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Category Archives: Property Tax Valuation

So, the Auditor tells you your property valuation is going up, waaaay up….

Author By Christopher P. FinneyPosted on

Our phones are ringing and email boxes are filling up at Finney Law Firm about notices from County Auditors throughout the state of Ohio about dramatic property tax valuation increases coming with the January 2024 tax bills.

Read this shocking paragraph from an article from Paula Christian at WCPO (Channel 9):

The [Ohio Department of Taxation] recommended a 43% increase in property values in Clermont County and 42% in Butler County. The updates will be reflected in 2024 tax bills, which are sent out early next year and will last for three years until reappraisal.

So, the natural reaction from property owners receiving such notices is that their tax bill (i.e., the amount of taxes they are obligated to pay) will rise a similar amount.  This is not true — not by a long shot — given the intricacies of Ohio property taxation.

How could that be?  We explain:

  • First, the County Auditors throughout Ohio are charged by statute with re-valuing properties in their County every three years (a “Triennial”).  The statutory duty is to value each parcel at its fair market value (in the case of new tax valuations coming in January of next year, that is a January 1, 2023 valuation).
  • In southwest Ohio, January of 2024 will see new valuations for each of Hamilton, Butler, Clermont and Montgomery Counties.  Warren County will have new valuations in January of 2025.
  • It is not the Auditor’s job to show mercy, or to “shade” the fact that the real estate market has changed dramatically since the prior 3-year valuation date (in the case of Counties having new valuation in January of 2024, that would be a January 1, 2020 valuation as a comparison).  They are obligated by statute to value properties fairly (i.e., what a reasonable buyer would pay a reasonable seller for that property).
  • Your property taxes are, very roughly, a result of this formula:

(Tax Valuation * Tax rate) – certain credits = tax bill.

  • Thus, it is natural to assume that to the same degree your valuation rises, so does your tax bill.
  • However, it is much more complicated than that.
    • About 10% of your tax bill is inside millage which does stay at the same tax rate (i.e., it does generate more revenue in direct proportion to your increasing valuation).  But that is a very small part of your tax bill.
    • About 90% of your tax bill is outside millage, which is a result of tax levies that year after year generate a fixed amount of revenue for the levy recipients (depending on the district, schools are about 55-70% of your tax bill).  For example, a specific levy passed by the voters years ago may generate a fixed $40,000,000 in taxes each year (regardless of inflation or valuation increases).
    • That means that for the great majority of your Ohio tax bill, as the valuations increase, the rate rolls back, generating the roughly same revenue for the levy recipient overall each and every year.
    • Therefore, if your property has a lower-than-average valuation increase, the outside millage portion of your tax bill will actually decrease.  To the extent that your increase is merely average for that taxing district, the outside millage portion stays the same.  And to the extent that your valuation increase is more than average, the outside millage portion of your taxes will rise, but only to the extent of that excess increase.
    • Remember the last school levy campaign where the pro-levy advocates told you that “taxes don’t keep pace with inflation”?  Well, as a result of the formula set forth above, that’s actually true.

Do remember that when you get a changed value, that’s the first change in three years, so the increase reflects that entire Triennial period (i.e., 8% per year compounded would exceed a 25% valuation increase over three years).

Also keep in mind that certain categories of real estate have in fact seen dramatic changes since three years ago.  Indeed, our region has seen much greater-than-average appreciation than the rest of the nation for single family homes: “Cincinnati has seen the highest percentage of home-sale price increases in the country over the last year.”    As a result, our view is that property values in certain categories of real estate have skyrocketed in the past few years, especially single family residential and apartments, as well as warehouse and industrial properties.  Office properties, especially downtown, may have seen a decrease in valuation.  County Auditors simply are required by state law — as overseen by the State Department of Taxation — to recognize the full measure of those increases in their triennial valuation work. They have no choice.

Chicken Little cries from taxpayers that “the sky is falling” as a result of these properly-recognized valuation hikes are vastly over-stated.  For most taxpayers, the increase in their tax actually paid will be less than the inflation over that Triennial cycle.

By the way, two of the primary bases we see clients try to raise against the valuation increases of their properties are simply not valid in Ohio:

  • “My property could not have risen in value by this amount.”  While that statement well could be true, the Auditor may have undervalued your property in prior years, resulting in an above-market hike.
  • “The Auditor has valued four similar houses on my street lower than my valuation.”  As entirely unfair as it may seem, the value the Auditor places on another property — as similar in location, size, age and other characteristics as it may be — is irrelevant as a matter of law.  What is relevant are sales of similar properties (which is different than the Auditor’s opinion as to values).

