[Cite as Menlo Realty Income Properties 28, L.L.C. v. Franklin Cty. Bd. of Revision, 2019-Ohio-4872.]

                              IN THE COURT OF APPEALS OF OHIO

                                   TENTH APPELLATE DISTRICT

Menlo Realty Income Properties 28, LLC, :

                 Appellant-Appellant,                :
                                                                             No. 19AP-316
v.                                                   :                    (BTA No. 2016-445)

Franklin County Board of Revision                    :               (REGULAR CALENDAR)
et al.,
                                                     :
                 Appellees-Appellees.
                                                     :


                                            D E C I S I O N

                                   Rendered on November 25, 2019


                 On brief: Sleggs, Danzinger & Gill Co., LPA, and Todd W.
                 Sleggs, for appellant. Argued: Todd W. Sleggs.

                 On brief: Rich and Gillis Law Group, Mark H. Gillis, and
                 Richelle L. Thoburn Ford, for appellee Columbus City Schools
                 Board of Education. Argued: Mark H. Gillis.

                              APPEAL from the Board of Tax Appeals

NELSON, J.
        {¶ 1} In this property valuation case from the Board of Tax Appeals, property
owner Menlo Realty Income Properties 28, LLC ("Menlo") seems to argue for a rule that
despite a recent arms-length sale, the taxing authorities must automatically discount the
sale value of any leased property by the vacancy rate in the area without regard to whether
the lease at the time of sale was above, below, or at market value. But a lease in any area,
including an area with less than a 100% occupancy rate, at least theoretically can be above-
market, below-market, or at market value, and simply knowing the neighborhood's vacancy
rate does not by itself establish which of these descriptions fits any particular circumstance.
The absolute rule Menlo proposes has no basis we can discern in law or logic. And because
Menlo has failed to point us to a sufficient showing that the lease at issue here (to CVS) was
No. 19AP-316                                                                                 2

at above-market value for the landlord at the time of sale or that the purchase price
consequently (or otherwise) could not be considered an accurate indicator of the property's
fee simple value, we will overrule Menlo's two related assignments of error and affirm the
BTA determination.
       {¶ 2} Menlo purchased the subject retail condominium at Suite 1A of 109 South
High Street in Columbus on June 20, 2013 for $4,865,000 (which amounted
approximately to $460.18 per square foot). See Menlo's Ex. 1, February 22, 2016 appraisal
by Samuel D. Koon & Associates, LTD ("Koon appraisal") at A-5. The Columbus City
Schools then filed a complaint asking that the real property tax assessment for that parcel
be increased for tax year 2014 from its previously assessed $1,600,000 valuation; the
Franklin County Board of Revision, over Menlo's protestations, pegged the property's value
at the new sale price; the Board of Tax Appeals agreed with that result; and Menlo appealed
to the Supreme Court of Ohio.
       {¶ 3} In the wake of a spate of cases in which the Board of Tax Appeals appeared to
have ignored statutory amendments by taking an arms-length sale price as conclusive proof
of value without consideration of competing proffered evidence, the Supreme Court ruled:
"Because the Board of Tax Appeals ('BTA') did not fully consider the appraisal evidence
presented by * * * Menlo * * * , we vacate the decision of the BTA and remand the case for
further proceedings on the authority of Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision,
150 Ohio St.3d 527, 2017-Ohio-4415, * * * and Spirit Master Funding IX, L.L.C. v.
Cuyahoga Cty. Bd. of Revision, [155 Ohio St.3d 254], 2018-Ohio-4302 * * *." Menlo Realty
Income Props. 28, L.L.C. v. Franklin Cty. Bd. of Revision, 155 Ohio St.3d 258, 2018-Ohio-
4305, ¶ 1.
       {¶ 4} Terraza explained that 2012 amendments to R.C. 5713.03 "required county
auditors to determine 'the true value of the fee simple estate, as if unencumbered, of each
separate * * * parcel of real property and of buildings, structures, and improvements
located thereon.' " 2017-Ohio-4415, ¶ 15 (emphasis in original), quoting R.C. 5713.03.
Those amendments also provided that "concerning recent arm's-length sales, * * * 'the
auditor may [rather than the former "shall"] consider the sale price * * * to be the true value
for taxation purposes.' " Id. (emphasis in original), quoting R.C. 5713.03. So the real
property has to be valued as if no lease had existed at the time of sale. (That makes sense
No. 19AP-316                                                                                 3

