Villa Park Ltd. v. Clark Cty. Bd. of Revision - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
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Villa Park Limited, Appellant, v. Clark County Board of
Revision et al., Appellees.
[Cite as Villa Park Ltd. v. Clark Cty. Bd. of Revision
(1994), Ohio St.3d .]
Taxation -- Real property valuation -- Federally subsidized
apartments -- Appropriate treatment of expenses in
determining valuation.
(No. 92-1488 -- Submitted May 27, 1993 -- Decided February
2, 1994.)
Appeal from the Board of Tax Appeals, No. 90-H-558.
Appellant, Villa Park Limited ("Villa Park"), owns a
federally subsidized apartment complex located on 11.56 acres
at 1350 Vester Avenue and adjacent addresses in Springfield,
Ohio. The complex, an all-electric project, was constructed in
two phases in 1977 and 1978. Phase I, for elderly or
handicapped persons, is a three-story apartment building with
one hundred one units consisting of ninety one-bedroom,
one-bath apartments, ten one-bedroom, one-bath apartments
designed for residents using wheelchairs, and one two-bedroom,
one-bath apartment. Phase II, for low-income families, is
fifty townhouse apartments in seven buildings, with thirty
three-bedroom units and twenty four-bedroom units. Villa Park
pays all the Phase I tenants' utilities, including electricity,
and Phase II tenants pay their own utilities, except for water
and sewer.
For tax year 1989, the Clark County Auditor assessed the
subject property at a true value of $3,986,250. On appeal the
board of revision affirmed the value determination. On appeal
to the Board of Tax Appeals ("BTA"), Villa Park claimed the
correct true value was $2,575,000.
At the hearing before the BTA, Villa Park's appraiser,
John R. Garvin, used the income and the cost approaches.
Garvin found no comparable sales with a similar apartment mix
in the Springfield area, so he did not use the market-data
approach. Appellee's appraiser, Gerald Tipton, used all three
approaches, but chose a value derived from a market approach
that compared properties based on ratios of sales prices to
potential gross rental income.

Both appraisers used a five-percent vacancy and
credit-loss rate, which reflected rates in nonsubsidized
apartments in the Springfield area. In the income approach,
the primary disagreement between the appraisers involved
calculating expenses. Garvin used economic rents but actual
expenses. Garvin stabilized expenses by applying an economic
budget that he developed. The budget included reserves for
replacements as adjustments, to reflect economic or market
expenses. Tipton used economic or market rents, and, for
operating expenses, a pro forma forty-percent rate.
The BTA criticized Garvin's expenses, finding that the
fifty-four-percent ratio of expenses to gross income was
"excessive," and that "$108,500 is excessive for electricity
since the market rents used in the income approach presume the
tenants will pay electricity."
The BTA found that the parties had not submitted evidence
of any sale price of the property to indicate its true value,
and that the parties relied on the approaches to value
prescribed in Ohio Adm. Code 5705-3-03 (D).
The BTA found that the fair market value, or the "true
value in money," of the property was $3,281,140.
The cause is now before this court upon an appeal as of
right.

Arter & Hadden and Karen H. Bauernschmidt, for appellant.
Stephen A. Schumaker, Clark County Prosecuting Attorney,
Kirk D. Ellis and William D. Hoffman, Assistant Prosecuting
Attorneys, for appellees.

