Jefferson Industries Corp. v. Madison Cty. Bd. of Revision (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as

Jefferson Industries Corp. v. Madison Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-7089.]

NOTICE

This slip opinion is subject to formal revision before it is published in an

advance sheet of the Ohio Official Reports. Readers are requested to

promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65

South Front Street, Columbus, Ohio 43215, of any typographical or other

formal errors in the opinion, in order that corrections may be made before

the opinion is published.

SLIP OPINION NO. 2016-OHIO-7089

JEFFERSON INDUSTRIES CORPORATION, APPELLANT, v. MADISON COUNTY

BOARD OF REVISION ET AL., APPELLEES.

[Until this opinion appears in the Ohio Official Reports advance sheets, it

may be cited as Jefferson Industries Corp. v. Madison Cty. Bd. of Revision,

Slip Opinion No. 2016-Ohio-7089.]

Taxation—Real-property valuation—BTA must address potentially material

conflicts in evidence before adopting appraiser’s opinion of value—

Decision vacated and cause remanded.

(No. 2014-1594—Submitted June 14, 2016—Decided October 4, 2016.)

APPEAL from the Board of Tax Appeals, No. 2012-3624.

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Per Curiam.

{¶ 1} This real-property-valuation case concerns the proper valuation for

tax year 2011 of a plant involved in manufacturing and stamping car frames for

Honda. The Madison County Auditor valued the property at approximately

$34,500,000. Owner and appellant, Jefferson Industries Corporation, filed a

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complaint challenging this valuation with the Madison County Board of Revision

(“BOR”) and offered its own appraisal. After considering the additional

information, the BOR adjusted its valuation to $28,000,000. Jefferson Industries

appealed to the Board of Tax Appeals (“BTA”), offering its appraisal valuation of

$10,420,000. Before the BTA, appellee Jefferson Local School District Board of

Education (“BOE”) argued for retention of the $28,000,000 valuation. The BTA

agreed with the BOR’s value, primarily on the basis of the BOE’s appraisal.

Jefferson Industries has again appealed.

{¶ 2} Although we defer to the BTA’s broad discretion to determine the

probative force of appraisal evidence, we also insist that the BTA explicitly address

important evidentiary conflicts so that we may determine on appeal whether the

BTA’s decision is reasonable and lawful. In this opinion, we will address certain

points that were the subject of specific discussion by the BTA, and we will also

identify certain points that the BTA did not address but should have. We vacate

the decision of the BTA and remand the case to afford the BTA the opportunity to

address particular objections to the BOE’s appraisal that the board did not resolve.

FACTUAL BACKGROUND

{¶ 3} The property consists of three parcels amounting to approximately 81

acres. As of 2011, the tax year in question, the land had been improved with about

685,000 square feet of manufacturing, warehouse, and office space. The

improvements were constructed in 11 increments from 1988 through 2010, with the

two largest increments being the original 159,800 square feet in 1988 and 104,800

square feet in 2007.

{¶ 4} An earlier valuation case involving this property furnishes the

backdrop for this appeal. Jefferson Industries had sought relief from the assessment

for tax year 2004, when the auditor had valued the facility at $23,308,690 and the

BOR had ordered a reduction to $20,650,000. Jefferson Industries claimed a value

of $12,250,000, relying on an appraisal from David Hatcher, MAI (Member of the

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Appraisal Institute); the BOE presented an appraisal report from Robert Weiler,

MAI, and G. Franklin Hinkle II, MAI, opining a value of $19,750,000. The BTA

adopted the BOE’s appraisal valuation, explaining that it agreed that Hinkle had

properly categorized the property as “heavy manufacturing,” as opposed to the

“light industrial” characterization of Hatcher. Jefferson Industries Corp. v.

Madison Cty. Bd. of Revision, BTA No. 2005-M-1525, 2007 WL 1946465, at *3,

5 (June 22, 2007).

