February 8, 2020
As we have written about previously, real estate transfers involving the sale of a limited liability company or other entity that owns the underlying real estate are under increasing scrutiny by Ohio’s county auditors and school boards. Now, Ohio’s Supreme Court has declared that these sales are “a contrivance for accomplishing the sale of commercial real estate.”
In a decision that will have broad implications on Ohio’s property tax law, Columbus City Schools Board of Education v. Franklin County Board of Revision, Slip Opinion 2020-Ohio-353, an LLC that owned a 264-unit apartment building was sold but the contract documents indicated that the transaction was actually the sale of real estate, distinguishing this case from prior cases in which the Court had affirmed the Board of Tax Appeals’ treatment of such sales as the sale of a business rather than the sale of real estate. In those prior cases, the transfer of title to real estate did not appear to be the primary factor in the transaction.
“In stark contrast, the BTA in this case confronted a document labeled by the parties as “Sale of Palmer House on the Boulevard 4121 Palmer Park Circle East New Albany, Ohio” and “Purchase and Sale Agreement.” That is, the contract identifies itself as a purchase agreement for the real estate at issue. Beyond its cover page, the contract takes the classic form of a purchase agreement for commercial real estate by identifying as the subject matter of the transaction the specific real property along with categories of personal property appurtenant to the commercial operation of the real estate. Finally, this particular contract includes an explicit provision setting forth an optional method for consummating the deal as a transfer of corporate ownership rather than a conveyance of real estate from the seller to the buyer.
We conclude that the documentation in this case made it reasonable for the BTA to find that this sale, unlike those in the earlier cases, reflected the parties’ intent to sell and purchase income-producing real estate and supported the BTA’s finding that the parties’ transfer of corporate ownership constituted a contrivance for accomplishing the sale of commercial real estate.”
Decision, at ¶¶ 38-39.
The prior cases involved an existing shareholder buying out other shareholders – indicating that such a sale was not “arm’s length” and that it was truly the business that was being purchased rather than simply the underlying real estate; and sales where the conveyances did not indicate that the real estate was truly the asset being acquired, rather than an actual going concern.
As a result finding that the transfer was a sale of real estate, the Board of Tax Appeals then treated the sale price as the “best evidence of value” of the real estate, thereby shifting the burden to the property owner to defeat the sale price value. Ultimately resulting in an increase of value from $16 million to over $34 million.
As school districts and county auditors become more aggressive in identifying membership interest transfers, and treating them as real estate sales, investors would be wise to review their contract documents with an appreciation for the fact that they may end up as evidence in a valuation dispute.