Arbors E. RE, L.L.C. v. Franklin Cty. Bd. of Revision (Slip Opinion)

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

Arbors E. RE, L.L.C. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2018-Ohio-1611.]

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. 2018-OHIO-1611

ARBORS EAST RE, L.L.C., APPELLANT, v. FRANKLIN COUNTY BOARD OF

REVISION ET AL., APPELLEES.

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

may be cited as Arbors E. RE, L.L.C. v. Franklin Cty. Bd. of Revision,

Slip Opinion No. 2018-Ohio-1611.]

Taxation—Real-property valuation—Board of Tax Appeals erred in failing to

exercise its statutory authority to obtain a complete record and in holding

as matter of law that any allocation of a property’s sale price to goodwill

is improper—Decision vacated and cause remanded.

(No. 2015-1410—Submitted December 5, 2017—Decided April 26, 2018.)

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

____________________

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

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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.”

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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

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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 subject property. The BOE also objected, on hearsay grounds, to Koon’s

testimony that he had been told that the April 2011 sale was of a going concern.

{¶ 9} On October 14, 2014, the BOR convened to determine the subject

property’s value. The auditor’s delegate stated that “the panel wants to make it

clear for the record that * * * the price paid for this property as recorded was the

price paid for the going concern.” In arriving at that conclusion, the BOR relied on

“additional documentation that was requested and received from the property

owner, all but the original lease agreement, which [it] did not receive.” The

auditor’s delegate stated that the additional documentation included the lease

amendments and a “Schedule D-1 analysis of property, plant, and equipment, which

was part of [Arbors East’s] federal-tax-filing materials.” Relying on the Schedule

D-1, which “conforms with Mr. Koon’s appraisal report,” the BOR made a

deduction of $287,100—that being the “net book value as reported to the IRS” of

certain personal property.

{¶ 10} After the deduction, the adjusted sale price indicated that the real-

estate value was $7,202,900, and the BOR adopted that amount as the property

value for tax years 2011, 2012, and 2013. The treasurer’s delegate noted that

Arbors East “did not really prove * * * any other deductions were warranted,”

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Koon stated that the “Leased Property” referred to in the purchase contract was limited to the real

estate, but the purchase contract does refer to a bill of sale for the conveyance of “Landlord Personal

Property” to Arbors East in conjunction with the sale.

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January Term, 2018

inasmuch as the record did not contain an allocation contemporaneous with the sale

and Koon’s allocation was performed “well after the sale.” The delegate also

alluded to the existence of a contemporaneous appraisal (not in the record), but

because “it was also based on the going-concern value,” he was unsure “how it

would support breaking out those other elements to the sale other than” the FF&E

that the BOR deducted from the sale price.

{¶ 11} When Arbors East appealed to the BTA, neither side offered

additional evidence. After the parties briefed the case, the BTA issued its decision,

which noted that the BOR had received additional documents from Arbors East

after the hearing—namely, the lease amendments and the federal tax filing—and

that although the BOR relied on at least one of the documents, they were not

included in the record certified by the BOR to the BTA. BTA Nos. 2014-4527 and

2014-4607, 2015 Ohio Tax LEXIS 3201, *4 (July 30, 2015).

{¶ 12} The BTA determined that the $7,490,000 sale price should be

regarded as the best evidence of value. Noting the property owner’s burden to

demonstrate that its allocation of the sale price is proper in order to obtain a

reduction from the sale price, the BTA held that Arbors East had not satisfied that

burden inasmuch as (1) “all documentation submitted to the county auditor reflects

a value for realty only” and (2) there was no contemporaneous allocation of the sale

price. Id. at *10. The BTA found itself “unable to verify which items other than

the real property described in the sale documents in fact transferred or the portion

of the overall purchase price attributable to those items.” Id. at *11. Moreover, the

BTA rejected any allocation to goodwill because “the Supreme Court [of Ohio] has

found [goodwill] is not an asset separable from the realty.” Id. at *11-12.

Accordingly, the BTA adopted the total sale price of $7,490,000 as the property

value for tax years 2011, 2012, and 2013.

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II. Standard of review

{¶ 13} Our review of a legal issue is de novo, not deferential. Akron Centre

Plaza, L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-Ohio-5035,

942 N.E.2d 1054, ¶ 10. But if we determine that there was no legal error, we review

the BTA’s decision concerning the weighing of appraisal evidence under a highly

deferential abuse-of-discretion standard. See EOP-BP Tower, L.L.C. v. Cuyahoga

Cty. Bd. of Revision, 106 Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d 686, ¶ 9, 14.

Our discernment of multiple legal errors in this appeal leads us to remand this case

to the BTA for additional factfinding.