Per Curiam. From our review of the record, the decision
of the BTA is unreasonable and unlawful. The decision is
vacated and the cause is remanded for further consideration.
The BTA found, and neither party disputes, that the best
method of valuing subsidized apartments is the income approach.
The second paragraph of the syllabus of Alliance Towers,
Ltd., v. Stark Cty. Bd. of Revision (1988), 37 Ohio St.3d 16,
523 N.E.2d 826, one of the three leading cases involving
valuation of subsidized apartments, states:
"An apartment property built and operated under the
auspices of the Department of Housing and Urban Development is
to be valued, for real property tax purposes, with due regard
for market rent and current returns on mortgages and
equities." See, also, Canton Towers, Ltd. v. Stark Cty. Bd. of
Revision (1983), 3 Ohio St.3d 4, 3 OBR 302, 444 N.E.2d 1027,
and Oberlin Manor, Ltd. v. Lorain Cty. Bd. of Revision (1989),
45 Ohio St.3d 56, 543 N.E.2d 768.
While there is no dispute about what kind of rent is
applicable ("'economic rent is a proper consideration in a
situation in which contract rent is not truly reflective of
true value in money,'" Canton Towers, supra, at 7, 3 OBR at
305, 444 N.E.2d at 1030, quoting Wynwood Apts., Inc. v.
Cuyahoga Cty. Bd. of Revision [1979], 59 Ohio St.2d 34, 37, 13
O.O. 3d 19, 21, 391 N.E.2d 346, 347), none of these cases
specifically discusses the appropriate treatment of expenses in
determining the value of subsidized apartments.
Villa Park points out that Garvin "reviewed actual
expenses and market expenses" and "stablized operating expenses

to reflect 'market expenses.'" Villa Park argues that all
apartments (subsidized and nonsubsidized) have expenses for
administration, utilities, maintenance, insurance, etc. that
can be stabilized to reflect market expenses. We agree.
American Institute of Real Estate Appraisers, The
Appraisal of Real Estate (9 Ed. 1987) 445, states:
"Operating expenses are the periodic expenditures
necessary to maintain the real property and continue the
production of the effective gross income.
"* * *
"* * * [A]n appraiser analyzes and reconstructs expense
statements to develop a typical expense expectancy for the
property on an annual accrual basis.
"Operating expense estimates usually list fixed expenses,
variable expenses, and a replacement allowance." (Emphasis
sic.)
Garvin reviewed and stabilized expenses and developed an
expense budget that included administrative and other operating
expenses and reserves for replacement.
The BTA found that Garvin erred in using actual expenses.
The question is: Did Garvin use actual expenses improperly or,
as he contends, by proper adjustments to actual expenses, did
he stabilize them to "reflect market operating expenses"? In
other words, did he employ an alternate way of showing expenses
that was equivalent to using market operating expenses?
In Oberlin Manor, supra, we criticized the board of
revision's appraiser for basing "his opinion on data from other
subsidized apartments and actual income, expense, and cost
figures from Oberlin Manor." Id., 45 Ohio St. 3d at 56, 543
N.E.2d at 768. We accepted the opinion of value expressed by
Oberlin Manor's appraiser, based on "information derived from
the general apartment market." Id.
Garvin's testimony in the instant appeal may be equivalent
to information derived from the general apartment market and,
thus, would be likewise acceptable, based as it is on his
analysis that adjusted actual expenses to "reflect economic or
market expenses" and that included reserves for replacement to
compute net rentals. "Such reserves are proper items of
expense to be utilized when estimating the true value of real
property through an income approach." Freshwater v. Belmont
Cty. Bd. of Revision (1991), 58 Ohio St.3d 140, 141, 568 N.E.2d
1215, 1217.
Here, as in Freshwater, the following caveat applies:
"The BTA should analyze the reserves to determine if they
include any inappropriate items, or if they are otherwise
excessive, which would warrant a modification in the amount
deducted as expenses." Id.
The BTA should also decide, in the context of Garvin's
testimony, the meaning of the terms "stabilized" and
"reflective of" and whether Garvin's stabilized expenses are
in accordance with economic or market expenses.
In its review of the record, the BTA apparently overlooked
the fact that the cost of electricity was included in the rent
that Phase I tenants paid and that Garvin adjusted his market
rent to compensate for this. The BTA observed: "$108,500
[Garvin's electricity expense] is excessive for electricity
since the market rents used in the income approach presume the

tenants will pay electricity." This error affected the BTA's
determination of market expenses and the resultant true value.
The BTA should review the $l08,500 cost of electricity to see
what impact, if any, it has on market rent and market expenses
and whether Garvin correctly calculated for this expense.
The decision of the BTA is reversed and remanded to the
BTA with instructions to (1) review and reconsider the record,
(2) make factual findings, that are supported by the record, of
the appropriate economic or market rents and expenses to be
used in the income approach to value, and (3) indicate the
specific calculations the BTA uses to determine the fair market
value or the "true value in money" of the subject property.