This all leads to a significant caution for those desiring to charge into the Board of Revision and challenge the value of their property: The Board can raise your property value even more if the then-current valuation does not reflect market.  Proceed with great caution.

If you have questions about your new tax valuation, please call the professionals at the Finney Law Firm.  We can answer your questions as well as challenge any valuation that exceeds fair market value of your property.  Contact Jessica Gibson (513.943.5677) or Chris Finney (513.943.6655) to help with that assignment.

 

Clermont property buyer gets tagged with $682,000 extra tax bill; litigation ensues

Author By Christopher P. FinneyPosted on

The purchaser of an apartment building Clermont County and his counsel are learning the lessons of real property taxes — and the ways to handle tax prorations —  the hard way.  Because neither the seller nor his attorney thought through the transaction carefully, the purchaser (a) lost $682,000 in tax proration negotiations and (b) has suffered what appears to be an entirely unnecessary increase in the same amount in his annual real estate taxes, essentially forever.

How can outcomes between savvy and clumsy real estate transactional work vary so dramatically?

Underlying facts

On December 28, 2021, RS Fairways, LLC closed on the purchase of Fairways at Royal Oaks, an apartment complex in Pierce Township on Clermont County for $32,600,000.  The Auditor’s valuation at the time of the sale was $6,622,000.  The difference between the sale price and the Auditor’s valuation was $25,977,700, a whopping 500% increase.

Following the sale, our former Associate, Brian Shrive — who now heads the civil division of the Clermont County Prosecutor’s office — on behalf of the Prosecutor, saw the conveyance fee form filed with the deed reporting the whopping sale price-compared-to-Auditor’s-valuation and filed \a Board of Revision Complaint to increase the valuation — retroactively to January 1, 2021 — to the sales price.

Almost inexorably, the Board of Revision would have so increased the value, so the owner, the Prosecutor and the School Board later entered into a Stipulation as to the new valuation at $32,600,000.

Tax proration language

As we have written about here (just one month before this buyer closed; he should have read our blog!), standard tax proration language in use in the Cincinnati area calls for a tax proration to be based upon the most recent available tax duplicate.  Since the Auditor and School Board will not know about the sale until after the deed is recorded, current taxes can’t possibly be based upon the sale price.  Here, the Auditor obviously had a grossly outdated and inaccurate valuation.

In other words, standard and customary contract language in use in greater Cincinnati simply does not adequately protect the purchaser in a situation where it is paying much higher than the Auditor’s present valuation.

The Contract in question provided:

If the 2021 tax bill is not available as of the Closing Date, then the proration described in clause (b) above shall be based on the 2020 tax bill for the property.

Why do we prorate taxes in Ohio?  Taxes in Ohio are paid “six months in arrears at the end of the period.”  What does that mean?

It means that the first half 2021 tax bill is issued in January of 2022 and the second half 2021 tax bill is issued in July of 2022.  Therefore as of the date of closing (here, the end of December 2021), the seller owned the property for all of 2021, but hadn’t paid the taxes for 2021.  Therefore, at closing (under local contract form and custom) the seller prorates to the buyer the taxes for the period it had owned the property, but at existing tax and valuation rates.

The dual problems are: (i) if there is a change in the tax rate for 2021 (such as with the passage of a school or other levy), the proration will be wrong as to the 2021 rate and (b) if there is a change in the tax valuation in the normal triennial cycle, the valuation (and thus the taxes) will change, and, here’s the kicker, (c) well after the closing, a school board or the County Prosecutor have the right to ask the Board of Revision to retroactively, back to the beginning of the prior tax year, change the valuation to a reported sales price.

And, as Casey Jones of our office blogged here, a recent arm’s length sale is uncontestably the valuation for tax purposes.

Thus, under the law, a purchaser is liable for taxes calculated at the tax amount for the taxes for the periods from the date prior to the sale (based upon the next tax bill to be issued) and into the future.  And this new tax rate calculates in “unknowns” at the time of the closing, which are a change in rate and a change in valuation.  Both of these can be both assessed, and as to the valuation, can be contested and litigated, well after the sale, but the retroactive liability for those taxes falls on the new property owner.

