Spirit Master Funding IX, L.L.C. v. Cuyahoga Cnty. Bd. of Revision

2022-Ohio-610

SPIRIT MASTER FUNDING IX, L.L.C., ET AL., Plaintiff-Appellants/ Cross-Appellees v. CUYAHOGA COUNTY BOARD OF REVISION, ET AL., Defendants-Appellees/ Cross-Appellants

No. 110264

Court of Appeals of Ohio, Eighth District, Cuyahoga

March 3, 2022

Administrative Appeal from the Board of Tax Appeals Case No 2017-73

Sleggs, Danzinger & Gill Co., L.P.A., and Todd W. Sleggs for appellant/cross-appellee Balco Realty, L.L.C., successor to Spirit Master Funding IX, L.L.C.

Frantz Ward, L.L.P., and John P. Desimone, for appellee/cross-appellant Orange City School District Board of Education.

JOURNAL ENTRY AND OPINION

KATHLEEN ANN KEOUGH, J.

{¶ 1} In this appeal, we pick up where we left off in 2019 when we considered the first appeal concerning the 2015 tax year value of real property located at 3655 Orange Place, Beachwood, Ohio, permanent parcel number 901-01-064 ("subject property"). See Spirit Master Funding IX, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 2019-Ohio-1349, 135 N.E.3d 371 (8th Dist.) (hereinafter "8th 2015 Tax Appeal"). In that case, this court vacated the Board of Tax Appeals' ("BTA") decision and in accordance with recent Ohio Supreme Court authority, remanded the matter to the BTA to weigh and address appraisal evidence in determining the 2015 true value of the "unencumbered fee simple estate." Id. at ¶ 23.

{¶ 2} In response to this court's mandate, the BTA reconsidered the property value for the 2015 tax year after purportedly "addressing and weighing" the appraisal evidence and testimony that asserted that the lease in effect at the time of the December 2014 sale impacted the purchase price and thus, the sale price was not the true value. The BTA again rejected the evidence and testimony that the "purported lease" had any effect on the sale price and thus, the BTA gave less weight to the appraisal than the December 2014 arm's-length sale. Accordingly, it again found that the true value of the property was the December 2014 sale price.

{¶ 3} Appellant, Balco Realty, L.L.C, successor to Spirit Master Funding IX, L.L.C. ("appellant"), again appeals the BTA's decision regarding the 2015 valuation of the subject property. Appellee, Orange City School District Board of Education ("BOE"), has filed a cross-appeal. For the reasons that follow, we reverse and remand.

I. Factual History and Procedural Background^[1]

{¶ 4} Although this appeal concerns the property value for the 2015 tax year, it is important to review the conveyance and tax history of the subject property. The subject property is a 7, 534-square-foot restaurant situated in the city of Beachwood on 2.26 acres and owned by appellant. In August 2014, N and D Restaurants, Inc. sold the subject property to Red Lobster Hospitality, L.L.C., for $2, 925, 880. In December 2014, Red Lobster Hospitality sold it to Spirit Master for $3, 439, 029. Appellant subsequently became the successor in interest to Spirit Master.

A. Tax Year 2014

{¶ 5} In 2014, the Cuyahoga County Fiscal Officer assessed the property value at $2, 016, 400 for the 2014 tax year. Appellant filed a complaint with the Cuyahoga County Board of Revision ("BOR") against the fiscal officer's fair market valuation of the subject property, contending that the true value was $1, 535, 000. The BOE filed a countercomplaint, contending that the true value was $3, 439, 000 based on the December 2014 sale of the property. However, because the August 2014 sale was closer in time to the tax-lien date, the BOE conceded that $2, 925, 880 was the appropriate valuation, as long as the BOR determined that the sale had occurred at arm's length.

{¶ 6} The BOE presented to the BOR the deeds and conveyance-fee statements referencing both sales. For its part, at the BOR hearing, appellant introduced testimony and the appraisal of Richard G. Racek Jr., MAI, of Racek & Associates, L.L.C. ("Racek"). According to Racek, the August 2014 sale of the subject property was part of the sale of the entire Red Lobster restaurant chain for $2.1 billion. He explained

that $2, 925, 880 - the amount reported on the August 2014 conveyance-fee statement - was allocated to the sale of the subject property. The conveyance-fee statement reports that no part of the $2, 925, 880 consideration was allocable to assets other than the real property. Racek acknowledged that the property was not encumbered by a lease at the time of the August 2014 sale, but he stated that it was encumbered by a 20-year lease that took effect around the time of the December 2014 sale. He used the income and sales-comparison approaches to reach a valuation of $1, 535, 000 as of January 1, 2014.

OSC 2014 Tax Appeal at ¶ 4.

