[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Rite Aid of Ohio, Inc. v. Washington Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-371.]




                                        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. 2016-OHIO-371
   RITE AID OF OHIO, INC., APPELLEE, v. WASHINGTON COUNTY BOARD OF
                           REVISION ET AL., APPELLANTS.
  [Until this opinion appears in the Ohio Official Reports advance sheets, it
   may be cited as Rite Aid of Ohio, Inc. v. Washington Cty. Bd. of Revision,
                         Slip Opinion No. 2016-Ohio-371.]
Taxation—Real-property valuation—Because a long-term lease affects sale price
        and value, the sale price of a leased-fee comparable should be adjusted
        when the subject property has no lease—Special-purpose doctrine not
        applicable—Decision of the Board of Tax Appeals affirmed.
   (No. 2014-0828—Submitted August 11, 2015—Decided February 4, 2016.)
              APPEAL from the Board of Tax Appeals, No. 2011-1760.
                               ____________________
        Per Curiam.
        {¶ 1} This real-property-valuation case concerns the tax-year-2010
valuation of multiple parcels that together constitute a Rite Aid drugstore and its
parking lot in Marietta. In that sexennial reappraisal year, the Washington County
                              SUPREME COURT OF OHIO




Auditor, an appellant here, determined a value of approximately $3,319,000 for
the store.    Appellee, Rite Aid of Ohio, Inc., filed a complaint before the
Washington County Board of Revision (“BOR”), also an appellant here, and
presented an opinion seeking a reduction, but the BOR retained the auditor’s
valuation. On appeal at the Board of Tax Appeals (“BTA”), Rite Aid and the
county presented competing appraisals. The BTA adopted Rite Aid’s appraisal,
and the county has appealed.
       {¶ 2} The county argues that our decision in Meijer Stores Ltd.
Partnership v. Franklin Cty. Bd. of Revision, 122 Ohio St.3d 447, 2009-Ohio-
3479, 912 N.E.2d 560, requires the use of the kind of comparables that the
county’s appraiser relied upon. We disagree, and we therefore affirm the decision
of the BTA.
                              FACTUAL BACKGROUND
       {¶ 3} The property at issue consists of 1.13 acres in downtown Marietta
that are improved with an 11,052-square-foot building constructed in 1999.
According to Rite Aid’s complaint, the auditor determined a total fair-market
value for the parcels of approximately $3,319,000; Rite Aid sought a reduction to
$1,396,920. The BOR held a hearing on May 24, 2011. Rite Aid’s attorney
appeared on behalf of the property owner; the board of education was not
represented at the hearing.
       {¶ 4} At the BOR hearing, Rite Aid’s attorney presented a summary of
information developed by a contractor, International Appraisals, for Rite Aid,
showing sale comparables and rent comparables in the geographic region. The
attorney explicitly disavowed providing an appraisal in a formal sense and also
stated that the contractor was not able to find any drugstore sales in the area
considered. The BOR’s consultant recommended no change in property value,
and the BOR adopted that recommendation on June 15, 2011.




                                        2
                               January Term, 2016




                The competing appraisals and theories at the BTA
       {¶ 5} Rite Aid appealed to the BTA, which held a hearing on June 12,
2013. At the BTA hearing, Rite Aid presented an appraisal report and testimony
by Geoffrey Hatcher, MAI. The county presented its own appraisal report and
testimony by Karen Blosser, MAI.
       {¶ 6} Both appraisers found the cost approach inapplicable, primarily
because the building was already ten years old as of the lien date. Blosser stated
as well that she did not have sufficient data to compute the obsolescence
deduction in light of the economic recession.
       {¶ 7} The competing statements of counsel at the opening of the BTA
hearing reflect the different approaches taken by the appraisers in the light of
differing understandings of the law of property-tax valuation.      The owner’s
counsel summarized its appraiser’s approach as one that evaluated the Rite Aid
property by “look[ing] at comparable properties both for sale and for lease in the
general geographic area of the subject property,” but not just as a drugstore,
whereas the county’s appraisal “looked at only drugstores for their * * *
comparables scattered around the State of Ohio.”
       {¶ 8} The county’s counsel did not contest her opposing counsel’s
characterization of her own appraiser’s evidence; indeed, she countered by
stating, “[T]he most competent and probative evidence of value is going to be
presented through the appraisal of Karen Blosser, our appraiser, in which she
appraises the property as it actually existed on the tax lien date as a Rite Aid.”
(Emphasis added.) In other words, the county posits a valuation in terms of
continued use by Rite Aid even after a putative sale, presumably with the
drugstore continuing as lessee under a long-term lease. As counsel stated, this
does resemble the existing use as of the lien date; but it also differs from the
manner in which the property was held on the lien date because this property—
unlike all of Blosser’s comparables—was not subject to a lease.




