[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Notestine Manor, Inc. v. Logan Cty. Bd. of Revision, Slip Opinion No. 2018-Ohio-2.]




                                        NOTICE
     This slip opinion is subject to formal revision before it is published in an
     advance sheet of the Ohio Official Reports. Readers are requested to
     promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
     South Front Street, Columbus, Ohio 43215, of any typographical or other
     formal errors in the opinion, in order that corrections may be made before
     the opinion is published.



                            Slip Opinion No. 2018-Ohio-2
 NOTESTINE MANOR, INC., APPELLEE, v. LOGAN COUNTY BOARD OF REVISION
                                 ET AL., APPELLANTS.

  [Until this opinion appears in the Ohio Official Reports advance sheets, it
   may be cited as Notestine Manor, Inc. v. Logan Cty. Bd. of Revision, Slip
                             Opinion No. 2018-Ohio-2.]
Taxation—Property—Valuation—Government-subsidized low-income                      housing
        under federal “Section 202” program—Preference for market-rent
        approach over contract-rent approach is presumptive, but not conclusive—
        Valuation method must account for affirmative value of government
        subsidies—Contract-rent approach is appropriate when contract rents do
        not exceed generally available market rents.
   (No. 2015-0791—Submitted October 17, 2017—Decided January 2, 2018.)
              APPEAL from the Board of Tax Appeals, No. 2014-2543.
                               ____________________
                             SUPREME COURT OF OHIO




       Per Curiam.
       {¶ 1} This appeal involves the tax valuation of government-subsidized low-
income housing under the federal Section 202 program. Appellants, the Logan
County auditor and the Logan County Board of Revision (“BOR”) (collectively,
“the county”), valued the property for tax year 2013 at $811,120, but the Board of
Tax Appeals (“BTA”) adopted the opinion of the property owner’s appraiser, who
valued the property at $75,000.
       {¶ 2} On appeal, the county contends that the BTA’s decision is contrary to
our decision in Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision,
151 Ohio St.3d 12, 2017-Ohio-2734, 85 N.E.3d 694, because the BTA improperly
relied upon an appraisal that used below-market contract rents rather than market
rents. The county also calls for us to clarify or overrule Woda Ivy Glen Ltd.
Partnership v. Fayette Cty. Bd. of Revision, 121 Ohio St.3d 175, 2009-Ohio-762,
902 N.E.2d 984. We disagree with the county’s position and therefore affirm the
BTA’s decision.
                          FACTUAL BACKGROUND
       {¶ 3} At issue is an 11-unit residential rental property developed as low-
income housing under Section 202 of the Housing Act of 1959, codified at 12
U.S.C. 1701q. The property is titled to appellee, Notestine Manor, Inc., a nonprofit
corporation with 26 U.S.C. 501(c)(3) status as a charitable institution.
       {¶ 4} Section 202 provides assistance in the form of a “capital advance”
from the United States Department of Housing and Urban Development (“HUD”)
to build rental housing for very low-income elderly individuals.           12 U.S.C.
1701q(c)(1); Charles L. Edson, Affordable Housing—An Intimate History, Journal
of Affordable Hous. & Community Dev.L. 193, 198-199 (Winter 2011).
Notestine’s president, Robert Bender, testified that the construction costs for the
subject property were about $1.5 million, and the federal capital advance was about
$1.3 million.




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                                 January Term, 2018