on the view that the purchaser assumes lease rights and obligations that may add to or
detract from the value the property would have absent the lease.) "The General Assembly
reinforced this policy change by * * * * [allowing] taxing authorities to consider non-sale-
price evidence – particularly evidence of encumbrances and their effect on sale price – in
determining the true value of property that has been the subject of a recent arm's-length
sale." Id. at ¶ 27.
       {¶ 5} Terraza continued by instructing that an "actual, recent * * * arms-length"
sale "creates a rebuttable presumption that the sale price reflected true value." Id. at ¶ 33.
"Market rent becomes relevant only if an opponent presents it as evidence in an attempt to
rebut a sale price." Id. at ¶ 34. But where a party has "presented appraisal evidence that
purports to explain why the sale price did not reflect the value of the unencumbered fee-
simple estate," the BTA must properly consider such evidence. Id. at 39.
       {¶ 6} Spirit Master further underscored that the sale price "only 'presumptively
represents the value of the unencumbered fee-simple estate,' " and that the taxing
authorities must consider also " 'any other evidence the parties present that is relevant to
the value of the unencumbered fee-simple estate.' " 2018-Ohio-4302 at ¶ 6, 9 (citations
omitted).
       {¶ 7} On remand of this case from the Supreme Court, the BTA on tax day 2019
acknowledged that appraisal evidence can serve to rebut the value presumption created by
a sale price, and considered Menlo's argument "that, because the subject property sold
pursuant to an above-market lease (a 'negative leasehold interest' as described in Menlo's
brief to this board prior to the remand), the sale did not reflect the property's
unencumbered fee simple value." April 15, 2019 BTA Decision and Order at 2
(characterizing Menlo's position). The BTA noted that "[w]e must therefore determine
whether the lease was at market terms." Id.
       {¶ 8} The BTA assessed the "nine rent comparables" provided in the Koon
appraisal. It did not buy the Koon opinion that the 10,572 square foot subject property
(which was purchased subject to a lease at $26.85/SF) would on the open rental market go
for the same rental rate of $25.00 per square foot as "a 3,500 SF space in a building on the
same block as the subject property that was built in 1958"; rather, the BTA thought, "[i]t
seems likely that the higher actual rental rate for the subject property reflects the fact that
No. 19AP-316                                                                              4

the subject property is significantly newer than most other comparable spaces in the
Columbus CBD." Id. at 3. The board did not accept the Koon appraisal's "final value
estimate" of $3,900,000. Id. at 2-3.
       {¶ 9} "We acknowledge that other factors may cause a lease rate to be above
market," the board's analysis continued, "including the creditworthiness of the tenant.
* * * * However, Menlo has provided this board with no analysis or evidence demonstrating
what, if any, effect the creditworthiness of CVS had on its lease rate. Moreover [despite a
suggestion that the lease rate may have included build-out costs], there is no evidence to
support such statement nor is there any indication of what portion of the rental rate is
attributable to such construction costs." Id. at 3.
       {¶ 10} Finding that Menlo "failed to present probative evidence demonstrating that
the subject's lease rate * * * was above market," the BTA determined that the sale price
reflected the true value of the property as if unencumbered. In reaching that conclusion, it
found further "support" in the Koon appraisal's reference to "the sale of a Walgreens on
Harrisburg Pike (comparable sale #3) in May 2015 for $6,963,666 (or $461.29/SF)," as
compared to the $460.18/SF price Menlo paid. Id. "Mr. Koon appears to have made only
two adjustments to that [Walgreens] sale: (1) downward for occupancy (comparing the
comparable's 100% occupancy to an estimated 92.5% market occupancy for the subject
property['s neighborhood]), and (2) upward for location (inferior compared to the subject).
The amount of his overall downward adjustment is not clear from his report and testimony;
however, we find comparable sale #3 a good indication of the market on tax lien date." Id.
       {¶ 11} Appealing to this court, Menlo makes two assignments of error:
              [1.] The Board of Tax Appeals decision and order fails to
              consider that the subject property sold leased fee (encumbered)
              with an occupancy of 100% when the unrebutted appraisal
              testimony in the record showed that market occupancy was
              91.3% at the beginning of 2014. As a result the Board of Tax
              Appeals decision and order is unreasonable and unlawful.