{¶ 5} In this case, the auditor assigned a true value of $34,504,964 to the

property for 2011, and Jefferson Industries filed a complaint seeking a reduction to

$18,196,400. The BOE filed a countercomplaint seeking retention of the auditor’s

valuation. The BOR held a hearing on July 24, 2012, at which Jefferson Industries,

through counsel, presented the appraisal report and testimony of Ronald M. Eberly

Jr., MAI, who opined a value of $10,420,000.

{¶ 6} In its deliberation, the BOR referred to a consultation with an

unidentified appraiser hired by the county, who had concluded that the auditor’s

value was about 20 percent too high. The BOR set the true value at $41 per square

foot, or $28,000,000—a value that is, consistent with the consultant’s advice, 81

percent of the auditor’s valuation. Jefferson Industries appealed to the BTA.

{¶ 7} At the BTA hearing, the BOE presented the appraisal report and

testimony of Hinkle, who had determined a value of $28,000,000, thereby

supporting the BOR’s decision. Additionally, the Madison County auditor testified

that the BOR had considered the Jefferson Industries appraisal and five comparable

sales provided by an appraisal firm. For Jefferson Industries, Eberly testified that

three of the comparables had not been offered on the open market and that the

property uses were not comparable. Eberly also offered specific criticisms of the

Hinkle appraisal.

{¶ 8} The BTA issued its decision on August 15, 2014, noting that it had

previously issued a decision on the same points regarding the 2004 tax year. The

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BTA stood by its analysis regarding the heavy-manufacturing issue, as well as its

distinction between real and personal property, and adopted $28,000,000 as the

property’s true value. BTA No. 2012-3624, 2014 Ohio Tax LEXIS 3856 (Aug. 15,

2014). On the personal-property issue, the BTA quoted its earlier decision:

Thus, the argument goes, even though the subject property

has installed deeper concrete foundations under certain machinery,

the value of the thicker floor cannot be considered in this matter.

There has been no substantiation, other than testimony, as to the

manner in which the foundations are taxed. Moreover, under the

principle of substitution, while the foundation is taxed as personalty,

its utility to a subsequent purchaser may add value. In other words,

a subsequent purchaser may take into consideration that it would not

have to fortify a floor for heavy machinery in the subject, while it

would have to make such alterations in a competing property.

Jefferson Industries Corp. v. Madison Cty. Bd. of Revision, BTA No. 2012-3624,

2014 Ohio Tax LEXIS 3856, 4-5, quoting Jefferson Industries Corp., BTA No.

2005-M-1525, 2007 WL 1946465 at *5, fn. 1.

THE COMPETING APPRAISAL EVIDENCE

{¶ 9} The BOE and Jefferson Industries appraisers approached the

valuation process differently. Eberly first valued the land using a land-sale

comparison method, arriving at a value of $2,250,000 for the land. With respect to

improvements, Eberly developed a “weighted chronological age” of 11 years for

the facility as a whole, given that it had been built in increments over a 22-year

period. He next performed a cost approach using Marshall Valuation Service

(“Marshall”) for cost figures and generated depreciation of 71 percent by the

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market-extraction method, which relies on comparables; his cost approach led to a

value of $11,630,000 once improvement cost was added to land value.

{¶ 10} Eberly’s sales-comparison approach relied on five comparables

within Ohio. Eberly consulted other brokers about potential sale price, made

adjustments for curing deficiencies in the current plant and for its functional

detriments, and concluded that $15.25 per square foot was appropriate, which

generated a value of $10,420,000.

{¶ 11} In his reconciliation, Eberly noted that the cost approach was

primarily a cross check against the sales-comparison approach, which “does not

reflect the actions of market participants and is therefore given secondary weight,”

with primary weight accorded to the sales-comparison approach. Thus, Eberly

adopted the result from the latter approach, which he understood to be corroborated

by the former: the value of the property as of January 1, 2011, was $10,420,000.

{¶ 12} Eberly put the manufacturing portion of the Jefferson Industries

facility at 553,575 square feet while Hinkle put it at 585,000 square feet. Hinkle

distinguished the heavy-manufacturing area at 150,640 square feet from the light-

manufacturing area at 434,360 square feet.