III. Analysis

A. The BTA did not find that the sale involved only real estate but did reject any

allocation

{¶ 14} The BTA rejected any allocation of the April 2011 sale price to

assets other than realty because it was “unable to verify which items other than the

real property described in the sale documents in fact transferred or the portion of

the overall purchase price attributable to those items.” 2015 Ohio Tax LEXIS 3201

at *11. Notably absent in the BTA’s decision is any finding that the sale involved

a transfer of real estate only. Although the BTA observed that “all documentation

submitted to the county auditor reflects a value for realty only,” id. at *10, referring

to the deed and the conveyance-fee statement, the BTA did not extend that finding

to the totality of the evidence, including the record developed before the BOR.

{¶ 15} Nor is it surprising that the BTA stopped short of determining that

the April 2011 sale price in fact reflected the transfer of merely real estate: the BOR

had specifically determined based on the entire record before it that the sale price

was “the price paid for the going concern,” and it had ordered a deduction for FF&E

based on documentation that was not included in the record certified to the BTA.

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January Term, 2018

B. The BTA’s authority to investigate should be employed to obtain a complete

record in order to avoid prejudice to the parties

{¶ 16} This case implicates the principles used to determine how real estate

is valued when it is transferred in a single transaction together with other property.

When applied to such “bulk sales,” the familiar precept that “[t]he 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” has a corollary: the principle that the law favors a

“proper allocation of [a] lump-sum purchase price” over “an appraisal ignoring the

contemporaneous sale.” Conalco, Inc. v. Monroe Cty. Bd. of Revision, 50 Ohio

St.2d 129, 363 N.E.2d 722 (1977), paragraphs one and two of the syllabus. That

this fundamental principle applies here is undisputed; the only question is the

propriety of the allocation presented by the owner. And Koon’s appraisal was

offered for the purpose of showing that the sale price reflected the transfer of a

going concern, with a view to demonstrating a proper allocation.

{¶ 17} Under these circumstances, it is essential that the BTA confront the

issue of the propriety of an allocation of the sale price by consulting all of the

evidence that has been submitted to the BOR, in addition to any evidence submitted

at the BTA hearing. R.C. 5717.01 requires the county boards of revision to transmit

to the BTA “all evidence offered in connection” with a valuation complaint, and

we have admonished that county boards of revision should regard this as their legal

duty. Knickerbocker Properties, Inc. XLII v. Delaware Cty. Bd. of Revision, 119

Ohio St.3d 233, 2008-Ohio-3192, 893 N.E.2d 457, ¶ 4, fn. 1. We have also found

plain error when the BTA adopts an appraisal’s valuation after the BOR has failed

to certify potentially material portions of the record on which it relied, or may have

relied, in rejecting the appraisal. Cannata v. Cuyahoga Cty. Bd. of Revision, 147

Ohio St.3d 129, 2016-Ohio-1094, 62 N.E.3d 144, ¶ 19. Additionally, the BTA’s

duty to perform its independent evaluation of all the pertinent evidence is well

established. Vandalia-Butler City Schools Bd. of Edn. v. Montgomery Cty. Bd. of

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Revision, 130 Ohio St.3d 291, 2011-Ohio-5078, 958 N.E.2d 131, ¶ 13; see, e.g.,

Columbus Bd. of Edn. v. Franklin Cty. Bd. of Revision, 76 Ohio St.3d 13, 16, 665

N.E.2d 1098 (1996).

{¶ 18} Here, the property owner obtained a partial reduction at the BOR

based on evidence that the BOR failed to transmit to the BTA. This evidence

apparently assisted in persuading the BOR both that the sale of the property was a

going-concern sale and that there was a sufficient basis for allocating a portion of

the sale price to FF&E. It is true that Arbors East did not avail itself of its

opportunity at the BTA hearing to make sure that the record was complete. But

like the board of education in Cannata, Arbors East here could reasonably rely on

the BOR’s statutory duty to transmit all evidence submitted to it. When the BTA

ascertains that evidence is missing, it should notify the parties and exercise its

statutory authority to investigate pursuant to R.C. 5717.01. See Cannata at ¶ 21.

Here, the BTA could have convened a new hearing and invited the submission of

the omitted evidence, issued an order to the BOR, or both. On remand, the BTA

should exercise its authority to supplement the record with the omitted documents

or with any other evidence the BTA deems material to its determination.

C. When the record permits, the business value of a nursing home or congregate-

care facility should be separated from its real-estate value

{¶ 19} The case law clearly establishes that a sale of a congregate-care

facility is a sale of the facility’s real-estate and business activities. Dublin Senior

Community Ltd. Partnership v. Franklin Cty. Bd. of Revision, 80 Ohio St.3d 455,

460, 687 N.E.2d 426 (1997). Such facilities charge residents for providing care and

services, which is a general business activity, and charge rent, which is a real-estate

activity. Id. “In a valuation of only the real estate, the two activities must be kept

separate.” Id.; accord Health Care REIT, Inc. v. Cuyahoga Cty. Bd. of Revision,

140 Ohio St.3d 30, 2014-Ohio-2574, 14 N.E.3d 1009, ¶ 41-42 (lead opinion); LTC

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Properties, Inc. v. Licking Cty. Bd. of Revision, 133 Ohio St.3d 111, 2012-Ohio-

3930, 976 N.E.2d 852, ¶ 21.