         {¶ 5} The Section 202 program also provides for a “project rental
assistance” contract, or PRAC, which sets forth the rights and duties of the owner
and HUD with respect to the project. 12 U.S.C. 1701q(c)(2); 24 C.F.R. 891.105.
The rent to be paid by eligible tenants is strictly limited and is tied to the
individual’s income. 12 U.S.C. 1701q(c)(3). The PRAC for Notestine covers all
11 units and requires tenants to be at least 62 years old and have income under 50
percent of the area median income. Bender testified that the rent level dictated by
HUD for Notestine was $407 per month, including utilities, with any overage
payable to HUD. Notestine’s tenants pay up to 30 percent of their adjusted gross
income on rent, with HUD subsidizing any difference.
         {¶ 6} A “Capital Advance Program Use Agreement” and a “Capital
Advance Program Regulatory Agreement” are recorded in the property’s chain of
title.   The agreements detail the overriding control that HUD exercises over
Notestine’s use of the property. The use and/or regulatory agreements provide:
            HUD is “is possessed of an interest in the above described Project such
             that the Owner shall remain seized of the title to said property and
             refrain from transferring, conveying, assigning, leasing, mortgaging,
             pledging, or otherwise encumbering or permitting or suffering any
             transfer, conveyance, assignment, lease, mortgage, pledge or other
             encumbrance of said property or any part thereof without the release of
             said covenants by HUD.”
            The term of the Capital Advance Program Use Agreement is “not less
             than 40 years from June 1, 2013, unless otherwise approved by HUD.”
            Tenancy is limited by Section 202 to low-income elderly tenants.
            No changes in Notestine’s bylaws or articles of incorporation may occur
             without HUD approval, nor can any person associated with Notestine
             have any interest in any of Notestine’s contracts.




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          All project income must be deposited in a reserve fund.
          Rents for Notestine Manor were fixed at $407 per month. Although
           Notestine could petition HUD for a rent increase based on increased
           expenses, HUD would never grant an increase that would show a
           monthly surplus of more than $1,000
                         COURSE OF PROCEEDINGS
       {¶ 7} The auditor valued the property at $811,120 for tax year 2013, which
was a reappraisal year in Logan County. Notestine filed a complaint seeking a
reduction to $165,000. At the BOR hearing, Notestine presented the testimony of
Robert Bender, its president, who stated that the building on the subject property
was roughly 67 percent complete on the tax-lien date. Notestine also presented an
owner’s opinion of value of $165,000. That valuation was based on an income
approach that used actual rent and expenses. The BOR retained the auditor’s value,
and Notestine appealed to the BTA.
       {¶ 8} At the BTA, Notestine presented the appraisal report and testimony
of Cynthia L. Hatton Tepe. Because of the restrictions on the property, Tepe
rejected the cost approach. She also rejected the sales-comparison method, due to
a lack of sales. Tepe performed an income-capitalization approach based on the
actual restricted rents, and she used actual and market-comparable expenses. Tepe
derived a capitalization rate by using the direct-comparison, band-of-investment,
and debt-coverage formula techniques, and applied that rate to a net-operating-
income figure. Tepe took into account the incomplete state of the project on the
lien date by deducting an amount of rent loss after capitalizing the income to
$100,000. That reduction amount was $26,862. Thus, under her income approach,
Tepe concluded that the value of the property was $75,000 as of January 1, 2013,
reflecting a value of $6,818 for each of the 11 units.
       {¶ 9} After reviewing the evidence, the BTA adopted Tepe’s appraisal.
First, the BTA rejected the county’s argument that the use restrictions were not in




                                          4
                                January Term, 2018




place on the lien date. In fact, although the actual rent amount was not finalized
until the PRAC was signed, the use restrictions themselves were recorded on July
26, 2012.
        {¶ 10} Second, the BTA rejected the argument that actual restricted rent
should not be used under Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision, 37
Ohio St.3d 16, 523 N.E.2d 826 (1988), which calls for valuing properties as if
unencumbered. The BTA noted as a crucial distinction that the Section 8 subsidies
at issue for the subject properties in Alliance Towers “resulted in contract rent that
typically exceeded the rents generally available in the market.” BTA No. 2014-
2543, 2015 Ohio Tax LEXIS 2174, *10, citing Alliance Towers, at 21, fn. 4. By
contrast, “[n]othing in the record” in this case “shows that the contract rents exceed
those generally available in the market or that the property benefits from additional
tax incentives.” 2015 Ohio Tax LEXIS 2174, *11. Through this analysis, the BTA
sought to reconcile Alliance Towers with Woda Ivy Glen’s holding that
governmentally imposed use restrictions should be taken into account when valuing
properties subject to those restrictions. Woda Ivy Glen, 121 Ohio St.3d 175, 2009-
Ohio-762, 902 N.E.2d 984, ¶ 23.
        {¶ 11} Third, the BTA rejected the county’s objection to the reduction
determined by the appraiser on account of the incomplete status of the project on
the lien date.
        {¶ 12} Based on its analysis, the BTA adopted the appraiser’s valuation of
$75,000. The county has appealed.
                                    ANALYSIS
                                Standard of review
        {¶ 13} Our review of a legal issue is de novo, not deferential. See Akron
Centre Plaza, L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-
Ohio-5035, 942 N.E.2d 1054, ¶ 10. But if we determine that there was no legal
error, we review the BTA’s decision concerning the weighing of appraisal evidence