“Forever” increase in taxes

The tax proration flub — a $682,000 mistake — was bad enough, but worse is that the reported sale will result in a new baseline valuation for future taxes of $32,600,000 for a property that previously was valued and taxed at just $6.2 million.  Every three years the County will start with the $32 million number and make (likely) increases from there, so this owner will have $700,000 in higher taxes (than likely he anticipated) forever.

Could the massive increase have been prevented?

Two fairly sophisticated legal techniques could have been employed by this purchaser to avoid these massive “surprise” tax bills.  One would have spared them the cost of the under-proration, and the second could have resulted in a permanent savings — tens of millions to the purchaser’s bottom line.  They employed neither.

First, when a purchaser pays an amount significantly above Auditor’s valuation for property (this is a simple task of comparing the sale price to Auditor’s valuation [a quick on-line check]) before the contract is negotiated and signed, a purchaser will want the tax proration language to include a re-proration after the final taxes for the year prorated are known.  [By the way, when we get into an environment of declining values, the inverse rules as to tax proration can apply — the purchaser will have an advantage in the proration process — an over-proration —  if the contract language is not modified.]

Second, a technique is available in Ohio (but not Kentucky) to have the seller first transfer the property into an LLC that he owns exclusively (by deed, but with an “exempt conveyance fee form,” so that no sales price is reported) and then, at the closing between seller and purchaser, the seller transfers his interest in the LLC to the purchaser — and thus there is no recorded deed.  These transfers are referred to as “drop and swaps” or “entity transfers.”  In this situation — with some possible exceptions, the Auditor and school board are not put on notice of the sale or the sale price, and thus the increase in value could slip by unnoticed.

Here, the purchaser employed neither technique resulting in a bad proration and “forever” tax liability.

Ensuing litigation

Despite terrible tax proration language that we see as “fatal” to the purchaser’s claims (see above, they agreed to base the proration on the 2020 tax bill, period), the purchaser has sued the seller for a re-proration based upon the post-closing tax “surprise.”  Good luck with that.  See the Complaint here.

Conclusion

Smart advance legal planning by a purchaser or seller can dramatically change the outcome as to taxes in a real estate transaction.  Contact Isaac T. Heintz (513.943.6654) or Eli Krafte-Jacobs (513-797-2853) for assistance on your real estate transactions to avoid these disastrous outcomes.

How Recent Sales Affect Your Property Taxes

Author By Casey A. JonesPosted on

Most property owners recognize that the real estate taxes they pay are directly tied to the county auditor’s assessed value of their property. What most do not understand, however, is how those values are determined. In short, auditors in Ohio are tasked with reappraising all real estate in the county ever six years, with “updates” every three years. R.C. 5715.24.

As one might imagine, this is not an easy task, especially in more populous counties. Auditors use a variety of methods and technologies to assist them with appraising and updating the values in their counties. One of the most common and most accurate methods utilized is an examination of recent sales. This does not refer to recent sales in the area (i.e., comparable sales or “comps”)—that is a different method—but, rather, a sale of the actual subject property.

In Ohio, a recent sale of the subject property is “rebuttably presumed to be the true value and represents the best evidence of true value.” Amherst Marketplace Station, LLC v. Lorain Cty. Bd. of Revision, 2021-Ohio-3866, ¶ 10 (emphasis added), citing Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, 150 Ohio St.3d 527, 535 (2017). See also R.C. 5713.03. In other words, “[t]he use of a recent arm’s-length sale price is [] the favored means of determining value for purposes of taxation.” Amherst, at ¶ 10. However, this presumption is subject to rebuttal via evidence that the sale was either (a) not at arm’s length or (b) not recent. Id.

What is an “arm’s length” transaction?

For purposes of R.C. 5713.03, an “arm’s length sale” is “a voluntary sale without compulsion or duress, that generally takes place in an open market where the parties act in their own self-interest.” Buck Warehouses, Inc. v. Bd. of Revision, 2d Dist. Montgomery No. 2007-Ohio-2132, ¶ 13, citing Walters v. Knox City Bd. of Revision, 47 Ohio St.3d 23, 25 (1989). Put simply, the inquiry is: What would a willing buyer pay to an unrelated, willing seller for this property on the open market? Of course, the presumption makes sense in this context—obviously, a buyer would pay what a buyer did pay.

What is considered a “recent” sale?