{¶ 13} Hinkle performed a cost approach by first determining a land

valuation of $2,450,000 (as opposed to Eberly’s $2,250,000). Hinkle’s Marshall-

derived figure for the heavy-manufacturing space was valued at $93.76 per square

foot, with values of $41.50 for the light-manufacturing area and $40.37 for the

warehouse and shipping area. The blended price per square foot was $52.83. Once

special adjustments were made, the figure was $72.63 per square foot.

{¶ 14} Hinkle’s use of the Marshall cost schedules contrasted sharply with

Eberly’s. Eberly’s overall cost per square foot was $40.74, the lower amount

traceable in part to the adjusted cost of $37.23 per square foot for the

manufacturing/warehouse area and $59.95 for the office area, as opposed to the

higher figures used by Hinkle. Hinkle also used a lower depreciation factor, 55

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percent, derived primarily by the economic-age-life method, which is determined

by assessing the amount of wear and tear on a building. Hinkle’s cost approach

figure was $28,000,000, as opposed to Eberly’s $11,630,000.

{¶ 15} Hinkle’s sales-comparison approach relied on four widely dispersed

comparables, three of them out of state.1 Hinkle, unlike Eberly, was seeking

facilities with a heavy-manufacturing component. Hinkle made adjustments and

concluded a value in the $27,400,000 to $28,770,000 range.

{¶ 16} At the BTA hearing, Eberly testified that under Marshall, the

Jefferson plant did not qualify as heavy manufacturing because both the cranes and

the reinforced floors were independent of the plant structure and were therefore

personal property.

{¶ 17} Hinkle testified on surrebuttal that the walls and floors had a

reinforcement component because of the heavy pounding and vibrations caused by

the round-the-clock stamping operations and were therefore part of the realty.

Hinkle added that Eberly should not have used the market-extraction technique for

depreciation because it was primarily an academic exercise not commonly used in

the appraisal business.

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As Jefferson Industries points out, one of Hinkle’s comparables had been rejected by the BTA in

the 2004-tax-year case on the grounds that the building had been transferred as part of the sale of

the business and the allocation to real property was uncertain. See Jefferson Industries, BTA No.

2005-M-1525, 2007 WL 1946465, *4. Before the BTA, Jefferson Industries did nothing to impugn

the validity of the sale except to observe that it had been previously rejected. Given that no

collateral-estoppel issue has been raised, the BTA was not legally constrained to disregard the sale.

Accord Rural Health Collaborative of S. Ohio, Inc. v. Testa, 145 Ohio St.3d 430, 2016-Ohio-508,

50 N.E.3d 486, ¶ 39-40 (BTA not precluded from redetermining an issue of fact previously decided

one way, based on the evidence presented in the current case).

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THE USE OF AND EMPHASIS UPON A COST APPROACH LAY WITHIN THE

PROPER EXERCISE OF DISCRETION BY THE BTA

1. The cost approach constitutes a valid component of determining the value of the

property at issue

{¶ 18} Jefferson Industries faults the BTA’s decision for an alleged

overreliance on the cost approach. We conclude that this objection lacks merit.

First, the BTA adopted Hinkle’s appraisal, which performed both a cost approach

and a sales-comparison approach. The BTA specifically observed that Hinkle’s

cost approach was supported by his sales-comparison approach as a reason for

adopting it. Second, a reliance on the cost approach would have placed the BTA in

a position not substantially different from the more general selection of one

appraisal over the other; Eberly’s cost approach would have yielded a value of

$11,600,000, if relied upon.

{¶ 19} More significantly, though, the emphasis on the cost approach

cannot be said to be erroneous. It is certainly true that “[t]he cost approach usually

works best for newer improvements, because construction costs are easier to

estimate and there is less depreciation.” International Association of Assessing

Officers (“IAAO”), Property Assessment Valuation 127 (2d Ed.1996). Jefferson

Industries argues that the age of the manufacturing facility here militates so strongly

against relying on the cost approach that the BTA’s reliance on it is unreasonable

or unlawful. Jefferson Industries points out that the BTA’s 2007 decision, which

addressed the value of the property at issue for the tax year 2004, called into

question any reliance on a cost approach because of the facility’s age. BTA No.