                                          5
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under a highly deferential abuse-of-discretion standard. EOP-BP Tower, L.L.C. v.
Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d
686, ¶ 9, 14.
        The BTA properly applied Alliance Towers and Woda Ivy Glen
 1. The case law requires a market-rent approach when federal subsidies would
                               inflate the property’s value
       {¶ 14} Although the county presents six propositions of law, the essence of
the first, second, and sixth propositions may be distilled and summarized as a single
proposition: Because the property at issue constitutes an apartment property built
and operated under the auspices of HUD, the property must be valued with due
regard for market rent and current returns on mortgages and equities. Citing
Alliance Towers, 37 Ohio St.3d 16, 523 N.E.2d 826, paragraph two of the syllabus,
the county argues that the BTA’s adoption of the Tepe appraisal is an error of law,
inasmuch as the appraisal relies on contract rent rather than market rent.
       {¶ 15} At the outset, this argument begs the question of how much “regard
to market rent” is due under the factual circumstances. That inquiry, in turn, calls
for close attention to Alliance Towers, which involved a consolidated disposition
of five BTA appeals involving four different subsidized projects: the Alliance
Towers project, the Sunset Square project, the Murray Commons project, and the
Staunton Commons project. Alliance Towers resulted in a three-justice-plurality
opinion, two syllabus paragraphs that garnered four votes each, and a judgment
split four-to-three on three of the five appeals.
       {¶ 16} The rejection of the county appraiser’s “reversion/shelter valuation
approach” in the two Sunset Square appeals was unanimous, however. That
approach was designed to “take[ ] into account that a willing buyer of subsidized
property will consider all aspects inherent in government financial support by way
of mortgage, contract rental, subsidies and tax savings.” Sunset Square, Ltd. v.
Miami Cty. Bd. of Revision, BTA No. 83-A-451, 1986 Ohio Tax LEXIS 457, *6




                                           6
                                January Term, 2018




(Mar. 27, 1986), rev’d sub nom. Alliance Towers. Because all seven justices voted
to reverse in the Sunset Square appeals, all apparently rejected that approach, and
the three-justice-plurality opinion explained that “tax shelter advantages” constitute
“intangible items” that “do not make the real estate more valuable.” Id. at 23;
accord Woda Ivy Glen, 121 Ohio St.3d 175, 2009-Ohio-762, 902 N.E.2d 984, at
¶ 29, fn. 4 (discerning “ample reason to disregard” the income-tax credits associated
with the low-income-housing tax-credit project at issue, in that the credits “qualify
as intangible interests separable from the real property”).
       {¶ 17} As to the three remaining appeals, the Alliance Towers court split
four-to-three. In those appeals, the distinction between the appraisals turned on use
of the cost approach and the particular way in which competing appraisers
developed an income approach.         The three-justice-plurality opinion broadly
explains that in each appeal “[t]he taxpayers’ appraisers valued the property free
and clear of any encumbrance, whereas the appraisers for the taxing authorities
presented values of the properties as encumbered by the mortgages and restrictions
imposed by the agreements with the federal government.” 37 Ohio St.3d at 22, 523
N.E.2d 826.
       {¶ 18} We explained the significance of Alliance Towers in Woda Ivy Glen
and Columbus City Schools, 151 Ohio St.3d 12, 2017-Ohio-2734, 85 N.E.3d 694.
In Woda Ivy Glen, we considered whether the highest and best use of real estate
should be determined by taking into account the significant tenant and rent
restrictions recorded in the chain of title as prerequisites for the low-income-
housing tax credit (“LIHTC”). We held that the restrictions were governmental
restrictions on land use and that the property should therefore be valued as a low-
income-housing development.
       {¶ 19} Woda Ivy Glen, however, addressed only the proper determination
of highest and best use; it did not involve a conflict between a contract-rent