The recency question is a bit more complex. The Ohio Supreme Court appears to say that courts (or taxing authorities) are not “compelled” to presume the recency of a sale that occurs more than 24 months before the tax lien date. See generally Akron City Sch. Dist. Bd. of Educ. v. Summit County Bd. of Revision, 139 Ohio St. 3d 92 (2014). The “tax lien date” is most easily understood as January 1 of the tax year in question. While the Akron case appears to set a “bright-line rule” as to how recent a sale must be in order to be afforded the true value presumption, the Court qualified it by saying that recency should not be presumed relative to a sale that occurred more than 24 months before the tax lien date, “when a different value has been determined for that lien date as part of the six-year reappraisal.” So, if the auditor determines that a value other than the sale price applies, then that sale price (more than 24 months old) cannot be used to create a presumption of the true value of the property.

Regardless of whether a prior sale is sufficiently recent to trigger a presumption as to the value of the property, even older sales are important to the determination of the true value. The Ohio Supreme Court has held that, even where sales are too remote to be afforded a presumption of value, they are “some indication of true value” and “should [be] taken into account.” Dublin-Sawmill Properties v. Franklin County Bd. of Revision, 67 Ohio St. 3d 575, 576-77 (1993) (emphasis added). Similarly, the First District Court of Appeals has held that taxing authorities act appropriately in “considering evidence of [a] sale . . . in making [their] determination of value” even where the sale was not sufficiently recent to create a presumption of value. Othman v. Bd. of Educ., 1st Dist. Hamilton Nos. C-160878, C-170187, 2017-Ohio-9115, ¶ 22.

What does all of this mean for property owners?

Practically speaking, this body of law affects the average property owner in two ways: (1) preparing for a potential increase in property taxes relative to recently purchased property, and (2) knowing the available options relative to tax appeals.

The first scenario is perhaps most common in the current, booming real estate market. Consider the following:

You purchased a home in May 2019 for a purchase price of $350,000.00. The county auditor’s assessed value of the home was $180,000.00 as of the date you purchased. In 2020, the auditor increases your value to $350,000.00.

(Side Note: Many homeowners are pleased when the auditor increases the value of their home because they think it corroborates the investment they made and demonstrates that they now own a more valuable piece of property. While this makes sense, it is also important to consider that this value is what sets the amount of property taxes for which the owner will be responsible. In short, the higher the value, the higher the taxes.)

In the above example, your property taxes will nearly double if the auditor catches the sale and adjusts the value to the sales price. This is not inherently unfair. Notwithstanding the rising sale prices, that is what you paid for the property so you must have thought it was worth that. But it is important that buyers are aware of this near inevitability, go into the transaction with eyes open, and have the means to properly deal with its implications.

The second scenario will likely be less common with the recent passing of HB 126 (significantly restricting school districts’ ability to file tax complaints seeking an increase in the value and, thus, taxes paid by property owners in their districts).

Your property is and has been valued between $430,000.00 and $450,000.00 from 2008-2018. You bought the property on the open market for $515,000.00 in 2018. In 2019, you receive a notice in the mail that the value is being increased to $515,000.00 (to match the sale price). Three years later (in 2022), you receive a similar notice increasing the value to $800,000.00. You haven’t made any material improvements to the property. What are your options?

Here, this is an arm’s length transaction. However, you purchased the property nearly three years prior to the “tax lien date” (Remember: 2022 tax bills relate to Tax Year 2021, so the “tax lien date” is 1/1/2021). Under the precedent set in the Akron case, you aren’t entitled to a presumption of value based on the sales price. However, the sale price is some evidence of value that any reviewing authority should take into account. These considerations are important in deciding whether to file a Complaint with the Board of Revision to challenge your value.

Our firm’s experienced attorneys represent real estate investors, property owners, and tax payers relative to these issues and can help you navigate the best option(s) for your individual circumstance, including advising as to whether and when you should challenge your property values and formulating a strategy to give you the best possible chance of success. We’d love to work with you.

The Intersection Between “Omitted” Property Taxes and TOD Affidavits

Author By Casey A. JonesPosted on

Pursuant to R.C. 5713.20(A), “[i]f the county auditor discovers that any building, structure, or tract of land or any lot or part of either, has been omitted from the list of real property, the auditor shall add it to the list[.]” This “omitted property” includes property that was incorrectly, though in earnest, subjected to an exemption. However, it does not stop there.

