb. 1, 2023, for $2,000,000. The school district may file a valuation increase complaint for tax year 2023 by the March 31st appeal deadline in calendar year 2024. However, the school district may not use the same sale to file a tax year 2022 complaint by filing on or before March 31, 2023.
The General Assembly’s use of a sale as a trigger for reassessment as a result of the school board assessment complaint evokes limitations existing in California and Michigan, where sales are cause for reappraisal. As a result of HB 126’s changes, the General Assembly is leaving responsibility to monitor changes in value not indicated by sales to county auditors and the Ohio Department of Taxation, which collectively have greater resources than school districts to monitor and collect market data such as new construction, market rents, expenses, capitalization rates and other statistics beyond sale prices.
Future Private Payment Agreements Proscribed
Through HB 126, the General Assembly declares that private payment agreements are void and unenforceable. Private payment agreements are any agreements in which a property owner or tenant agrees to make a payment in exchange for a government entity agreeing to either:
- Refrain from filing a property tax complaint or counter-complaint
- Dismiss the government entity’s complaint or counter-complaint
- Resolve a claim through settlement agreement outside of a process where the agreed-upon valuation would be approved by the county auditor and reflected in the tax list
In a case where private payments would keep value from being added to tax lists, property tax rates would be kept artificially high as HB 920 factors operate to adjust property tax mill rates down when values increase, keeping voter approved tax collections from increasing without authorization. Private payment agreements frequently kept school districts financially insulated from downward changes in property values by basing payments on the value foregone multiplied by the school district portion of the tax rate, while simultaneously not reducing tax rates through the HB 920 rate reduction process. As private payment agreements phase out over time, jurisdictions where the agreements were common should see decreases in property tax rates as value is added to tax lists, which should benefit all property taxpayers.
School districts and other government entities would not be permitted to enter into any new private pay agreements on or after the effective date of HB 126. However, HB 126 does not abrogate private payment agreements entered into before the bill’s effective date. What happens to private payment deals in negotiation on the effective date or after would depend on circumstances.
Subdivision Appeals of BOR Decisions Eliminated
While the ability of property owners and appropriately authorized tenants to appeal BOR decisions remains untouched by HB 126, the new law prohibits most appeals of BOR decisions by school districts. The prohibition applies whether the school district files an original complaint or countercomplaint. A subdivision would only be able to appeal a BOR decision if it owned or leased the property subject to the action.
Tax Authority Appeal Resolution Requirements
HB 126 requires school districts or other authorities to pass resolutions in favor of pursuing appeals to increase values. In advance of a vote on such resolutions, an authority would have to provide property owners with notice of the proposed resolution at least seven days before the vote on the resolution.
Projecting the Impacts of HB 126
The Ohio Legislative Service Commission projects that the new limitations may lead to reductions in tax revenues, reduced numbers of complaints at county boards of revision, decreased Board of Tax Appeals and reduced court costs.
While the changes proposed by HB 126 would take effect for tax year 2022, the full valuation impacts of the changes may take several years to be observed throughout the state. The effects of direct pay agreements in place before HB 126’S effective date may take years to burn off, especially as parties scramble to examine ways to enter into new agreements or extend existing agreements before the effective date deadline. Ohio’s 88 counties conduct appraisals under the oversight of the Ohio Department of Taxation only every six years using sales to calibrate computer assisted mass appraisal valuation models. Counties adjust values for the fourth year of the sexennial period through a triennial update also overseen by the Ohio Department of Taxation.
As a result of the changes enacted by HB 126, county tax rolls should gradually reflect market values more closely as the incentive to disguise sales diminishes, making more sales readily observable by assessors and useable for updating computer assisted mass appraisal valuation models. Increased availability of sales to use in developing the valuation models should aid assessor’s accuracy in assessment. Increased valuation accuracy by assessors should help provide real estate investment underwriters with data points to evaluate local behavior with regard to assessment and taxation practices, thereby increasing confidence in projected investment performance. It is axiomatic that investor confidence, or a lack thereof, can significantly impact markets. Accordingly, increased investor confidence in Ohio’s property tax assessment practices should boost investment activity and valuations over time, which should increase assessments. Ohio’s historically uneven assessment practices have been the subject of many intricate conversations between real estate professionals over the decades, particularly among those with experience across multiple states. Without question, Ohio’s assessment practices pertaining to investment real estate were a drag on valuations as investors contemplated increased taxes, valuation litigation costs, questionable data points and uneven practices. Going forward, the HB changes should translate into more streamlined real estate tax provisions in commercial and industrial leases and purchase and sale agreements as parties deal with less unknown variables pertaining to property tax assessment. The practical necessity to accomplish transfers of control and ownership for properties at the business entity level to help manage property tax assessments, among other issues, should diminish for many transactions.
Problems May Still Remain
While the HB 126 changes should be received positively by larger property owners, problems may still remain where properties, individually or as an asset class, are underassessed as a matter of policy or otherwise by county auditors and the Ohio Department of Taxation. Real estate investment underwriters may still struggle to support property tax operating expense estimates when sale prices and assessments lag behind market values, which is often the case in a state with dynamic real estate markets where real estate assessments are only adjusted every three years. Properties that have sold tend to pay more than their fair share between adjustment periods if they are reassessed based on a sale price and other similarly situated properties do not sell.
Financial impacts of changes should be most readily observed in Ohio’s most populous counties that are home to most of the state’s commercial and industrial properties. School district funds obtained through property tax complaints should decrease, shrinking school district revenue pools and forcing school districts to rely on more traditional means, such as voter approved levies, for funding. Claims of unfair burden shifting from large commercial and industrial property owners to homeowners should be viewed against Ohio’s tax credits for residential and homeowning taxpayers. Ohio has a 10.0% automatic credit for non-business property types, a $8,750 taxable value homestead exemption for senior citizens and totally and personally disabled, and a 2.5% owner occupancy credit. State programs reducing homeowner property taxes cost Ohio $1.79 billion during 2021, according to a report titled Real Property Tax Relief, By County, Distributed During Calendar Year 2021 published by the Ohio Department of Taxation. Ohio’s non-business credit, homestead exemption and owner occupancy credit cost Ohioans $1.2 billion, $364 million and $226 million, respectively.
For further questions or clarifications regarding HB 126, please contact Richard Morehouse (RAM@kjk.com; 216.736.7292), Steven Marrer (SAM@kjk.com; 216.736.7267), or Jon Pinney (JJP@kjk.com; 216.538.8695).