              [2.] The Board of Tax Appeals consideration of the Walgreens
              (encumbered) sale at $461.29 per square foot as corroborating
              evidence for the encumbered sale of the subject property at
              $460.18 per square foot ignores the fact that both sales needed
              to be adjusted to market occupancy of 91.3% (or 92.50% as Mr.
              Koon did) in order to determine unencumbered fee simple
No. 19AP-316                                                                                5

               value under R.C. 5713.03. As a result the Board of Tax Appeals
               decision and order is unreasonable and unlawful.

Appellant's Brief at 7, 9.
       {¶ 12} "We must affirm the BTA's decision if it was 'reasonable and lawful.'
R.C. 5717.04. In making this determination, we must consider legal issues de novo, * * *
and defer to findings concerning the weight of evidence so long as they are supported by
the record * * * ." Terraza, 2017-Ohio-4415 at ¶ 7 (citations omitted).
       {¶ 13} The two assignments of error somewhat merge in Menlo's arguments, and we
consider them together. Menlo submits that the BTA "failed to recognize the need to adjust
the sale data in the appraisal to reflect market occupancy." Appellant's Brief at 5.
Acceptance of the sale price as reflecting the property's unencumbered fee simple value,
Menlo urges, "is unreasonable and unlawful because the unrebutted appraisal evidence
showed that market occupancy was 92.5%, not 100%"; thus, the board erred when it "used
a sale of property that was 100% occupied in adopting the June 2013 sale price." Id. At the
time of sale, Menlo elaborates, the property was subject to a lease that did not expire for at
least another 13 years, id. at 7: consequently, Menlo contends, "the lease encumbering the
property at an occupancy of 100% was not reflective of market conditions as of January 1,
2013 (10% vacancy) and * * * * the June 20, 2013 leased fee sale of the property did not
reflect the unencumbered fee simple value of the real property * * * ." Id. at 8.
       {¶ 14} But as Menlo's counsel confirmed at argument, the value calculations its
appraiser made did not incorporate or depend on the specific duration of the lease, and
Menlo's briefing does not direct us to any place in the record that would require the BTA to
conclude that having that particular CVS lease for its particular duration and at its
particular rental rate inflated (or deflated) the sale value by any particular amount. Rather,
Menlo falls back on a highly generalized argument that because a long-term "lease at 100%
occupancy * * * exceeds market occupancy [rates] * * * , the June 20, 2013 leased fee sale
of the property cannot be used to value the unencumbered fee simple interest in the
property * * *." Id. at 13.
       {¶ 15} That appears to be another way of saying that whenever occupancy rates in a
neighborhood are less than 100%, the sale value of a leased property is never its
unencumbered value. But that proposition eviscerates, for properties under lease, the
No. 19AP-316                                                                                  6

