Ohio Supreme Court: Above-Market Rate Lease Terms Must be Considered
STATUTORY AMENDMENT RECOGNIZED IN TERRAZA 8, L.L.C.
NNN properties with national, credit-worthy tenants often sell for a premium and are often subject to leases that are above market.
The Supreme Court of Ohio issued a decision that supports the property owner's position that above-market lease rates must be considered in evaluating the merits of a sale price. In Ohio, a proponent of a recent, arm's-length can can create a presumption that the sale price is the best evidence of the fair market value fairly easily. With this new decision, the Supreme Court of Ohio has found that the opponent of sale prices can rebut the best-evidence-of-value presumption by presenting its own evidence that the property received above-market rents. Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-4415. In Terraza 8, L.L.C., the Court vacated the Ohio Board of Tax Appeals' decision, which looked past recent statutory changes and disregarded the property owner's appraisal evidence. On remand, the Court tasked the BTA with evaluating the appraisal evidence.
ORIGINAL POST FROM MY LINKEDIN ACCOUNT PRIOR TO THE ISSUANCE OF THE TERRAZA 8, L.L.C. DECISION:
There are several cases making their way to the Supreme Court of Ohio that may fundamentally change the way leased-fee sales with above-market lease terms are viewed in Ohio. Presently, Ohio law dictates that a recent, valid arm’s-length sale is the best evidence of the true value in money of real estate. 
Changes in the Air
In a footnote, the Supreme Court of Ohio appears to have signaled that recent, arm’s-length sales may no longer be the best evidence of value.  To date, a party opposing a sale price could only challenge the validity of the sale by establishing the sale was either too remote from the tax lien date or that the sale was not an arm’s-length transaction. 
In 2012, the Ohio General Assembly amended O.R.C. 5713.03 to state that the sale price may (instead of “shall”) be the best evidence and that real property is to be valued as if unencumbered. These are small, but significant changes in the statute. The intended effect of the change in the statutory language was to step back from the hard-and-fast rule that a sale-is-a-sale-is a-sale, which meant there was no real way to avoid the impact of a recent, arm’s-length sale.
Ohio's Legislature Makes Major Changes to R.C. 5713.03 by Substituting 'May' for 'Shall'
In 2013, the Court issued its decision in Sapina, wherein the Court discussed the amendments to O.R.C. 5713.03, but applied the unamended version of the statute to the 2007 tax year case. However, again in a footnote, the Court stated: “amended R.C. 5713.03 may have substantively changed the law” in Ohio regarding leased fee sales. (Emphasis added.) The Court avoided directly addressing the issue since the facts of the case called for the application of the statute prior to amendment.
In the HIN case, the property owner argued that there are "factors other than a sale's arm's length nature and recency which can render a sale unrepresentative of value."  (Emphasis added.) The HIN property owner argued that the existence of the long-term lease needed to be considered. The HIN property owner argued that its appraisal evidence was better evidence of that real property’s true value in money. Id. at ¶13.
In the HIN case, the Supreme Court of Ohio reviewed O.R.C. 5713.03 as written both prior to and after the amendment. Id. at ¶13. Applying the original version of O.R.C. 5713.03 since the case involved the 2006 tax year, the Court found that the recent, arm’s-length sale price was the best evidence of value.
Then, in Steak ‘n Shake,  the Supreme Court of Ohio acknowledged a market-place reality, i.e.:
Precisely because the encumbrances affect sale price, and precisely because the difference in sales price is a difference in value for tax purposes, [the appraiser] was required to adjust the sale prices for his comparable properties to reflect the fact that the subject property was not encumbered and would therefore likely sell for less. Id. at ¶36. (Emphasis added.)
Steak ‘n Shake involved a 2009-tax-year case and was decided on November 25, 2015—i.e., after R.C. 5713.03 was amended.