2005-M-1525, 2007 WL 1946465, *5. Jefferson then asserts that there is “no basis

for the conclusion that, seven years later, the cost approach is now somehow

reliable.”

{¶ 20} But that is wrong. The facility was built in increments over a 20-plus

year period. While the initial 159,800 square feet of the current 683,415 square

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feet were constructed in the 1988, Jefferson Industries added 104,800 square feet

in 2007, with an additional 42,000 square feet added in 2008 and yet another 35,134

square feet added during 2010, the year leading up to the January 1, 2011 lien date.

Indeed, more than 50 percent of the plant was less than six years old as of the lien

date, and 63 percent of the facility was built within the last 10 years. Because nearly

two-thirds of the facility had been constructed within ten years of the lien date, we

find the age-of-improvements argument unpersuasive.

2. There is no legal error in the BTA’s endorsement of Hinkle’s use of the

“heavy industry” cost schedules

{¶ 21} Jefferson Industries also launches a two-pronged challenge to the

manner in which Hinkle performed his cost approach. First, Jefferson maintains

that the use of the “heavy industry” portion of the cost schedules for part of the

facility is mistaken. Second, Jefferson asserts that Hinkle’s cost approach included

tangible personal property that should have been subtracted from the real-property

assessment.

{¶ 22} Although these arguments were appropriately addressed to the BTA

as the finder of fact, the BTA rejected them, and we discern no legal error in that

rejection. Eberly asserted reasons why the heavy manufacturing category could not

be applied; Hinkle asserted reasons why it should be. The BTA made its

determination.

{¶ 23} As for the alleged inclusion of personal property in the assessment

value, the record does not furnish an adequate basis for identifying any item of

property, or any component of the facility, whose classification as real or personal

property is specifically at issue. Eberly’s testimony indicated that foundational

support structures for equipment used in heavy manufacturing constituted personal

property and should not be part of the assessment. But the difference between his

appraisal and Hinkle’s appraisal on this score is not whether or not certain

specifically identified structural components are included within, or excluded from,

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the real property valuation. Rather, the issue is which cost-per-square-foot schedule

should be used. Hinkle testified in surrebuttal that he had been told that the “walls

and floors of the manufacturing area had a reinforcement component because of the

heavy pounding and the vibrations that are caused by the stamping facilities.” He

used “heavy manufacturing” on that basis, and the BTA acted within its discretion

as fact-finder in relying on his judgment.

THE BTA FAILED TO ADDRESS CONFLICTING EVIDENCE REGARDING ASPECTS

OF THE HINKLE APPRAISAL

{¶ 24} In this appeal, Jefferson Industries takes issue not only with what the

BTA did find, but what it ignored; and what the board ignored in this case was not

just an argument advanced by counsel below, but conflicting evidence. Where

there is conflicting evidence, the BTA must address potentially material conflicts

in the evidence before simply adopting an appraiser’s opinion of value. See Gen.

Motors Corp. v. Cuyahoga Cty. Bd. of Revision, 67 Ohio St.3d 310, 617 N.E.2d

1102 (1993); Villa Park Ltd. v. Clark Cty. Bd. of Revision, 68 Ohio St.3d 215, 218,

625 N.E.2d 613 (1994); HealthSouth Corp. v. Levin, 121 Ohio St.3d 282, 2009-

Ohio-584, 903 N.E.2d 1179, ¶ 31-35; compare Sears, Roebuck & Co. v. Franklin

Cty. Bd. of Revision, 144 Ohio St.3d 421, 2015-Ohio-4522, 44 N.E.3d 274, ¶ 18

(distinguishing cases where there are multiple appraisals and the BTA must “set

forth sufficient reasons for its determination that would permit us to decide whether

the board’s valuation was reasonable and lawful” from those cases in which the

BTA straightforwardly adopts the value from the only appraisal in the case).