"rebuttable presumption that the sale price reflected true value," Terraza, 2017-Ohio-4415,
at ¶ 33, because circumstances generally conspire to generate some sort of commercial
space vacancy rate. A presumption so limited is not much of a presumption, and we do not
read Terraza or related precedents to rest on such sweeping generalities divorced from any
sort of more detailed analysis.
       {¶ 16} Of course, a long-term lease that locks in a tenant at above-market rates can
enhance sale value, just as a long-term lease that locks in a tenant at below-market rates
can depress the sale value of a property. But the background vacancy rate, alone, does not
establish whether a lease is above- or below-market (and in fact it may be possible to find
good and bad lease deals among the balances of long-term leases for properties in the same
neighborhood, especially if the leases were entered into at different times). Even with a
relatively high vacancy rate, a long-term lease obligation at cheap rates (think 40 years at
one dollar per year) could deflate the encumbered property's value, while a long-term lease
at steep rates (40 years at a billion dollars a year, for example) could inflate the encumbered
property's value even in an area with a very low vacancy rate. The point of Ohio's statutory
scheme is to endeavor to separate out, where possible, value attributable to having the lease
itself (value not subject to the property tax) and value attributable to the "fee simple estate,
as if unencumbered" (value that is subject to the property tax).
       {¶ 17} Menlo cites an appraisal authority that recognizes the basic concept. "If the
rent and/or terms of the lease are favorable to the landlord (lessor), the value of the leased
fee interest will usually be greater than the value of the fee simple interest, resulting in a
negative leasehold interest. If the rent and/or terms of the lease are favorable to the tenant
(or lessee), the value of the leased fee interest will usually be less than the value of the fee
simple interest, resulting in a positive leasehold interest. * * * * The negative or positive
leasehold interests will cease if contract rent and/or terms equal market rent and/or terms
any time during the lesae or when the lease expires." Appellant's Brief at 10-11, quoting The
Appraisal of Real Estate, 12th Ed., at 82 and supplying emphasis.
       {¶ 18} But Menlo translates this truism by saying that "[p]ositive leased fee value
(here, a long term lease at 100% occupancy) is offset by a corresponding negative leasehold
value (market conditions at a 10% vacancy) and vice-versa"—without ever attempting to
follow the book's explanation by assessing the "rent and/or terms of the lease" as a whole,
No. 19AP-316                                                                                7

gauging whether they are favorable or unfavorable to the lessor, and thus showing whether
the property's "leased fee interest" is above or below its "fee simple interest."         See
Appellant's Brief at 11. Simply reciting vacancy rates doesn't do the trick.
       {¶ 19} Beyond its appraiser's views on discounting by vacancy rates, Menlo has not
attempted to show us where the record establishes that the lease terms themselves were not
at market value as of the sale date. If the lease was not at market value at the time the
property was sold (whether because of a change over time in prevailing occupancy/vacancy
rates or in other ambient conditions that could drive the value of the lease up or down), its
remaining duration could well inform a determination of by how much the sale price should
be adjusted in order to reach unencumbered property value, but Menlo does not direct us
to any meaningful such discussion in the record.
       {¶ 20} Indeed, Menlo stipulates that "[t]he lease rate of $26.85 per square foot is not
at issue in this appeal, only the narrow issue of whether the sale price should have been
adjusted to reflect market occupancy." Reply Brief at 3. Menlo simply asserts that
"properties that are not 100% occupied would presumably be valued at a lesser value" than
the Menlo property, id. at 4, but whether a vacant property would be valued less or more
highly than the same property with the lease Menlo inherited could depend in significant
part on whether the lease was more favorable to the landlord than prevailing market rents,
or less favorable. While the property owner in Terraza " 'presented appraisal evidence that
purports to explain why the sale price did not reflect the value of the unencumbered fee-
simple estate,' " Reply Brief at 4, quoting Terazza, 2017-Ohio-4415, at ¶ 39, Menlo has
assayed no such explanation. Menlo suggests under its first assignment of error that the
lease in place at the time of sale did not "reflect[] market terms at the time" of sale, see
Appellant's Brief at 6 (capitalizations adjusted), but Menlo undertakes no showing to that
effect beyond its appraiser's postulation (made in light of background vacancy numbers) of
a $25.00 per square foot rate that the BTA was not bound to credit. See id. at 7 (Menlo
submits that its appraiser's "conclusion of market rent at $25.00 per square foot [Koon
Appraisal at page D-5] was very close to the contract rent under the lease at $26.85 per
square foot").
       {¶ 21} To be sure, "the difference between actual rent and market rent is only one
factor that might make an existing lease affect the sale price"; factors such as tenant
No. 19AP-316                                                                                8