                                          7
                               SUPREME COURT OF OHIO




appraisal and a market-rent appraisal. It therefore does not control the resolution
of the issue presented here.
       {¶ 20} In Columbus City Schools, we confronted a BTA decision rejecting
a market-rent appraisal of properties subject both to LIHTC and the so-called
Section 8 program subsidies available through 42 U.S.C. 1437f. Despite the
appraisal’s explicit discussion of the subsidies, the BTA found that the appraisal
directly contradicted two principles:      property valuation must disregard the
affirmative value of government subsidies and must take into account use
restrictions on property. BTA No. 2011-714, 2014 Ohio Tax LEXIS 2505 (Apr.
21, 2014), *4, rev’d, 151 Ohio St.3d 12, 2017-Ohio-2734, 85 N.E.3d 694. The first
principle derived from Alliance Towers; the second from Woda Ivy Glen.
       {¶ 21} The BTA opined that by using market rent, the appraiser was
“ignor[ing] the LIHTC restrictive covenant” while also “tak[ing] into account the
value of federal government subsidies.” Id. at *4-5. In reversing, we emphasized
that under Alliance Towers, market rents (instead of contract rents) are used.
Columbus City Schools at ¶ 16. In that way, the “ ‘affirmative value’ ” of
government subsidies is “adjusted out” of the property valuation. Id. at ¶ 17. We
attempted to correct an apparent misreading of Woda Ivy Glen that would uniformly
preclude the use of a market-rent appraisal. Id. at ¶ 19, 22, 24.
  2. The case law does not preclude the use of contract rent for a Section 202
                                        property
       {¶ 22} The BOE now reads Columbus City Schools as setting the opposite
iron rule—that a market-rent approach is required and a contract-rent approach is
precluded in all cases. Although we did state that use of market rents and expenses
constituted a “rule” to be applied when valuing low-income government housing
generally, id. at ¶ 16, 22, the preference for market rent over contract rent is
presumptive, not conclusive.       The guiding principle from Alliance Towers,
articulated in Woda Ivy Glen and reiterated in Columbus City Schools, is that the




                                          8
                                January Term, 2018




valuation method must account for the “affirmative value” of government
subsidies, i.e., the tendency of government subsidies to inflate the value above what
the market would otherwise bear. Woda Ivy Glen, 121 Ohio St.3d 175, 2009-Ohio-
762, 902 N.E.2d 984, ¶ 28, 29; Columbus City Schools, 151 Ohio St.3d 12, 2017-
Ohio-2734, 85 N.E.3d 694, ¶ 17. That “affirmative value should be adjusted out of
the property valuation.” Id. With Section 8 rent subsidies, using market rent
removes the affirmative value of government subsidies because the subsidies tend
to inflate rents above market rent.
        {¶ 23} But the property at issue here, which is in the Section 202 program,
presents a different situation. The rents appear to be minimal, and any federal
subsidization is strictly controlled by rigorous HUD-imposed restrictions on the
accumulation of surpluses. There is no evidence here that any adjustment from
contract rent to market rent would eliminate the “affirmative value” of government
subsidies.
        {¶ 24} In sum, the Alliance Towers premise favoring market rent is that the
Section 8 rent subsidies may elevate rents above the general rental market. But this
case is distinguishable in that, as the BTA held, “[n]othing in the record * * * shows
that the contract rents exceed those generally available in the market or that the
property benefits from additional tax incentives.” BTA No. 2014-2543, 2015 Ohio
Tax LEXIS 2174, *11, citing Alliance Towers, 37 Ohio St.3d at 20, 523 N.E.2d
826, fn. 4.
    The amendments to R.C. 5713.03 do not affect the issue in this appeal
        {¶ 25} R.C. 5713.03 governs the valuation of real estate. Because this case
involves tax year 2013, we apply the version of R.C. 5713.03 found in 2012
Am.Sub.H.B. No. 487 (“H.B. 487”). Terraza 8, L.L.C. v. Franklin Cty. Bd. of
Revision, 150 Ohio St.3d 527, 2017-Ohio-4415, 83 N.E.3d 916, ¶ 18. That version
of the statute calls for the auditor to determine the true value of the “fee simple
estate, as if unencumbered.” Under its fourth proposition of law, the county




