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Ohio Property Tax Updates

UPDATED December 2019

Assisted-Living Facility Valuation - Apartment Comparables vs. Lease-Coverage Analysis

To properly value an assisted-living facility for property tax purposes, an appraiser must separate the facility’s business value from the value of the real estate.  To isolate the value of the real estate, Ohio appraisers have relied on the use of conventional apartment comparables in their approaches to value.  Ohio case law supports this approach but does not require it.

In November of 2018, the Supreme Court of Ohio (SCO) addressed the tax year 2014 valuation of an 89-unit assisted-living facility in HCP EMOH, L.L.C. v. Washington BOR.[1]

Competing appraisals were presented at the Board of Tax Appeals (BTA).  The taxpayer appraiser used apartment comparables in his sales comparison approach.  The county appraiser used an income approach with assisted-living-facility comparables.  The county appraiser’s approach relied on a lease coverage analysis that allocated a portion of each business’ net operating income to the going concern attributed to the real estate.  The BTA rejected the taxpayer appraisal, finding its adjustments inadequate.  The BTA found the county appraiser’s comparables superior to the taxpayer’s apartment comparables because they more closely resembled the living units found in a skilled nursing facility.  It adopted the value concluded by the appraiser for the county.

On appeal, the Court held the BTA erred in adopting the county appraisal value because the leases in the report’s income approach (which relied on a lease-coverage ratio) were all based on the net operating income of the business of each comparable.  Citing Higbee,[2] the Court noted “[i]f it is the real property that is being valued, its valuation cannot be made to vary depending on the success or lack thereof of the business located on the property.” 

The lease-coverage ratio in the county appraiser’s income approach was created using only comparables with net leases based on a percentage of the net operating income of the business operating at the property.  By doing so, the appraiser failed to separate the business value from the realty value.  The Court found, because the ratio was created from flawed inputs (the comparable leases with rents based on income generated by the businesses), any calculations using the ratio were likewise flawed.  Having rejected this analysis, the Court found it did not need to address the use of a lease-coverage analysis to value real property, generally.  The BTA retained the original value on remand, finding no evidence with which to determine value. 

The taxpayer also filed a complaint for the same property for a subsequent tax year.[3]  This time, the taxpayer appraiser broadened his comparables to include assisted-living properties while also adding a cost approach.  The county appraiser’s approach was identical to his analysis in the prior case.  The taxpayer’s appraisal was found to be competent and probative, was noted to be the best indication of value in the record and was adopted.  The BTA remarked that the Court appeared to disfavor the lease-coverage analysis. 

Using apartment comparables to properly value an assisted-living facility is recommended.  The use of such comparables isolates the value of real estate and has been relied upon by taxing authorities in Ohio for decades.  While it may be possible to perform a lease-coverage analysis that successfully separates the business value of a property from its real estate value, no caselaw could be located that assigned value under this approach. 

[1] HCP EMOH, L.L.C. v. Washington Cty. Bd. of Revision, 155 Ohio St.3d 378, 2018-Ohio-4750.

[2] Higbee Co. v. Cuyahoga Cty. Bd. of Revision, 107 Ohio St.3d 325, 2006-Ohio-2

[3] HCP EMOH LLC v. Wash. Cty. Bd. of Revision, 2019 Ohio Tax LEXIS 2437

Kristopher Nicoloff
Siegel Jennings Co., L.P.A.
American Property Tax Counsel (APTC)

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