creditworthiness and whether the lease is a net lease also can influence such analysis. GC
Net Lease @(3) (Westerville) Investors, L.L.C. v. Franklin Cty. Bd. of Revision, 154 Ohio
St.3d 121, 2018-Ohio-3856, ¶ 10. Here, however, Menlo makes no "creditworthiness" or
"net lease" arguments. Despite stipulating under its first assignment of error that the "fee
simple standard * * * requires an inquiry into whether a lease in place reflects market terms
at the time of a sale," Appellant's Brief at 6, Menlo really makes no arguments specific to
the terms of the lease in contending that the lease had an effect on the sale price. Again,
Menlo does not argue from the particular duration of the lease, or the monthly rental fee,
or the character of the tenant; it does not look to "whether [the] lease in place reflects
market terms," but only to the fact that a long-term lease exists at all. And it cites no
precedential authority showing that its simple incantation of area vacancy rates permits us
to gainsay the BTA's conclusions.
       {¶ 22} Nor does Menlo's reference to Ohio Administrative Code Rule 5703-25-
07(D)(2) and that subsection's description of "[t]he income approach" to estimating true
value as needing to account for "normal vacancies," see Appellant's Brief at 9-10, establish
that recent sale prices of leased property automatically have to be discounted in light of
prevailing vacancy rates. It does not show as a matter of law, that is, that the BTA's failure
automatically to discount any sale price of leased property given neighborhood vacancy
rates "makes no sense." Compare Reply Brief at 2. And the Supreme Court of Ohio has
noted that "the administrative rule * * * does not mandate a particular methodology for
appraising a property's value" and "does not require the use of the income approach in every
valuation * * *." Terraza, 2017-Ohio-4415 at ¶ 38.
       {¶ 23} Without more, we cannot adopt Menlo's argument that the Walgreens sale
price used as a comparable sale in its appraiser's review needed to be discounted by that
factor, too, even absent consideration of any other factors. Compare Appellant's Brief at 9.
The BTA did consider Menlo's appraisal evidence, but would have been justified in
considering the appraisal report truncated in explaining why and how that vacancy rate
adjustment was required in this context, see Menlo's Ex. 1 at D-5 to D-6 (using a "vacancy
and collection loss factor of 7.5%," without examination of why the lessee and lessor might
not themselves have taken neighborhood vacancy rates into account in their bargaining,
thus moving the lease toward market value, and without any further analysis of the discount
No. 19AP-316                                                                              9

rationale in this particular context). We find nothing on this record that compelled the BTA
to adopt the appraisal's bottom line to the exclusion of the sale price evidence.
       {¶ 24} This does not appear to be a case like GC Net Lease where the BTA deemed a
proffered appraisal not relevant, 2018-Ohio-3856 at ¶ 9, or that decision's precursor,
Westerville City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 154 Ohio St.3d 308,
2018-Ohio-3855, ¶ 1, 13, which underscored that the BTA had acted "without considering
the appraisal offered" and which emphasized that "no threshold showing is required
before a tax tribunal must give full consideration to appraisal evidence."
Rather, the BTA here did review the appraisal submitted by Menlo as non-sale evidence.
The BTA offered a reasoned explanation for its disagreement with the appraisal's
conclusions, and it found that the rebuttable presumption of true fee simple value created
by the arms-length sale had not been overcome. On this record and with the minimalist
argument Menlo posits, we are not in a position to find that the evidence the BTA weighed
was not supported by the record, or to say that the BTA refused to consider the proffered
appraisal, or to conclude that the BTA's determination was unreasonable or unlawful.
       {¶ 25} The BTA professed itself open to considering "whether the lease was at
market terms" and to taking into account factors "including the creditworthiness of the
tenant" in determining whether the sale amount "did not reflect the property's
unencumbered fee simple value." April 15, 2019 BTA Decision and Order at 2-3. But Menlo
didn't really make that case, and its limited argument from background vacancy rates did
not provide a sufficiently powerful lease-specific rationale that the BTA was required on
this record to set aside the presumptive accuracy of the recent sale price as reflecting the
property's true value as if unencumbered. And the BTA's own assessment of other lease
and sale evidence does not show its conclusion to have been unreasonable. We overrule
Menlo's two assignments of error and affirm the decision of the Board of Tax Appeals.
                                                                        Judgment affirmed.
                                DORRIAN, J., concurs.
                          SADLER, J., concurs in judgment only.
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