The auditor is also required to compute and assess the taxes for preceding years during which the property was incorrectly omitted or exempted, up to five years, unless the property was transferred in the meantime. For purposes of this provision, “in the meantime” means before the omitted tax is actually assessed. If the property was transferred, the assessment can only relate to the time period after the transfer – i.e., the new owner will not be responsible for omitted taxes that would have accrued prior to its ownership. This should encourage a new or prospective owner to evaluate whether and how the property is taxed, make sure any exemptions, indeed, apply or that such use will continue, and otherwise prepare themselves for the likelihood of an increased tax.

As for property taxes accrued prior to a transfer of ownership, these are typically prorated at the closing (as for arm’s length transactions for value). But what happens if there is no closing?

Consider the following scenario:

Father owns property that has, for years, been subject to a property tax exemption. Father is ill and wants to avoid probate upon his death, so he executes a Transfer on Death (“TOD”) Affidavit, which will allow the property to transfer to Daughter without the need to open an estate. Upon Father’s Death, the property transfers to Daughter. However, unbeknownst to Daughter (and, perhaps, even unbeknownst to Father), an “omitted tax” was assessed two weeks before Father’s death and, thus, prior to the point in time that the property actually transferred to her.

The omitted tax was assessed because the auditor found that the property was improperly exempted or the exemption no longer applied for tax years preceding Father’s death. Because the omitted tax was assessed prior to the actual transfer of the property (remember, it did not transfer until the time of Father’s death), the “unless in the meantime the property has changed ownership” exception to R.C. 5713.20 does not apply. However, property tax assessments “run with the property,” meaning that Daughter is now responsible for, essentially, paying back up to five years’ worth of tax savings that Father realized as the result of the improper exemption (through no fault of his own), even though Daughter had no vested interest in the property during the period for which the exemption was in effect. If Daughter does not pay the omitted tax, she risks tax liens and/or foreclosure of the property. These omitted taxes can pretty quickly add up to tens of thousands of dollars, even before non-payment penalties.

In the case of an omitted tax, timing is of the utmost importance – e.g., when the omitted tax was assessed relative to when the property changed ownership. This may seem like a one-off case or unlikely occurrence. However, TOD affidavits are becoming an increasingly popular method of avoiding probate and, often, the TOD beneficiaries take little interest in the property until such time as it is to transfer to them. The lesson: be vigilant. The county auditors’ websites publish information relating to tax assessments and payments. The knowledge of whether a property in which you may, at some future time, have an interest is literally a few mouse clicks away. And if you need help, we have attorneys who are familiar with these issues relative to each of the tax, real estate, and probate implications who can assist you.

Governor DeWine signs into law legislation that significantly clips wings of School Districts in tax valuation litigation

Author By Christopher P. FinneyPosted on

Until now, School Districts in Ohio were fully empowered to participate in legal proceedings to oppose the lowering of Auditor’s property tax valuations and to seek increases in property tax valuations.  No more.

As we explain here, the Ohio House and Senate in the past few weeks passed legislation that upends the current equilibrium among County Auditors, property owners and school boards, to tilt matters decidedly in favor of property owners. (In fairness, Ohio had granted school boards a far greater role in the process than most other states.)

Today, Governor DeWine signed that bill, Am. Sub. H.B. 126, into law.  Read the summary of the legislation here.  The Cleveland Plain Dealer covers today’s events here.

For assistance with property tax valuation matters, please contact Chris Finney (513.943.6655) or Casey Jones (513.943.5673).

Ohio legislature sends major changes in Boards of Education/Boards of Revision process to Governor DeWine for signature

Author By Christopher P. FinneyPosted on

A bill passed this week by the Ohio legislature could make major changes in the current process for Ohio tax valuation challenges before Ohio Boards of Revision as it relates to participation by Boards of Education if Governor DeWine signs it into law.

Unlike the procedures in many other states, in Ohio, Boards of Education (the major recipients of property tax monies) may both initiate complaints to increase the valuation of real property (and thus increase property taxes owed) and may oppose a property owner’s legal attempts to secure a reduction in tax values as well.

