Commercial Real Estate Taxes and Changing Commercial Property Values

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How much is your company paying in commercial real estate taxes? Historically, if you had a recent sale of the property, the county auditor would solely rely on the sales price for calculating value and would not consider any other evidence. The Ohio Supreme Court recently clarified that the county auditor can and should consider other non-sale price evidence to determine the true value of the property.

The Ohio Supreme Court decided Terraza 8, L.L.C. v. Franklin Cty. Bd. Of Revision, 2017-Ohio-4415 on June 22, 2017, and enforced the Ohio General Assembly’s revised statutory language, which provided “the auditor may consider the sale price … to be the true value for taxation purposes.” Ohio R.C. § 5713.03. The previous version of the statute stated the “auditor shall consider …” While attorneys and politicians certainly enjoy arguing over such statutory language, this change in one word is significant when it comes to valuing your commercial property for tax purposes.

In the Terraza case the county auditor increased the property’s valuation to $15,403,200, based upon the price Terraza paid for the property. Terraza presented an appraisal showing the property should be valued at approximately $7 million based upon the monthly market-rate for rent on comparable properties. Such an $8 million difference in taxable property value will greatly affect the bottom line for any commercial enterprise.

The commercial lease market can be very fluid, and lease rates often fluctuate year to year and industry to industry. In Terraza, the commercial appraiser presented evidence that the lease in place before Terraza acquired the property was now double the market rate for comparable properties. There are many factors that can affect lease rates, including the passage of time, demographic changes in the locality, the economics of the specific industry, or simply the prior owner overcharging for the lease that was in place when the subsequent purchase occurred. Regardless, changing markets typically lead to adjustments in commercial lease rates. These changing lease rates ultimately affect the value of any commercial property.

The Ohio Supreme Court properly recognized that an arms-length sale of the property is still an important indicator of property value, as the Court held “a recent arms-length sale price constitutes the best evidence of a property’s value, but such a sale price no longer conclusively determines that value as it did under prior law.” The Court therefore allows a property owner to present evidence of changing commercial property values based upon the very real changing market conditions every business owner faces. Prior to the Terraza decision, the county auditor would simply rely on the recent sale of the property and disregard any attempts to provide contrary evidence of market value.

The recent Terraza decision emphasizes the importance of understanding the commercial real estate market in which you operate. Cost savings can often be found hidden in inflated commercial property values. If you recently acquired commercial property, the purchase price may not tell the whole story regarding the assessed property value for tax purposes. It may be worthwhile to speak with a real estate professional and approach the county auditor regarding the true property value based upon ever changing market conditions.

Barnes & Thornburg LLP is a large, full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business.

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