Summary
In Wynwood Apts., we held that the Board of Tax Appeals ("BTA") may, when valuing income-producing real estate, consider "economic rent"-i.e., the "rental warranted to be paid in the open real estate market based upon current rentals for comparable space," id. at 35-as well as "contract rent"-i.e., the actual rent designated in an existing lease, id. at 37-38.
Summary of this case from Rancho Cincinnati Rivers, LLC v. Warren Cnty. Bd. of RevisionOpinion
No. 78-1505
Decided July 3, 1979.
Taxation — Board of Tax Appeals — Real property tax valuation — Considerations.
The Board of Tax Appeals may consider economic rental value of commercial real property as an indicium of valuation for ad valorem real property taxation purposes.
APPEAL from the Board of Tax Appeals.
In its complaint before the Cuyahoga County Board of Revision, Wynwood Apartments, appellant herein, sought to have the valuation of certain real property reduced by $12,960. The board of revision reduced the valuation by $4,210. Upon appeal, the Board of Tax Appeals, pursuant to R.C. 5717.03, increased the original assessment by approximately 66 percent.
The subject property is located in the Westlake Taxing District of Cuyahoga County and consists of a one-story retail furniture store with an adjacent parking lot. The property comprises 47,100 square feet, with the building covering 16,000 square feet.
At the date of valuation, January 1, 1976, the property was occupied by The Cabinet Shoppe, Inc., under a long-term lease commencing in 1963. The term of the lease is for 18 years and provides for rent of $18,000 per year for the first 15 years and $6,000 per year for the remaining 3 years. The lease also provides for three extension options, all at $6,000 per year. The first extension option is for a ten year period; the second and third are for five year periods.
The lease obligates the lessee to maintain the property interior and exterior, except for that portion of the property to be maintained by the lessor. The lessee is also responsible for all plate glass. The lessor, Wynwood, is obligated to maintain the roof, exterior walls, and structural components, and the heating, plumbing, electrical and airconditioning systems.
The parties agree that the contract rent (that rent which is designated in the lease between appellant and The Cabinet Shoppe) is substantially lower than the economic rent (the rental warranted to be paid in the open real estate market based upon current rentals being paid for comparable space).
The cause is now before this court upon appeal as a matter of right.
Mr. Jacob I. Rosenbaum, Mr. Thomas P. Meaney, Jr., and Mr. Michael J. Meaney, for appellant.
Mr. John T. Corrigan, prosecuting attorney, and Ms. Karen Hassenzahl, for appellees.
In order to determine the taxable value of the subject property, the Board of Tax Appeals must first determine the "true value in money," as mandated by Section 2, Article XII of the Ohio Constitution, and as codified in Title 57 of the Revised Code.
There was no recent arm's-length transfer of the property to serve as "best evidence" of the true value in money which the board must rely upon under R.C. 5717.03 and the case law of this court. See Conalco v. Bd. of Revision (1977), 50 Ohio St.2d 129; and State, ex rel. Park Investment Co. v. Bd. of Tax Appeals (1964), 175 Ohio St. 410. This court has long held that the board has wide latitude as to the matters to be considered and broad discretion in attaching what weight it will give to expert testimony. American Steel Wire Co. v. Bd. of Revision (1942), 139 Ohio St. 388, 393; Citizens Building Co. v. Bd. of Revision (1943), 141 Ohio St. 47, 51.
The problem confronted by the board herein was expressed as follows:
"In a situation like this, where there is income producing property which is under lease and the contract rent is lower than the economic rent, should contract rent or economic rent be relied upon in pursuit of establishing the fair market value of the property?"
This court has not had occasion to deal with this question. Those states which have had occasion to consider whether economic or real rent should be the basis of valuation of real property for ad valorem property taxes have generally resorted to economic rent.
While not determinative of this court's holding, the following states have decided as follows:
1. California.
In Clayton v. County of Los Angeles (1972), 26 Cal.App.3d 390, 102 Cal.Rptr. 687, the property in question was subject to a lease which could be extended to the year 2055 by the tenant. The taxpayer's appraiser utilized contract rent to determine the "full cash value" of the property, while the county assessor utilized economic rent. The court held that economic rent, rather than contract rent, should be utilized.
2. Illinois.
In Springfield Marine Bank v. Property Tax Appeal Board (1970), 44 Ill.2d 428, 256 N.E.2d 334, the Illinois Supreme Court was faced with determining the "fair cash value" of property subject to an unfavorable lease. The court held that the contract rent was irrelevant in determining value and, at page 431, stated:
"The relevance of rental income in this instance has been so diminished by the change in the property's value since the rents were established that it was properly disregarded. In such a situation, earning capacity is properly regarded as the most significant element in arriving at `fair cash value.' * * * [M]any factors may prevent a property owner from realizing an income from property which accurately reflects its true earning capacity; but it is the capacity for earning income, rather than the income actually derived, which reflects `fair cash value' for taxation purposes."