Some major features of the legislation, Am. Sub. H.B. 126, follow:

  1. School districts may not initiate a complaint to increase valuation unless the challenge meets all of three requirements (a) the challenge is based upon an actual arm’s length sale of the subject property before the tax lien date in question (this would then, it seems, also rule out challenges at all of “entity transfer” sales and sales after the tax lien date in question), (b) the sale is at least 10% above the then-established Auditor’s valuation and (c) such sale price exceeds the Auditor’s valuation by at least $500,000 (that amount is then annually subject to a CPI adjustment).
  2. Boards of Education would have to carefully undertake extensive and detailed procedures to specifically authorize by resolution such challenges, on a property-by-property basis, with at least seven days’ advance certified mail notice to each affected property owner.  The level of detail of these procedures appears to be nothing more than a series of procedural traps for Boards of Education to discourage their involvement in the tax valuation process.
  3. The involvement of Boards of Education stop at the Board of Revision.  While property owners or the Auditor may pursue an appeal of a Board of Revision decision, Boards of Education will have no authority to appeal (or participate in a property owner appeal) of a Board of Revision decision.
  4. Presently, property owners may enter into private settlements with school districts to avoid or end their opposition to a valuation reduction or its attempts to seek valuation increases. H.B. 126 will outlaw the practice of entering into these “side deals.”

More minor changes include:

  1. Boards of Education may file counterclaims to property owner complaints to reduce valuations only if the initial Complaint seeks a reduction of at least $17,500 (Boards of Education rarely if ever file counterclaims below this level at present).
  2. Boards of Revision lose jurisdiction to increase valuations of claims by Boards of Education are not acted upon within one year of the date of the filing of the Complaint (in our experience, this delay only happens in a few large urban counties in the year following a triennial revaluation, so this type of prolonged delay is quite uncommon).

There is no language in the bill about its effective date, upon our initial review, and thus it would seem its effective date would be 91 days after it becomes law (under the Ohio Constitution).  Thus, some of these provisions (pursuit of appeals, for example) could have an impact on valuation complaints and school board counterclaims filed in calendar year 2022.

We will promptly update this blog when Governor DeWine either vetoes or signs the legislation into law. He has 10 days to act, or the bill automatically becomes law.

Read more about the legislation here:

Read the actual legislation here. Contact Chris Finney (513.943.6655) if you have questions about the legislation or desire to pursue or defend against an Ohio or Kentucky property tax valuation challenge.

 

Real Estate Legal Pro Tip: Before signing contract, carefully consider tax proration language when contract price exceeds Auditor’s valuation

Author By Christopher P. FinneyPosted on

Make no bones about it: Ohio property taxes are complicated.

And with today’s dramatic upwardly dynamic real estate market, it is more important than ever that buyers and sellers carefully consider the impact of a sales price that exceeds the Auditor’s valuation when writing a purchase contract’s tax proration provision.

Ohio’s complicated property taxation structure

First, taxes in Ohio are billed semi-annually, in roughly January and July of each year.  Those two bills are, respectively, for the first half and second half of the prior calendar year.  So, the January 2022 bill will be for the first half of 2021, and the July bill will be for the second half of 2021.  Thus, when a buyer buys property, the seller owes between seven and thirteen months of taxes in arrears. 

How tax prorations are typically addressed in “form” contracts

Typically, the purchase contract will provide for several things so that the seller credits these accrued but not-yet-due taxes to the buyer:

  • First, there will be a proration of taxes from the seller to the buyer from January 1 of the year of the closing, or July 1 of the year prior to the closing, through the date of closing.
    • (In what I consider to be a weird local custom, in the Dayton marketplace only, a “short proration” is many times utilized for residential and commercial transactions. The “short proration” ignores the first six months of arrearage, and prorates only on the part-half-year immediately prior to the closing. I do not know the logic behind this.)
  • Second, the amount of that proration in a form residential and commercial purchase contact is typically to be “based upon the most recent available tax duplicate.”  Many times the contract (and/or documents signed at the closing) specifies that the tax proration is to be considered “final.”
  • [NOTE: The new Cincinnati Area/Dayton Area Board of Realtors standard form of residential real estate contract issued in the fall of 2021 is emphatic on this topic: Tax prorations are based upon “the most recent available tax rates, assessments and valuations” and “all tax prorations shall be final at Closing.”]

What does “based upon most recent available tax duplicate” mean?