Decision reversed
and cause remanded.
Moyer, C.J., A.W. Sweeney, Wright, Resnick and Pfeifer,
JJ., concur.
Douglas and F.E. Sweeney, JJ., dissent.
Douglas, J., dissenting. I respectfully dissent. I
would affirm the decision of the BTA.
In Crow v. Cuyahoga Cty. Bd. of Revision (1990), 50 Ohio
St.3d 55, 57, 552 N.E.2d 892, 893, we said that "[i]t has been
held by this court that the best method of determining true
value of real property, in the absence of an actual sale of
such property in an arm's length transaction, is an appraisal
based on the amount that such property would bring if sold on
the open market. * * *" (Citation omitted.) Further, in
Cardinal Fed. S. & L. Assn. v. Cuyahoga Cty. Bd. of Revision
(1975), 44 Ohio St.2d 13, 73 O.O.2d 83, 336 N.E.2d 433,
paragraph four of the syllabus, this court held: "The fair
market value of property for tax purposes is a question of
fact, the determination of which is primarily within the
province of the taxing authorities, and this court will not
disturb a decision of the Board of Tax Appeals with respect to
such valuation unless it affirmatively appears from the record
that such decision is unreasonable or unlawful. * * *"
(Citation omitted and emphasis added.)
A review of the decision of the BTA reveals that the BTA,
in placing a value on the Villa Park Apartments, used the
income approach to valuation. The BTA was required to follow,
and in my judgment did follow, this court's cases in Canton
Towers, Ltd. v. Stark Cty. Bd. of Revision (1983), 3 Ohio St.3d
4, 3 OBR 302, 444 N.E.2d 1027, Alliance Towers, Ltd. v. Stark
Cty. Bd. of Revision (1988), 37 Ohio St.3d 16, 523 N.E.2d 826,
and Oberlin Manor, Ltd. v. Lorain Cty. Bd. of Revision (1989),
45 Ohio St.3d 56, 543 N.E.2d 768. In doing so, the BTA was
presented with separate appraisals from the competing
interests. The BTA received the evidence, weighed it, accepted
in part and rejected in part the methods used and appraisals
submitted, and arrived at the true and taxable value of the
property. In reaching its decision, the BTA acted well within
its authority.
In R.R.Z. Assoc. v. Cuyahoga Cty. Bd. of Revision (1988),
38 Ohio St.3d 198, 201, 527 N.E.2d 874, 877, we stated that
"[t]he BTA need not adopt any expert's valuation. It has wide
discretion to determine the weight given to evidence and the
credibility of witnesses before it. Its true value decision is

a question of fact which will be disturbed by this court only
when it affirmatively appears from the record that such
decision is unreasonable or unlawful. * * *" (Citation
omitted.) Further, this court has stated that "[w]e do not sit
either as a 'super' Board of Tax Appeals or as a trier of fact
de novo. (Citation omitted.) Youngstown Sheet & Tube Co. v.
Mahoning Cty. Bd. of Revision (1981), 66 Ohio St.2d 398, 400,
20 O.O.3d 349, 351, 422 N.E.2d 846, 848. Findings of fact by
the BTA based upon sufficient probative evidence will not be
overruled by this court. Hawthorn Mellody, Inc. v. Lindley
(1981), 65 Ohio St.2d 47, 19 O.O.3d 234, 417 N.E.2d 1257,
syllabus.
We should not substitute our judgment for the decision of
the BTA. Because I believe that in this case that is what the
majority is doing, I must respectfully dissent.