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                             SUPREME COURT OF OHIO




       {¶ 9} True to counsel’s description, Rite Aid’s appraiser, Hatcher, had
selected six sale comparables—general retail rather than drugstores—with three
located in Zanesville, one in Nelsonville, one in Parkersburg, West Virginia (just
across the Ohio River, near Marietta), and one in Vienna, West Virginia. These
stores ranged from $59.87 per square foot to $103.26 per square foot in sale price,
and Hatcher settled (after adjustments for building size) on $100 per square foot
for the subject property. Hatcher did not completely ignore leased properties: one
of his comparables was a Family Dollar that was subject to a lease, for which
circumstance Hatcher made no adjustment, on account of lack of information.
       {¶ 10} By contrast, Blosser selected five sale comparables, all drugstores,
all geographically distant. Two were Walgreens (one in Canton, one in Medina),
one was a former Rite Aid (in Columbus on Bethel Road), and two were Dayton-
area stores: a current Rite Aid in Englewood and a CVS in Dayton. All were
apparently encumbered by leases at the time of sale—in other words, they were
sold subject to long-term leases. The leases were said to be “at approximately
market terms.” The appraisal report then states: “As the subject is being valued
based upon market terms, no adjustments were required.” (Emphasis added.)
       {¶ 11} At the BTA hearing, Hatcher testified that he had looked at sales of
drugstores but that “most of them were sale leaseback transactions.” And most
involved CVS and Walgreens, which were “higher credit rated tenants” than Rite
Aid.
       {¶ 12} Hatcher also testified to two matters relating to the competing
appraisal theories of the parties. First, he testified that nothing about the subject
parcel and building made it a special-purpose facility usable only for a retail
drugstore and that if it were sold, it would likely go on the market for general
retail purposes. Second, he distinguished between the leased-fee market and the
market for owner-occupied properties like the subject property.




                                         4
                                     January Term, 2016




         {¶ 13} Both appraisers also performed an income-approach valuation, for
which they utilized rent comparables. In this regard, Hatcher looked at numerous
leased properties within the Marietta and Parkersburg area, surveying the general
lease market, and obtaining lease information from shopping malls’ anchor and
in-line stores. Hatcher also collected information on Rite Aid store leases as a
reference, but relied on the general retail leases. He selected a rent of $12 per
square foot based on its being at the upper end of the general lease market.1 After
accounting for vacancy and collection loss and expenses and extracting a
capitalization rate, Hatcher arrived at an income-approach valuation of
$1,180,000.
         {¶ 14} For her part, Blosser based her market-rent calculation on her
extensive leased-fee study of first-generation drugstores; on that basis, she posited
market rent of $21 per square foot (compared to $12 per square foot in Hatcher’s
appraisal). Based again on the leased-fee analysis, a low 5 percent vacancy and
collection loss was applied (compared to 10 percent by Hatcher).                        Blosser’s
capitalization rate was 8.07 percent (compared to Hatcher’s 9.5 percent).
Blosser’s income-approach valuation was $2,600,000.
         {¶ 15} Hatcher reconciled his sales comparison approach ($1,115,000)
with his income approach ($1,180,000) to arrive at a value of $1,150,000 for the
drugstore property at issue. Blosser reconciled her sales-comparison ($2,200,000)
and income methods ($2,600,000) to a value of $2,400,000. The disparity of
valuations is striking: Blosser’s valuation is more than twice that of Hatcher’s.
                                      The BTA’s decision
         {¶ 16} The BTA’s analysis of the appraisals is terse. The board drew the
contrast between Hatcher’s general-market survey versus Blosser’s focus on
leased drugstores. The BTA found “Hatcher’s sale and lease comparables [to be]