{¶ 7} The BOR valued the property at $2, 925, 900 based on the August 2014 sale. Appellant appealed to the BTA, arguing that Racek's appraisal - rather than either of the 2014 sale prices - reflected the true value of the property. The BTA declined to consider Racek's appraisal, finding it was hearsay, and retained the valuation as determined by the BOR, concluding that the August 2014 sale was the best evidence of the true value of the property. Appellant appealed to the Ohio Supreme Court, contending that it was error when the BTA refused to consider Racek's appraisal in determining the 2014 tax value. See generally OSC 2014 Tax Appeal

{¶ 8} In its July 17, 2018 decision, the Ohio Supreme Court agreed with appellant. Relying on its recent decisions, the court held that under amended RC. 5713.03, "the price of that sale [of the property] is not 'conclusive evidence' of the subject property's value," but "only 'presumptively represents the value of the unencumbered fee-simple estate.'" OSC 2014 Tax Appeal at ¶ 6, quoting Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, 150 Ohio St.3d 527, 2o17-Ohio-4415, 83 N.E.3d 916, ¶ 30; and Bronx Park, S. III Lancaster, L.L.C. v. Fairfield Cty. Bd. of Revision, 153 Ohio St.3d 550, 2018-Ohio-1589, 108 N.E.3d 1079, ¶ 13. Accordingly, the court found that the BTA "'needed to consider not just the sale price but also any other evidence the parties presented] that is relevant to the value of the unencumbered fee-simple estate.'" Id., quoting Bronx Park at ¶ 12. The court found Racek's appraisal as "relevant evidence," vacated the BTA's decision, and remanded the matter to the BTA for it to weigh and address appellant's appraisal evidence. Id. at ¶ 6, 9.

{¶ 9} In its decision, the court specifically noted that for purposes of the 2014 valuation, the property was not encumbered by a lease at the time of the August 2014 sale, which made the subject property distinguishable from Terraza and Bronx Park, because both of those cases involved properties that were sold with above-market leases in place. OSC 2014 Tax Appeal at ¶ 8. This distinction is relevant because a claimed lease was in place when Red Lobster Hospitality sold the subject property to appellant in December 2014.

{¶ 10} On remand, the BTA considered Racek's appraisal and found that although Racek "performed a reasonable and well-supported appraisal analysis," he "ignore[d] the sales of the subject property and only relied on the adjusted sales of other properties" that "required some adjustments for differences among properties." Spirit Master Funding, IX, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 2020 Ohio Tax LEXIS 2482, 6-7 (Ohio B.T.A., Dec. 8, 2020). The BTA further found that Racek's income-approach analysis required "subjective judgments based on the experience of other properties rather than the experience of the subject [property]." Id. at 7. Accordingly, the BTA afforded Racek's appraisal less weight than the August 2014 arm's-length transaction and valued the property for tax year 2014 at $2, 925, 900. Id.

{¶ 11} Appellant appealed the BTA's decision to this court, and the BOE filed a cross-appeal. See Spirit Master Funding IX, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 8th Dist. Cuyahoga No. 110207, 2021-Ohio-3349 (hereinafter "8th 2014 Tax Appeal"). Appellant raised the same twelve assignments of error as raised in its prior appeal to the Ohio Supreme Court and contended that the BTA's rejection of Racek's appraisal, which included evidence regarding the lease in place, was unreasonable and unlawful.

{¶ 12} This court affirmed the BTA's decision, finding that the subject property, as acknowledged by Racek, was not encumbered by a lease at the time of the August 2014 sale. Id. at ¶ 27. Accordingly, the BTA afforded more weight to the August 2014 sale price than Racek's appraisal because the comparable properties relied on by Racek all required adjustments to compensate for their values. This court upheld the BTAs decision, finding that it was not unlawful or unreasonable. Id. at ¶ 27-28. No further appeal occurred.

B. Tax Year 2015

{¶ 13} For tax year 2015, the Cuyahoga County Fiscal Officer valued the subject property in the amount of $2, 016 400. Despite the recent arm's-length sales in 2014, the fiscal officer valued the property the same as it did for the 2014 tax year. In March 2016, appellant filed a complaint with the BOR against the fiscal officer's valuation, contending that the true value was $1, 535, 000 based on a "recent fee simple appraisal of property." Appellant noted on its complaint that the real property was sold in the past three years, most recently on December 29, 2014, with a sale price of "$3, 439, 029 (leased fee)." The BOE filed a countercomplaint, asserting that its opinion of the true value of the property was $3, 439, 000 based on the December 2014 sale of the property.

{¶ 14} In support of its complaint, appellant submitted the appraisal Racek prepared when challenging the 2014 tax year valuation. According to Racek's report, the December 2014 sale was a leased-fee...