{¶ 25} We identify several instances in which the BTA failed to properly

address evidentiary conflicts.

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1. Eberly’s objections to Hinkle’s cost approach need to be considered if

Hinkle’s appraisal is to be adopted

a. Reproduction versus replacement cost

{¶ 26} Jefferson Industries points to Eberly’s testimony in rebuttal to the

Hinkle appraisal asserting that Hinkle misused the Marshall cost schedules and

performed a reproduction-cost rather than the Ohio-law-mandated replacement-

cost analysis. See Ohio Adm.Code 5703-25-12(A) (“In the use of the cost approach

to estimate improvement value the replacement cost new is first estimated.”

[emphasis added]). As explained by the IAAO, “reproduction cost” is “the cost of

producing an exact replica of a building or improvement using the same or very

similar materials, design, and workmanship.” Property Assessment Valuation at

131; see also Appraisal Institute, Appraisal of Real Estate 569-570 (14th Ed.2013)

(reproduction cost “embod[ies] all the deficiencies, superadequacies, and

obsolescence of the subject improvements”). By contrast, “replacement cost” is

“the cost of producing a building or improvement having the same utility, but using

modern materials, design, and workmanship.” Id.; see also Appraisal of Real

Estate at 570 (noting that in using replacement cost, “some existing obsolescence

in the property may be cured”).

{¶ 27} In essence, Jefferson Industries contends that Hinkle overstated

these costs by assuming the construction of a replica rather than a similar building

of the same utility at the least possible cost. In two respects, Eberly gave testimony

that furthers Jefferson Industries’ reproduction-cost challenge. First, Hinkle used

the “average cost” figures from the relevant Marshall cost schedules rather than the

“low cost” figures; Eberly suggested that Hinkle was thereby counting tangible

personal property in the building as part of the building itself, thereby exaggerating

true value. Second, Hinkle added an increment of cost for air conditioning for the

factory portion of the facility, which Eberly described as a “superadequacy.”

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b. Warehouse-space characterization

{¶ 28} Eberly also challenged the choice of cost schedule with respect to

the warehouse space in the Jefferson Industries facility. Hinkle selected the

“distribution warehouse” schedule rather than using the light-manufacturing

schedule for that space.

c. Competing cost figures

{¶ 29} The starting point of estimated cost before the deduction of

depreciation and obsolescence varies greatly between the two appraisals. Eberly’s

estimated cost figure, including soft costs, was $33,685,457; Hinkle’s was

$52,239,128. The gap called for the BTA to explicitly consider the objections to

Hinkle’s method before adopting it.

d. Obsolescence

{¶ 30} Eberly opined that there would have been external obsolescence for

the Jefferson facility, but Hinkle opined that there was none. (Eberly’s own

external obsolescence constituted part of the depreciation that he extracted from the

market through five comparables.) “External obsolescence” is defined as “loss in

value as a result of an impairment in utility and desirability caused by factors

external to the property * * * and is generally deemed to be incurable.” Property

Assessment Valuation at 155. Both appraisers agreed that in 2011, the Jefferson

Industries plant had significant functional obsolescence, i.e. a loss of utility due to

physical characteristics of the property such as “poor or inappropriate architecture,

* * *, wasteful floor plans, inappropriate room sizes, inadequate heating or cooling

capacity, and so on.” Id. at 154-155. The main difference lay in whether general

economic conditions should be deemed to have adversely affected the market for

industrial properties.

{¶ 31} Eberly defended his market-extraction approach to depreciation and

criticized the “straight line” approach used by Hinkle, inasmuch as manufacturing-

facility depreciation occurs rapidly at first and then slows down. Given that Hinkle

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used a depreciation percentage of 55 percent and Eberly used a depreciation

percentage of 71 percent, the divergence was significant enough to require the BTA

to consider Hinkle’s computations before it adopted Hinkle’s appraisal valuation.