1
 The average rent for the general retail leases was $10.16 per square foot; the average rent for the
Rite Aid drugstore leases was $12.62 per square foot.




                                                 5
                               SUPREME COURT OF OHIO




more comparable to the subject property,” with the result that the board found his
valuation more persuasive. BTA No. 2011-1760, 2014 WL 2708165, *1 (Apr. 22,
2014). In footnotes, the BTA opined that Blosser’s comparables were drawn from
larger urban areas of Ohio and, as a premise for concluding that Hatcher’s
appraisal was more persuasive, expressed its view that use of leased-fee
comparables such as those Blosser relied upon, while potentially appropriate, was
not necessary.     The BTA adopted the Hatcher appraisal as the value of the
property.
        {¶ 17} The county has appealed, and we now affirm.
AS A GENERAL RULE, THE SALE PRICES OF LEASED-FEE PROPERTIES SHOULD BE
  ADJUSTED WHEN USED TO DETERMINE THE VALUE OF AN UNLEASED SUBJECT

        {¶ 18} The county first emphasizes the doctrine that a sale price of
property encumbered with a long-term lease constitutes the value of the property
without adjustment for the effect of the lease on the price. See Cummins Property
Servs., L.L.C. v. Franklin Cty. Bd. of Revision, 117 Ohio St.3d 516, 2008-Ohio-
1473, 885 N.E.2d 222, ¶ 16-18 (“the arm’s-length sale price of a legal fee interest
should not be adjusted on account of the mere existence of an encumbrance”);
AEI Net Lease Income & Growth Fund v. Erie Cty. Bd. of Revision, 119 Ohio
St.3d 563, 2008-Ohio-5203, 895 N.E.2d 830, ¶ 17 (elevated sale price attributable
to above-market lease payments resulting from an earlier sale-leaseback
transaction not required to be adjusted).2
        {¶ 19} The county uses that case law, which speaks to determining the
value of property encumbered by a lease, as support for a very different



2
  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. See 2012 Am.Sub.H.B. No. 487, further amended by 2012
Am.Sub.H.B. No. 510. A different rule therefore applies today, but the rule articulated in
Cummins would be applicable to a 2010 valuation.




                                             6
                                 January Term, 2016




proposition: that in determining the value of an unencumbered parcel of realty,
the sale price of encumbered parcels should not be adjusted.
       {¶ 20} We find this argument to be illogical on its face. Precisely because
the lease affects the sale price and value, the leased-fee comparable ought to be
adjusted when the subject property has no lease; the adjustment would remove the
effect of the lease on the sale price so that the sale can indicate what the
unencumbered subject property would sell for. Steak ‘n Shake, Inc. v. Warren Cty
Bd. of Revision, ___ Ohio St.3d ___, 2015-Ohio-4836, ___ N.E.3d ___, ¶ 36.
       {¶ 21} The rent in a build-to-suit drugstore is often above market, which
will elevate its sale price. See, e.g., Rhodes v. Hamilton Cty. Bd. of Revision, 117
Ohio St.3d 532, 2008-Ohio-1595, 885 N.E.2d 236, ¶ 3, 5-6 (sale price of build-to-
suit drugstore with admittedly above-market rent was found to be the value of the
property). To the extent that building costs, by being included in elevated lease
payments, have been incorporated into the value of the realty, an adjustment
would need to be made to determine the value of a different drugstore property
that was not so encumbered.
       {¶ 22} That is the general rule. Unless an exception to that rule applies,
the rule furnishes a strong reason to affirm the decision of the BTA.
  UNDER OHIO LAW, EXCHANGE VALUE IS THE RULE AND USE VALUATION IS A
                         LIMITED EXCEPTION TO THE RULE