{¶ 20} Viewing the present appeal against the backdrop of this case law

leads us to conclude that the BTA erred by holding as a matter of law that any

allocation to goodwill is improper. The decision the BTA relied on, Hilliard City

Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 128 Ohio St.3d 565, 2011-

Ohio-2258, 949 N.E.2d 1, is inapposite, as is St. Bernard Self-Storage, L.L.C. v.

Hamilton Cty. Bd. of Revision, 115 Ohio St.3d 365, 2007-Ohio-5249, 875 N.E.2d

85, the decision Hilliard City Schools itself relies on.

{¶ 21} While both cases concerned the proper allocation of a sale price,

Hilliard City Schools involved the sale of a hotel and St. Bernard Self-Storage

involved the sale of a self-storage facility. The BTA’s finding in Hilliard City

Schools that most of the income was derived from room rentals led us to observe

that the goodwill associated with the hotel facility was presumably not “a separable

asset that is distinct from the realty.” Hilliard City Schools at ¶ 33. In so stating,

we cited St. Bernard Self-Storage, in which the BTA found that the business of

leasing storage space and the income generated from that business meant that a

“business value” associated with the storage facility could not be severed from the

realty or transferred separately, St. Bernard Self-Storage at ¶ 24-25. Both of those

cases involved businesses that derived profit by permitting others to use real estate.

Neither of those decisions speaks to the materially different circumstance of the

sale of a nursing home, with its business value that is separable from real-estate

value. The BTA therefore erred by regarding those decisions as controlling here.

D. The case law does not prohibit an allocation of sale price merely because

there is no documentation of an allocation contemporaneous with the sale

{¶ 22} The BTA in this case laid great weight on the absence of a

contemporaneous allocation of the sale price to the assets sold. It is true that the

case law attaches importance, when allocating the sale price among various bulk-

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sale assets, to “corroborating indicia” or the “best available evidence” that is

associated with matters contemplated by the parties at the time of sale. Sapina v.

Cuyahoga Cty. Bd. of Revision, 136 Ohio St.3d 188, 2013-Ohio-3028, 992 N.E.2d

1117, ¶ 18, 37, 41 (mortgage loan secured by the real property was within the

contemplation of the parties and constituted corroborating evidence that supported

an allocation to the real estate); Hilliard City Schools at ¶ 26-27 (allocation to

personal property set forth in lender’s contemporaneous appraisal was evidence of

the “value the parties attached to the personal property in connection with the sale

of the hotel as a going concern” and accordingly furnished corroborating evidence);

accord W.S. Tyler Co. v. Lake Cty. Bd. of Revision, 57 Ohio St.3d 47, 49, 565

N.E.2d 826 (1991) (fact that allocation was negotiated by the parties militated in

favor of affirming reliance on that allocation).

{¶ 23} On the other hand, we have stated that “negotiation of the allocation

itself is neither a necessary nor a sufficient condition for concluding that the

allocation reflects the value of the constituent properties.” Bedford Bd. of Edn. v.

Cuyahoga Cty. Bd. of Revision, 132 Ohio St.3d 371, 2012-Ohio-2844, 972 N.E.2d

559, ¶ 26. Most significantly, we recently found an abuse of discretion by the BTA

when it failed to consider after-the-fact appraisal evidence offered to demonstrate

that the original allocation set forth on the conveyance-fee statement did not reflect

the true value of the real-estate component of the sale. Buckeye Terminals, L.L.C.

v. Franklin Cty. Bd. of Revision, 152 Ohio St.3d 86, 2017-Ohio-7664, 93 N.E.3d

914, ¶ 35. Here as well, appraisal testimony was offered to show that the original

report of the total sale price on the conveyance-fee statement did not reflect the

property value. And the appraisal here is particularly incisive, given that its

examination of the market involves not merely a valuation of the real-estate

component but also a justification for viewing the total sale price as consisting of

realty and nonrealty components.

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E. On remand, the BTA shall determine whether—and if so, what portion of—the

sale price should be allocated to assets other than real estate

{¶ 24} Our determination that the BTA’s decision is marred by legal error

requires that we vacate the decision and remand the case for further proceedings.

On remand, the BTA will confront three tasks. First, the BTA will need to exercise

its authority to obtain a complete record for deciding the case, as we have

previously discussed. Second, the BTA must determine whether there is adequate

support in the record to find that any of the consideration paid by Arbors East was

for assets other than real estate. Third, if the record supports the conclusion that

the sale was a “bulk sale” in the relevant sense, the BTA will need to determine the

proper allocation of the sale price.

IV. Conclusion

{¶ 25} For the foregoing reasons, we vacate the decision of the BTA and

remand the case for further proceedings consistent with this opinion.

Decision vacated

and cause remanded.

O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, FISCHER, and

DEWINE, JJ., concur.

DEGENARO, J., not participating.

_________________

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.

_________________

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