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Arbors East Re, L.L.C. v. Franklin County Board of Revision

Supreme Court of Ohio

April 26, 2018

Arbors East RE, L.L.C., Appellant,
Franklin County Board of Revision et al., Appellees.

          Submitted December 5, 2017

          Appeal from the Board of Tax Appeals, Nos. 2014-4527 and 2014-4607.

          Wayne E. Petkovic, for appellant.

          Rich & Gillis Law Group, L.L.C., Mark H. Gillis, and Karol C. Fox, for appellee Columbus City Schools Board of Education.

          Per Curiam

         {¶ 1} At issue is the 2011 value, with carryover to 2012 and 2013, of a nursing home that was purchased by its former lessee in April 2011. The parties dispute whether and to what extent the sale price, $7, 490, 000, ought to have been allocated to assets other than the real estate. The Franklin County Board of Revision ("BOR") ordered a small reduction in value to $7, 202, 900 after making a small deduction for furniture, fixtures, and equipment ("FF&E") (i.e., tangible personal property). On appeal, the Board of Tax Appeals ("BTA") reinstated the entire sale price as the value of the real estate. Arbors East has appealed, asserting that the BTA improperly failed to make allocations in accordance with the appraisal report it submitted below. Because we find that the BTA neglected to exercise its statutory authority to obtain a complete record, and because it predicated its decision in part on legal errors, we vacate the BTA's decision and remand the case for further proceedings consistent with this opinion.

         I. Course of proceedings

         {¶ 2} The county auditor valued the subject property for tax year 2011, a reappraisal year in Franklin County, at $4, 000, 000. Appellee Columbus City Schools Board of Education ("the BOE") filed a valuation complaint seeking an increase to the full sale price of $7, 490, 000; thereafter, Arbors East filed a separate original complaint seeking a reduced valuation of $3, 500, 000.

         {¶ 3} At the consolidated BOR hearing, the BOE relied on the conveyance-fee statement, which showed the entire sale price of $7, 490, 000 allocated to the realty. Also in evidence was a Purchase and Sale Agreement relating to the sale, and a deed. Arbors East presented an appraisal report and testimony from Samuel D. Koon, a member of the Appraisal Institute.

         {¶ 4} Whether to use the sale price is not in dispute; the controversy lies in whether and how to allocate that sale price among assets. Koon noted that on the 2011 tax-lien date, Nationwide Health Properties, Inc., owned the property but that Arbors East purchased it on April 5, 2011. Koon testified before the BOR that he investigated the transfer and determined that the sale was "an arms-length transaction of a going concern." He specifically testified that "[t]hat is what the property-owner contact told us, is that this was a transfer of a going concern." According to Koon, the components of the transfer were the real property, the FF&E, and the business goodwill, "mingled together" to constitute a going concern.

         {¶ 5} Koon compared recent sales of comparable nursing homes to arrive at a going-concern value of the subject property as of the January 1, 2011 tax-lien date equal to the April 2011 sale price. Thereafter, he allocated that value on the understanding that the present sale, like the sales of the comparable properties, constituted a sale of all the assets of the nursing-home business, including licenses, FF&E, and goodwill. Using cost schedules and market-extraction techniques, Koon determined the portions of the total sale price of the subject property allocable to FF&E ($300, 000), certificate of need ($1, 800, 000), and business value ($750, 000-about 10 percent of the sale price). The residual amount, Koon's "real estate value, " of $4, 640, 000 constituted about 62 percent of the total sale price, which correlated well with his comparable transactions, in which the realty constituted on average 52.8 percent of the total sale price.

         {¶ 6} Toward the end of the BOR hearing, the BOR examined William McVeigh, the property-tax manager for Extendicare, the parent company of Arbors East and the ultimate owner/operator of the facility. McVeigh, who is also tax manager for numerous other nursing homes in Ohio, testified that the sale of a nursing home typically, as in this case, involves the sale of the "operator's lease" with all the attendant licenses necessary to operate the nursing home-a "realty plus" transaction. McVeigh further testified that under prior law, the documentation of such sales was drafted to reflect real estate without other assets because real-estate investment trusts "weren't allowed to * * * call [their holdings] anything but real estate."

         {¶ 7} The Purchase and Sale Agreement refers to the property transferred as the "Leased Property" as defined in the lease between Arbors East and the seller, but the lease was never placed into evidence. Arbors East submitted to the BOR amendments to the lease after the hearing, but the BOR did not include them in the record certified to the BTA.[1] The BOR did include a settlement statement in the record, a one-page document indicating a "total consideration" of $7, 490, 000. Conspicuously absent from the record is any evidence of an allocation of the sale price to multiple assets that was contemporaneous with the sale; indeed, both Koon and McVeigh testified that no contemporaneous allocation had been performed.

         {¶ 8} At the BOR hearing, the BOE objected to the BOR's consideration of Koon's appraisal report on the grounds that there had been a recent, arm's-length sale of the subj ect property. The BOE also objected, on hearsay grounds, to Koon's ...

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