       {¶ 23} The proper analysis of this appeal calls for a recapitulation of the
“first principles” of valuing property for tax purposes in this state.
       {¶ 24} As a general matter, the Ohio Constitution provides, “Land and
improvements thereon shall be taxed by uniform rule according to value * * *.”
Value in the context of ad valorem taxation of property is defined in terms of the
exchange value rather than the current-use value. The general rule is as follows:




                                           7
                              SUPREME COURT OF OHIO




                 In the last analysis the value or true value in money of any
       property is the amount for which that property would sell on the
       open market by a willing seller to a willing buyer. In essence, the
       value of property is the amount of money for which it may be
       exchanged, i.e., the sales price.


State ex rel. Park Invest. Co. v. Bd. of Tax Appeals, 175 Ohio St. 410, 412, 195
N.E.2d 908 (1964).
       {¶ 25} Two corollaries were drawn by the court in Park Invest. Co.: first,
that a recent, arm’s-length sale price “will usually determine the monetary value
of the property” and second, that absent such a sale price, an appraisal indicates
value when it “determine[s] the amount which such property should bring if sold
on the open market.” Id.
       {¶ 26} Indeed, we have applied these principles as a constitutional
limitation on the legislative power to define property value. State ex rel. Park
Invest. Co. v. Bd. of Tax Appeals, 32 Ohio St.2d 28, 32-33, 289 N.E.2d 579
(1972). During the course of litigation following our 1964 Park Invest. Co.
opinion, the legislature in 1972 enacted Am.Sub.S.B. No. 455, which amended
R.C. 5715.01 to impose the following requirement:


                 Such true value shall take into consideration its current use
       without regard to neighborhood land use of a more intensive
       nature.     The rule to be adopted shall have standards for the
       determination of true value which will preclude the use of factors
       or circumstances of a speculative nature.


134 Ohio Laws, Part I, 868.




                                           8
                               January Term, 2016




       {¶ 27} In our 1972 Park Invest. Co. opinion, we rejected “the statutory
provision establishing the current use of real property as the basis for valuation
pursuant to a uniform tax assessment,” predicating our holding on our
interpretation of the constitutional term “value” in our 1964 Park Invest. Co.
opinion:


               Since the current use method of evaluation excludes,
       among other factors, location and speculative value which
       comprise market value, such current use method cannot be made
       the basis for valuation of real property for tax assessment purposes,
       and that portion of Amended Substitute Senate Bill No. 455
       making provision for such method of valuation is invalid, as being
       contrary to Section 2, Article XII of the Ohio Constitution, which
       enjoins that “land and improvements thereon shall be taxed by
       uniform rule according to value.”


32 Ohio St.2d at 32-33.
       {¶ 28} But the rule of market-exchange valuation is not a rule without
exception. For one thing, the state constitution itself expressly permits farmland
to be valued for tax purposes according to its current agricultural use rather than
according to its highest and best value in the market. Ohio Constitution, Article
II, Section 36; see also, e.g., Maralgate, L.L.C. v. Greene Cty. Bd. of Revision,
130 Ohio St.3d 316, 2011-Ohio-5448, 958 N.E.2d 153, ¶ 13.
       {¶ 29} We have recognized another permissible example of use valuation.
The lead case is Dinner Bell Meats, Inc. v. Cuyahoga Cty. Bd. of Revision, 12
Ohio St.3d 270, 466 N.E.2d 909 (1984). In Dinner Bell Meats, two competing
appraisals employed differing cost approaches based on their respective findings
that the property was “special purpose” in nature. The court concluded that “in