On this, issue of prorating taxes “based upon the most recent available tax duplicate,” consider a few things:

  • In Ohio, the starting point for the Auditor’s value is the actual value, i.e., what a willing buyer would pay a willing seller for the property.  It’s the same number used by buyers, sellers, appraisers and lenders for the property value, i.e., the actual sales price.  There is no other magical number. (Then, we speak in terms of 35% of that value as that is translated in the tax bill, but that number has no practical impact except to confuse people and does not change the analysis set forth in this blog entry.)
  • Secondly, the “most recent available tax duplicate” means the taxes to-be-paid, which is valuation times tax rate on the Auditor’s records as of the date of closing.
  • But both the tax valuation and the tax rate can change — with retroactive effect — all the way through the date the tax bill is issued in January of the following year, meaning well after the closing, or even by August or September of that following year when a tax valuation complaint before the Board of Revision is decided.  Indeed, if a valuation complaint is appealed all the way to the Ohio Supreme Court, taxes could be assessed with retroactive effect two, three or more years after a closing date.
  • (We primarily address valuation issues in this blog entry, but if a levy is on the ballot in May or November of any year, that rate increase also dates back to January 1 of that year, so a large tax levy can result in an inequitable tax proration as well.)

A sale price above Auditor’s value may result in a retroactive tax increase    

In today’s dynamic real estate market in which sales prices of certain properties are galloping upward at an astonishing pace, especially for apartment buildings, single family residences, and industrial and warehouse properties, that standard form language could leave an unsuspecting buyer holding the bag.  Here’s why:

  • First, County Auditors update their valuations once every three years, and the cutoff for those updates is around September 30 of that year. So, for a sale in a “triennial year” (six different triennial cycles for Ohio’s 88 counties) prior to September 30 of that year, the Auditor should, on his own, increase the valuation to the sales price retroactive to January 1 of that first year of the triennial (even if the sale is late in that year), but that increase only becomes reflected on the tax records when the valuation comes out with the January bill of the year subsequent to the applicable tax year.
  • But Auditors typically do not adjust values on their own after that date and in the “off” two years between the triennial valuation cycles.  So, Hamilton, Montgomery, Butler and Clermont Counties most recently updated valuations effective January 1, 2020, and those values came out with the January 2021 tax bills.  The Auditor’s of each of those Counties won’t “catch” a sale made after September 30, 2020 until the 2024 tax bills (values effective January 1, 2023).
  • Ohio law says that — with narrow and rare exceptions — the sale price is the correct property valuation. Thus, property owners have a difficult time arguing that the contract sale price is not the actual value of the property.
  • The contract sale price is reported to the Auditor with an “Real Property Conveyance Fee Statement of Value and Receipt” (“Conveyance Fee Statement”) signed by the purchaser at each closing.  It is a felony to falsify one of these forms.

It’s easy to ascertain if the sale price is above the Auditor’s valuation.  Each County publishes their valuations — current as of the date of contract signing — on its web site.

School districts can and do seek retroactive valuation increases

The biggest beneficiary of property taxes in Ohio is the local school board, which typically receives about two-thirds of the total tax bills into their coffers.

As a result, school districts hire attorneys skilled in property valuation matters to scour the Auditor’s records to find recent sales in their district that exceed Auditor’s valuation.  Then, they file Board of Revision complaints to seek an increase in valuation.  Some points on those complaints:

  • Those complaints are filed, as with property owner complaints seeking a reduction, between January 1 and March 31 of each year.
  • Those complaints by law seek a retroactive increase in taxes to January 1 of the prior year.  So, for example, complaints filed in the first quarter of 2022 will apply retroactively to January 1 of 2021, and the increased taxes are a lien on the property as of that prior year (e.g., January 1, 2021).
  • Almost universally, school districts limit their complaints to sales of a certain minimum variance from Auditor’s valuation (say, $50,000 or $100,000) and usually they ignore single family residential properties.
  • The buyer — the new property owner — should receive notice of the complaint, and could appear to oppose the increase.  But the an arm’s length sales price is, by law, the correct valuation and the Conveyance Fee Statement is usually prima facie evidence of both that contract price and the arm’s length nature of the transaction.

These school board complaints, if successful, have two effects: (i) in the tax year of the Complaint, it puts real cash in the pocket of the school district (the tax hike is very roughly about 3.0% of the valuation increase and the school district gets about two thirds of that one-time cash amount), and (ii) thereafter it ever-so-slightly reduces the burden on other property owners to have each property valued at its correct rate.

A post-closing surprise!