                                          9
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contends that the “as if unencumbered” language provides an additional basis for
disregarding the restrictive covenants in valuing the subject property. We conclude
that H.B. 487’s amendment to R.C. 5713.03 was not intended to alter the doctrine
of Woda Ivy Glen.
       {¶ 26} First, it is important to acknowledge what we have already held
concerning the H.B. 487 amendment to R.C. 5713.03. In Terraza 8, we held that
H.B. 487 was intended to “override” Berea City School Dist. Bd. of Edn. v.
Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 269, 2005-Ohio-4979, 834 N.E.2d
782. Terraza 8 at ¶ 26. Berea addressed “whether a property should be valued as
if unencumbered even when it was the subject of a recent arm’s-length sale.”
Terraza 8, ¶ 26-27. Berea held that the sale price from a recent arm’s-length sale
shall be the true value for taxation purposes. Berea at ¶ 13. In Terraza 8, we
decided that under the H.B. 487 amendment, evidence extrinsic to the sale should
be considered when determining whether the sale price was affected by
encumbrances upon the property. Id. at ¶ 27. Under Terraza 8, a sale price of
encumbered property is presumptive, but not conclusive, evidence of the value of
the unencumbered fee-simple estate. Id. at ¶ 32-33. The rebuttable nature of this
presumption opens the door to considering appraisal evidence of the property’s
unencumbered value. It is crucial to note in this context that the encumbrance at
issue in Terraza 8 was a commercial lease, not a governmentally imposed
restriction on the use of the property.
       {¶ 27} Second, we consider whether H.B. 487 additionally intended to
override the doctrine of Woda Ivy Glen, 121 Ohio St.3d 175, 2009-Ohio-762, 902
N.E.2d 984, that governmental use restrictions should be taken into account when
valuing property consisting of federally subsidized low-income housing. The
county notes that H.B. 487 codifies language set forth in paragraph one of the
syllabus of Alliance Towers by requiring the fee-simple estate to be valued as if
unencumbered.     But even at the time that the Alliance Towers syllabus was




                                          10
                                January Term, 2018




formulated, that rule was not without exception. Our case law acknowledged that
zoning restrictions, which can be viewed as a type of encumbrance, should be taken
into account in determining tax value. Porter v. Cuyahoga Cty. Bd. of Revision, 50
Ohio St.2d 307, 364 N.E.2d 261 (1977). See also Appraisal Institute, Dictionary
of Real Estate Appraisal, 76 (6th Ed.2015) (“[a]ny claim or liability that affects or
limits the title to property” is an encumbrance). Similarly, by definition, the
Appraisal Institute regards an appraisal of the “fee simple estate” as calling for a
valuation of the “[a]bsolute ownership unencumbered by any other interest or
estate, subject only to the limitations imposed by the governmental powers of
taxation, eminent domain, police power, and escheat.” (Emphasis added.) Id. at
90. And Ohio’s pre-H.B. 487 case law further embodies the distinction between
private and governmental restrictions by acknowledging that although privately
imposed restrictions are disregarded when applying the Alliance Towers syllabus,
tax valuation should take into account the effect of “limitations caused by
involuntary, governmental actions.” Muirfield Assn., Inc. v. Franklin Cty. Bd. of
Revision, 73 Ohio St.3d 710, 711, 654 N.E.2d 110 (1995).
       {¶ 28} In Woda Ivy Glen, we held that LIHTC restrictions came within the
“governmental actions” acknowledged in Muirfield Assn., even though the LIHTC
restrictions were arguably more voluntary than some other governmental actions.
Id. at ¶ 23-24. We also reconciled taking the LIHTC use restrictions into account
when valuing the property with paragraph two of the syllabus in Alliance Towers,
which addressed the valuation of government-subsidized properties. Id. at ¶ 26-30.
       {¶ 29} Against this case-law background, we do not read H.B. 487’s
enactment of “fee simple as if unencumbered” as reflecting a legislative intent to
supersede the case law’s repeated acknowledgment that the effect of
governmentally imposed restrictions should be taken into account when
determining tax value. More specifically, we do not read the H.B. 487 amendment
to R.C. 5713.03 to override the doctrine of Woda Ivy Glen.




