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Value of an assisted-living facility for property tax purposes.

HCP EMOH (Owner) owns a seven-acre property improved with an 89-unit assisted-living facility. The units range in size from 286 to 363 square feet, and each unit contains a kitchenette, a shower, and toilet facilities. Common areas make up roughly half the facility's space, including lounges, multipurpose rooms, dining rooms, and a commercial kitchen. The facility provides numerous services, including meals, medical assistance, and recreational activities.

The county auditor valued the property at $6 million, a value with which the Owner disagreed. At the Board of Review, the Owner presented an analysis using the sales comparison and income approaches to value based on apartment data, arriving at a valuation of $2.9 million. The Board of Review retained the auditor's valuation, and the Owner appealed to the Board of Tax Appeals (BTA).

Before the BTA, the Owner presented an appraisal report opining that the property's highest and best use as improved was as continued multifamily use. He applied both a sales comparison approach and an income approach, both drawing from apartment data. He justified his reliance on apartment data rather than assisted-living facility data based on what he viewed as the distortive effects that the facility's services have on the value of the realty. Including the value of the services in the analysis would generate rental rates far above what would be sustainable in the market. He concluded to a value of $3.55 million.

The county's appraiser valued the property as an assisted-living facility. In his income approach, his primary criterion was to find comparable properties offering assisted-living services. He began by computing a net operating income (NOI) for the going concern, then sought to isolate the cash flow to the real estate using a "lease coverage analysis." To perform this analysis, the county's appraiser evaluated nine market transactions, identifying the NOI per unit for the going concern and the rent per unit under the terms of an absolute net lease for each. After applying the resulting ratio to his estimate of the NOI for the subject's going concern, he concluded to a value of $9.1 million for the real estate.

The BTA adopted the county's appraisal, and the Owner appealed to the Ohio Supreme Court. The Owner first argued that prior case law required reliance on apartment comparables when valuing an assisted-living facility. In that earlier case, the court endorsed the use of apartment buildings as a point of comparison when valuing the real property of a congregate-care facility. But those decisions did not require appraisers to rely on apartment comparables when valuing an assisted-living facility; rather, those decisions permitted reliance on such comparables. Accordingly, the BTA did not err simply by adopting an appraisal that eschewed reliance on apartment comparables.

The Owner also argued that the county's appraiser used unreliable data that led him to value the business rather than the realty. According to the Owner, the crux of the problem plaguing the county's appraisal stemmed from the characteristics of the net leases the appraiser used to calculate his lease-coverage ratio. In the Owner's view, those leases reflected business value, not realty value; by relying on those leases, the county's appraiser failed to separate business value from realty value.

In earlier cases, the court had faulted a method of valuation that factored in a sales-per-square-foot metric because it conflated the value of the business with that of the realty. The court said the net leases from which the county's appraiser crafted his lease-coverage ratio were problematic in the same way that the sales-per-square-foot metric was. Net leases reflect the contracting parties' expectations about what an operating business could achieve, necessarily factoring business value into the lease payments.

Because the county's appraiser crafted his lease-coverage ratio from flawed inputs, the court held, it follows that any subsequent calculations built on the ratio are flawed too. Because his analysis was tainted, the court did not address as a general matter whether the lease-coverage analysis was even a methodologically sound way to achieve a real estate-only valuation. Thus, the court found the BTA erred in adopting the county's appraisal but stayed within the bounds of its discretion in rejecting the Owner's appraisal. The court remanded the case to the BTA to determine whether there was sufficient evidence to enable an independent valuation.


Washington County Bd. of Revision

Supreme Court of Ohio

November 30, 2018

2018 WL 6333010

Benjamin A. Blair, JD, is a partner in the Indianapolis office of the international law firm of Faegre Baker Daniels LLP, where his practice focuses on state and local tax litigation for clients across the United States. A frequent speaker and author on taxation and valuation issues, Blair holds a juris doctor from the Indiana University Maurer School of Law, where he also serves as an adjunct professor. Contact:
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Title Annotation:Recent Court Decisions on Real Estate and Valuation
Author:Blair, Benjamin A.
Publication:Appraisal Journal
Date:Mar 22, 2019
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