{¶ 32} Consideration was also necessary in light of the dispute over the use

of cost schedules in developing the replacement/reproduction cost; as the IAAO

instructs, “[t]heoretically it does not matter which type of cost is used in estimating

market value as long as accrued depreciation is measured correctly.” Property

Assessment Valuation at 131. Indeed, a proper allowance for functional

obsolescence would subtract any excess cost amount associated with

“superadequacies.”

2. The BTA should address Eberly’s criticism of Hinkle’s sale comparables

{¶ 33} The BTA stated that it would adopt Hinkle’s cost approach in part

because it was “well supported by [Hinkle’s] sales comparison approach.” But in

addition to differing from Eberly’s sales-comparison approach, at the BTA hearing

Eberly criticized specific features of Hinkle’s appraisal.

 The first comparable was not a sale on the open market, and the price was

an allocated sale price of the sale of the business (the same sale was rejected by the

BTA for the 2004 tax year). Also, the grantee was lessee at the time of sale,

indicating a relationship that may not qualify as one at arm’s length; Eberly also

testified that a leased fee sale usually does not indicate market value.

 The second comparable was also not an open-market sale, and here again,

the tenant was the purchaser. Also, the property was a “high-end warehouse

distribution facility” which in Eberly’s opinion was not at all comparable to the

subject property.

 The third comparable was an open-market sale, but was sold based on a

capitalization rate as an investment.

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 The fourth property was an open-market sale in which there was “unknown

distress” on the part of the buyer because of a flooding situation; in other words,

the sale may not have qualified as voluntary or at arm’s length.

{¶ 34} The BTA pronounced Hinkle’s sales-comparison approach strong

support for his cost approach, without addressing Eberly’s potentially substantial

objections. Nor did Hinkle’s rebuttal testimony address any of these points.

{¶ 35} Before adopting the Hinkle appraisal, caselaw requires the BTA to

address these objections and make whatever disposition of it the BTA deems

proper. Quite simply, as a reviewing court, “[w]e can perform our duty to affirm

reasonable, and to reverse unreasonable, determinations only when the BTA sets

forth its findings and the basis therefor.” Gen. Motors Corp. v. Cuyahoga Cty. Bd.

of Revision, 53 Ohio St.3d 233, 235, 559 N.E.2d 1328 (1990). Without the board’s

having explicitly addressed the evidentiary conflicts in the record, we cannot be

sure that the BTA did not simply ignore the conflicting evidence; nor can we

meaningfully determine whether the BTA’s decision is reasonable and lawful.

CONCLUSION

{¶ 36} For the foregoing reasons, we affirm the BTA’s rulings regarding

the use of the cost approach and the reliance on Hinkle’s use of heavy-

manufacturing schedules, and those findings shall be law of the case on remand.

But for the reasons stated, we vacate the decision of the BTA, and we remand with

instructions that the BTA reconsider the evidence in the light of the specific

objections, enumerated in this opinion, that were raised to Hinkle’s appraisal but

were not addressed by the BTA. If the BTA remains convinced that it should adopt

Hinkle’s appraisal, it should do so, stating why the objections do not persuade it

otherwise. Alternatively, the BTA may re-evaluate the evidence in the light of the

established law of the case, as well as in light of the objections, and perform an

independent valuation of the property.

Decision vacated

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and cause remanded.

O’CONNOR, C.J., and PFEIFER, LANZINGER, KENNEDY, FRENCH, and

O’NEILL, JJ., concur.

O’DONNELL, J., dissents, and would affirm decision of the Board of Tax

Appeals.

_________________

Vorys, Sater, Seymour & Pease, L.L.P., Nicholas M.J. Ray, Steven L.

Smiseck, and Lauren M. Johnson, for appellant.

Rich & Gillis Law Group, L.L.C., and Kelley A. Gorry, for appellees

Madison County Auditor and Madison County Board of Revision.

Scott, Scriven & Wahoff, L.L.P., Jennifer Stiff Tomlin, James K. Stucko

Jr., and Derek L. Haggerty, for appellee West Jefferson Local School District Board

of Education.

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