                                         11
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Whether highly restricted low-income-housing properties should have more
       than a nominal tax value is an issue for the legislature to resolve
       {¶ 30} Under its third and fifth propositions of law, the county contends that
the use of a contract-rent income approach in this context effectively forces the
county to extend a local property-tax subsidy to the property at issue, a result that
Ohio law allegedly does not authorize. The county highlights service calls for fire
or police services from the property that the taxes will not cover; and additionally,
the county notes that reduced value of the property shifts taxes to other taxpayers
by altering the reduction factors on outside levies.
       {¶ 31} We have held that despite their essentially nonprofit character and
the charitable-minded motives behind them, Section 202 properties like that at issue
here do not qualify for charitable-use exemption, because their primary use is
residential. NBC-USA Hous., Inc.―Five v. Levin, 125 Ohio St.3d 394, 2010-Ohio-
1553, 928 N.E.2d 715, ¶ 9. In her concurring opinion in NBC-USA, Justice
Lundberg Stratton opined that the Section 202 project should be deemed a
charitable use. Id. at ¶ 23 (Lundberg Stratton, J., concurring). And it is true that a
Section 202 project like the one at issue here is broadly analogous to public housing
in its purpose and function. By contrast, the later-developed Section 8 program
involved private developers in making low-income housing available through the
subsidization of rents to a level the market could bear.          Edson, Affordable
Housing—An Intimate History, at 201.
       {¶ 32} Contrary to the county’s argument, however, Ohio law does not
prohibit applying valuation principles merely because they generate a nominal
value under these circumstances. The county invites us to depart from Woda Ivy
Glen for the purpose of achieving what it considers a more appropriate policy
outcome. We decline this invitation and adhere to our precedent, leaving the policy
considerations to the General Assembly.




                                         12
                                  January Term, 2018




                                    CONCLUSION
          {¶ 33} For the foregoing reasons, we find that the BTA acted reasonably
and lawfully in adopting the Tepe appraisal, and we therefore affirm its decision.
We also deny the county’s motion to remand.
                                                                   Decision affirmed.
          O’CONNOR, C.J., and KENNEDY, FRENCH, O’NEILL, and FISCHER, JJ.,
concur.
          O’DONNELL, J., dissents, with an opinion joined by DEWINE, J.
                                 _________________
          O’DONNELL, J., dissenting.
          {¶ 34} Respectfully, I dissent.
          {¶ 35} R.C. 5713.03 as applicable here required the auditor to determine the
true value of the fee as if the property was unencumbered.              The property
construction costs in this case were approximately $1.5 million, and the auditor
valued the 11-suite subsidized apartment building at $811,120. The error in the
Board of Tax Appeals’ conclusion valuing the property at $75,000 occurred
because it relied on below market contract rents, not market value rents.
          {¶ 36} Accordingly, I would reverse its determination and remand the
matter to the Board of Tax Appeals.
          DEWINE, J., concurs in the foregoing opinion.
                                 _________________
          Vorys, Sater, Seymour & Pease, L.L.P., Karen H. Bauernschmidt, and
Nicholas M.J. Ray, for appellee Notestine Manor, Inc.
          Rich & Gillis Law Group, L.L.C., and Kelley A. Gorry, for appellants.
                                 _________________




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