Next, in Rite Aid of Ohio, the Supreme Court of Ohio stated:
After amendment in 2012, R.C. 5713.03 now makes the use of an arm's-length sale price discretionary and also requires county auditors to value property based on the value of the unencumbered fee simple. … A different rule therefore applies today, but the rule articulated in Cummins [infra] would be applicable to a 2010 valuation. Id., fn. 2.
The Court decided Rite Aid on February 4, 2016 which resolved a tax-year-2010 valuation.
The Cummins case stands for the proposition that “the arm’s-length sale price of a legal fee interest should not be adjusted on account of the mere existence of an encumbrance.” Cummins Property Servs., L.L.C. v. Franklin Cty. Bd. of Revision, 117 Ohio St.3d 516, 2008-Ohio-1473.
Ohio Supreme Court Recognizes that Above-Market Rents Inflate Sales Prices
In Rite Aid, the Supreme Court of Ohio held that above-market rents may elevate sales prices. Rite Aid, supra ¶21. Because of this logical corollary, the Supreme Court has held that an appraiser must adjust a leased-fee comparable sale “to remove the effect of the lease on the sale price so that the sale can indicate what the unencumbered subject property would sell for.” Id. at ¶22.
The BTA has narrowly interpreted and applied Steak ‘n Shake and Rite Aid as requiring that an appraiser must adjust a leased fee sale comp if the subject property is unencumbered. Cole SN Canton Ohio LLC v. Stark Cty. Bd. of Revision (Oct. 4, 2016), BTA No. 2015-2046, *3; Milford Exempted Village Schools Bd. of Edn. v. Clermont Cty. Bd. of Revision (May 9, 2016), BTA No. 2015-1093, *3.
However, this reading is problematic. Appraisers routinely consider the recent sale of an appraisal subject when it is both recent in time and an arm’s-length transaction. The appraiser then adjusts the sale of the subject property to the tax lien date. Cf. Columbus City Schools Board of Education v. Franklin Cty. Bd. of Revision, 2016-Ohio-757, 2014-0883 (where an appraiser was criticized for not using a January 2007 sale price of the hotel property at issue for a 2009-tax-year case).
There are several cases on their way to the Ohio Supreme Court that will require the Court to apply, expand upon or clarify what its Rite Aid footnote means. In the meantime, if you have purchased Ohio real estate in the last couple years which is subject to a long-term, above-market lease, it is worth considering Rite Aid’s implications and whether your sale price reflects market values and influences. If the sale price is “above market” challenges can be made and arguments need to be made to be protected.
Once the Supreme Court of Ohio addresses the issue squarely, Ohio will hopefully have a clear understanding how to apply the amended O.R.C. 571303 and have a much better idea of how recent sales of investment-quality NNN properties are to be treated.
 Conalco v. Monroe Cty. Bd. of Revision (1977), 50 Ohio St.2d 129, paragraph 1 of the syllabus, 363 N.E.2d 722.
 Cincinnati School Bd. of Edn. v. Hamilton Cty. Bd. of Revision, 78 Ohio St.3d 325, 327, 677 N.E.2d 1197 (1997) (holding “A sale price is presumed to establish the value of real property.”); State ex rel. Park Invest. Co. v. Bd. of Tax Appeals (1964), 175 Ohio St. 410, 412, 25 O.O.2d 432, 195 N.E.2d 908.
 Cummins Property Servs., LLC v. Franklin Cty. Bd. of Revision, 117 Ohio St.3d 516, 2008-Ohio-1473, 885 N.E.2d 222, ¶13.
 Sapina v. Cuyahoga Cty. Bd. of Revision, 136 Ohio St.3d 188, fn. 1, 992 N.E.2d 1117, 2013-Ohio-3028.
 HIN, L.L.C. v. Cuyahoga County Bd. of Revision, 138 Ohio St.3d 223, 5 N.E.3d 637, 2014-Ohio-523.
 Steak ‘n Shake, Inc. v. Warren Cty. Bd. of Revision, 145 Ohio St.3d 244; 2015-Ohio-4836