                                        9
                             SUPREME COURT OF OHIO




utilizing the ‘cost approach’ for a ‘special purpose’ building,” the appraiser
“simply considered the utility of the properties in conjunction with the highest and
best use of the meatpacking facility.” Id. at 272. In holding that the approach
was a proper cost approach and not a prohibited “current use” appraisal, the court
acknowledged the general principle that “ ‘the special purpose exception is
applied to a building in good condition being used currently and for the
foreseeable future for the unique purpose for which it was built,’ ” a doctrine
necessary to prevent “the owner of a distinctive, but yet highly useful, building”
from “escap[ing] full property tax liability.” Id., quoting Fed. Res. Bank of
Minneapolis v. State, 313 N.W.2d 619, 623 (Minn.1981).
        {¶ 30} Later, in Meijer, Inc. v. Montgomery Cty. Bd. of Revision, 75 Ohio
St.3d 181, 661 N.E.2d 1056 (1996), we affirmed a BTA decision over arguments
similar to those advanced and rejected in Dinner Bell Meats. In the context of
resolving a battle of appraisals, the BTA in Meijer, Inc. declined to adopt the
larger amount of obsolescence found by the owner’s appraiser. The BTA found
“nothing about the present property [that was] obsolete or useless to the owner
due to changing business conditions.” Meijer, Inc. v. Montgomery Cty. Bd. of
Revision, BTA Nos. 93-M-731, 93-M-732, and 93-M-733, 1995 WL 59106, *11
(Feb. 8, 1995). Indeed, “[t]he owner, by purchasing the land and constructing the
building, evidences a market need for such a property. Therefore the costs of
purchase and construction evidence that a prospective purchaser was willing to
pay at least the costs of the property as newly constructed.” Id. at *12; see also
Oakwood Club v. Cuyahoga Cty. Bd. of Revision, 70 Ohio St.3d 241, 638 N.E.2d
547 (1994) (invoking Dinner Bell Meats to overrule the property owner’s
contention that the county’s appraiser had performed a value-in-use analysis for
its golf-course facility).
        {¶ 31} In both Dinner Bell Meats and Oakwood Club, we disclaimed that
use valuation was being performed. In Dinner Bell Meats, we said, “The record




                                        10
                               January Term, 2016




supports the conclusion that Kaplan’s report was a proper ‘cost approach’
appraisal, not a ‘current use appraisal as proscribed under the Park Investment Co.
series of cases.” 12 Ohio St.2d at 272. But in 2009, we acknowledged that those
earlier cases did embody a type of use valuation. Meijer Stores, 122 Ohio St.3d
447, 2009-Ohio-3479, 912 N.E.2d 560, at ¶ 24 (“we have also held that the
constitutional prohibition does not bar consideration of current-use value in the
context of the ‘special-purpose property’ doctrine”).
       {¶ 32} The county pins its appeal in this case on applying our Meijer
Stores opinion from 2009. We hold, however, that Meijer Stores has not been
shown to be applicable.
THE SPECIAL-PURPOSE DOCTRINE, WHICH WAS APPLIED IN THE MEIJER STORES
             CASE, HAS NOT BEEN SHOWN TO BE APPLICABLE HERE

       {¶ 33} As noted, the county relies on our 2009 Meijer Stores opinion, but
that reliance is unavailing on this record.     In Meijer Stores, the competing
appraisals formed the basis for determining that the special-purpose doctrine
applied, which in turn justified a use valuation of the property. The present case
does not present the same kind of evidence at all.
       {¶ 34} One crucial element in determining the value of property in the
overall market lies in the concept of “highest and best use.” “Highest and best
use,” according to the International Association of Assessing Officers (“IAAO”),
“is that use which will generate the highest net return to the property over a
reasonable period of time.”      IAAO, Property Assessment Valuation 31 (2d
Ed.1996). Valuing a property at its highest and best use means identifying the
“reasonably probable and legal use of vacant land or an improved property that is
legally permissible, physically possible, appropriately supported, financially
feasible, and that results in the highest value.” (Emphasis added.) Appraisal
Institute, The Appraisal of Real Estate 278 (13th Ed.2008).