3. Massachusetts.
In Donovan v. Haverhill (1923), 247 Mass. 69, 141 N.E. 564, the Massachusetts Supreme Court held that unfavorable leases could not be utilized to determine a property's value for tax purposes.
4. Minnesota.
In Crossroads Center, Inc., v. Commr. of Taxation (1970), 286 Minn. 440, 176 N.W.2d 530, the taxpayers argued that the value of their property should be lowered because of an unprofitable lease. The court rejected this argument, stating, at page 448, that "[t]he lease value here is not controlling."
5. New Hampshire.
In DeMoulas v. Town of Salem (1976), 116 N.H. 775, 367 A.2d 588, the Supreme Court of New Hampshire, at page 782, stated:
"We hold * * * that, where the actual income from long term leases does not reflect the true value of the property because the leases were made in time of boom or depression or as a result of poor management, the board may reject or give little weight to the capitalization of actual net income method."
6. New Jersey.
The Supreme Court of New Jersey, in Parkview Village Assoc. v. Collingswood (1972), 62 N.J. 21, 29-30, 297 A.2d 842, adopted the principle that economic rent, not contract rent, is to be utilized to value real property:
"It is of course settled that gross rental income for purposes of applying the capitalized income approach to valuation of property is to be taken at `fair rental value,' professionally termed `economic' rent or income, if that differs from current actual rental. New Brunswick v. State of N.J. Div. of Tax Appeals, supra ( 39 N.J. at 544); American Institute of Real Estate Appraisers, The Appraisal of Real Estate (1967), p. 227 et seq.; International Association of Assessing Officers, Assessing and the Appraisal Process (4 ed. 1972), pp. 82, 172; Kahn, Case, Schimmel, Real Estate Appraisal and Investment (1963), p. 103 et seq.; Ring, the Valuation of Real Estate (1970), p. 208."
7. New York.
In People, ex rel. Gale, v. Tax Comm. (1962), 17 A.D.2d 225, 230, 233 N.Y.S. 2d 501, the Supreme Court of New York, Appellate Division, stated:
"* * * [T]he existence of an outstanding lease at an unrealistically low rental for a long term, not representing the fair rental value of the property, is not to be used as a basis for calculating actual value. Thus, the true value of the property for assessment purposes is to be ascertained as if unencumbered by such a lease." See, also, Ernst v. Bd. of Assessors (1968), 58 Misc.2d 504, 295 N.Y.S. 2d 712.
8. North Carolina.
In In re Pine Raleigh Corp. (1963), 258 N.C. 398, 128 S.E.2d 855, the property owner argued that the contract rent, which was far below market rent, should be utilized to determine value. The court rejected this argument, stating, at page 403:
"Net income produced is an element which may properly be considered in determining value, but it is only one element. If it appears that the income actually received is less than the fair earning capacity of the property, the earning capacity should be substituted as a factor rather than the actual earnings."
9. Oregon.
The Oregon Supreme Court stated, at page 629, in Swan Lake Moulding Co. v. Dept. of Revenue (1971), 257 Ore. 622, 480 P.2d 713:
"[T]he income from an existing lease is not * * * determinative of * * * earning power. It is the potential income to be derived from the highest and best possible use."
10. Rhode Island.
In Kargman v. Jacobs (1974), 113 R.I. 696, 325 A.2d 543, the Supreme Court of Rhode Island stated, at page 705:
"In using the income approach [to valuation], the significant element to be established is the realty's capacity for earning income rather than income actually derived from its operation."
11. South Dakota.
In Yadco, Inc. v. Yankton County (S. Dak. 1975), 237 N.W.2d 665, 668, the Supreme Court of South Dakota stated:
"The trial court found that the capitalization of actual income to determine `true and full' value was inappropriate when a taxpayer has burdened his property with a long-term uneconomical lease. We agree."
12. Virginia.
In Railroad Company v. Commonwealth (1962), 203 Va. 294, 124 S.E. 206, the Supreme Court of Virginia held that unfavorable long-term contracts or leases should not be considered in determining the "fair market value" of real estate.
The board believes that economic rent is a proper consideration in a situation in which contract rent is not truly reflective of true value in money.
The question actually before this court is whether the board's decision to give credence to economic rent over contract rent represents the resolution by it of a legal question (concerning which this court has the final decision) or a factual question (in which case the board has broad discretion and this court only reviews the reasonableness and lawfulness of the board's decision).
The board was faced with widely varying appraisals, and its duty was to determine which one was based upon facts that most accurately reflected market value or "true value in money." It was thus a factual determination, and within the discretion of the board to accept or reject opinion testimony. It should be noted that the board did not make any hard and fast rule that it would ignore contract rent and always adopt economic rent as determinative of "true value in money."
This court, therefore, determines that the Board of Tax Appeals may consider expert testimony concerning economic rent of commercial property in arriving at its factual determination of the "true value in money" of such property.
The decision of the board being neither unreasonable nor unlawful is affirmed.
Decision affirmed.
HERBERT, W. BROWN, P. BROWN, SWEENEY, LOCHER and HOLMES, JJ., concur.