                                        11
                             SUPREME COURT OF OHIO




       {¶ 35} Highest and best use of the improvements to the land will usually
be expressed in terms of the general type of use to be made of such property. In
this case for example, a “retail store” might be the highest and best use, and since
it is currently in that use, the appraisal report might say: “continued use as a retail
store.” That is in essence what both appraisal reports say in this case. By
contrast, in the special-purpose situation one would expect to see: “continued use
by the current occupant in its ongoing business.”
       {¶ 36} Meijer Stores illustrates the contrast: because purchasers in the
real-estate market might not be able to use the massive facility (a 190,000-square-
foot store plus other improvements) just recently built by Meijer to its own
particular specifications, the building was not highly marketable—from a cost
valuation standpoint, it suffered immediate economic or external obsolescence.
And that was how the property owner’s appraiser viewed the property.               By
contrast, the board of education’s appraiser performed a type of use valuation by
determining “market rent” by positing Meijer as the continuing tenant, and he
used build-to-suit properties subject to leases as part of determining what the
market rent should be.
       {¶ 37} Quite simply, the 11,000-square-foot drugstore at issue in this case
is not a likely candidate for special-purpose treatment (compare the 190,000-
square-foot store in Meijer Stores).      Indeed, the appraiser, Hatcher, testified
against the applicability of the special-purpose doctrine here, and the record
supports his assertion. It follows that the BTA was justified in rejecting the
Blosser appraisal.
       {¶ 38} In the context of the present record, the county argues that Meijer
Stores is applicable but ignores a case decided a mere month and a half earlier:
Target Corp. v. Greene Cty. Bd. of Revision, 122 Ohio St.3d 142, 2009-Ohio-
2492, 909 N.E.2d 605. In Target, the BTA adopted a value based on the opinion
of the owner’s appraiser, Lorms—the appraiser whose valuation was rejected in




                                          12
                                 January Term, 2016




Meijer Stores. In Target (in contrast with the Meijer Stores case), the county
presented no appraisal in support of its higher valuation at the BTA.
          {¶ 39} Without evidence of its own, the county in Target relied on a two-
pronged legal argument. First, that “the BTA should have used data from the
first-generation sale prices and rentals rather than second-generation examples.”
Target at ¶ 12. The court affirmed the BTA’s rejection of that argument based on
the lack of evidence of such first-generation properties.
          {¶ 40} Second, the county in Target cited our 1996 Meijer, Inc. opinion as
authority that the type of obsolescence found by the owner’s appraiser should not
be accepted as valid as a matter of law. This point is directly relevant here: in
Target, we rejected the county’s argument because the result in Meijer, Inc.
“implicates the special-purpose-property doctrine that we articulated in Dinner
Bell Meats.”      Quite simply, the absence of evidence supporting the special-
purpose doctrine constituted our reason for affirming the BTA’s decision in
Target.
          {¶ 41} This appeal is more akin to Target than to Meijer Stores. To be
sure, the present case does differ from Target in that here, the county did present
an appraisal—the Blosser appraisal. But the BTA opted to use the competing
appraisal for stated reasons, and the Blosser appraisal in the context of the entire
record lacks the element that would commend its approach under settled law:
namely, there is no finding that the property qualifies for use valuation under the
special-purpose doctrine.      Moreover, an 11,000-square-foot drugstore is an
unlikely candidate for such treatment.
          {¶ 42} Because there is no evidentiary basis upon which to apply the
special-purpose doctrine and engage in use valuation here, Meijer Stores does not
supply a legal reason for reversing the BTA’s decision.
                                    CONCLUSION
          {¶ 43} For the foregoing reasons, we affirm the decision of the BTA.




                                          13
                           SUPREME COURT OF OHIO




                                                          Decision affirmed.
       O’CONNOR, C.J., and PFEIFER, O’DONNELL, LANZINGER, KENNEDY,
FRENCH, and O’NEILL, JJ., concur.
                             _________________
       Stephen Swaim, for appellee.
       Rich & Gillis Law Group, L.L.C., Kelley A. Gorry, and James R. Gorry,
for appellants.
                             _________________




                                      14