This means that buyers can get a surprise of a tax bill far in excess of the prorated taxes (otherwise by law owed by the seller) well after the closing date.  And typically contract language and perhaps papers signed at the closing make this difference unrecoverable by the buyer as against the seller.

How to address this issue in the contract

From a buyer’s perspective, if he wants to recover a proration that will fully compensate him for taxes due (by seller) accruing prior to closing, he must deviate from the typical contract language that a tax proration is to be “based upon the most recent available tax duplicate” to add “but updated to reflect the sale price in this contract” or something to that effect.  A further possibility with an entirely solvent seller whose operation would continue well after the closing would be to call for a re-proration after the actual taxes are known. But it’s far better to adjust at closing so a post-closing claim (or law suit) is not necessary.

If the issue is not addressed in the contract but brought up before or after closing, it may be difficult to argue to the seller that the contract does not reflect the seller’s actual tax liability as of the closing date.

From a seller’s perspective, it is better use the typical default language of “based upon the most recent available tax duplicate.”

Obviously, if the contract price is lower than the Auditor’s valuation, the default language” of “based upon the most recent available tax duplicate” would disadvantage the seller and benefit the buyer.  This frequently was so in the last (and every) real estate recession, and may be true with isolated sales occurring today, or for certain categories of real estate such as restaurants and hospitality, parking garages, and retail. When this happens, a seller may want to ask to prorate based on the actual sale price rather than the “most recent available tax duplicate” information.  In the alternative, the seller could preserve the right to pursue a reduction in valuation post-closing and receive any refund arising from an over-payment or excess proration.

Ohio courts have addressed this precise question: What happens when, after closing, additional taxes are retroactively assessed for periods prior to closing due to an increase in value? Under the default “based upon the most recent available tax duplicate” language, the answer is that typically these additional taxes become the buyer’s responsibility.

In Lone Star Equities, Inc. v. Dimitrouleas, 2d Dist. Montgomery No. 26321, 2015-Ohio-2294, the seller filed a Board of Revision (“BOR”) complaint seeking a reduction in the value of his property and received such reduction. The local school board then appealed that reduction to the Board of Tax Appeals (“BTA”). While the BTA appeal was pending, the seller sold the property to the buyer for significantly more than the value to which the property was reduced at the BOR level and gave the buyer a general warranty deed disclaiming all encumbrances. The BTA hearing was held approximately one year after the closing, and (because he no longer owned the property) the seller did not attend. The buyer was seemingly unaware of the proceeding and, thus, did not attend the BTA hearing either. The BTA ended up increasing the value to what it was before the BOR reduction (i.e., the value sought by the school board). This created a retroactive tax assessment of nearly $34,000 relative to periods prior to the closing. The buyer paid those taxes and then sued the seller for breach of contract, breach of warranty, and fraud to recoup the same.

The applicable tax provision in the Lone Star case read as follows:

  1. Taxes: All installments of real estate taxes, and any other assessments against the Property, that are due and owing prior to Closing shall be paid by Seller regardless if the tenant reimburses Seller for same. The taxes and any other assessments assessed for the current year shall be prorated between Seller and Purchaser on a calendar year basis as of the closing date.”

(Emphasis added). There was no language to indicate what would happen should a tax be retroactively assessed for periods prior to closing, but the buyer argued that the seller should be responsible for the taxes under the above contract language, and that he knew of the pending BTA matter and knew that the tax proration on the HUD-1 settlement statement wasn’t final and fraudulently misrepresented the same.

As to the breach of contract claim, courts have long held that any contract claims will “merge” with the deed upon closing. “The doctrine of ‘merger by deed’ holds that whenever a deed is delivered and accepted ‘without qualification’ pursuant to a sales contract for real property, the contract becomes merged into the deed and no cause of action upon said prior agreement exists. The purchaser is limited to the express covenants of the deed only.” Id., at ¶ 29, citing 80 Ohio Jurisprudence 3d (1988) 91, 93, Real Property Sales and Exchanges, Sections 58-59; Brumbaugh v. Chapman (1887), 45 Ohio St. 368, 13 N.E. 584; Fuller v. Drenberg (1965), 3 Ohio St.2d 109, 32 O.O.2d 91, 209 N.E.2d 417, paragraph one of the syllabus. Cf. Dillahunty v. Keystone Sav. Ass’n. (1973), 36 Ohio App. 2d 135, 65 O.O.2d 157, 303 N.E.2d 750.

In other words, after closing occurs, the parties no longer have viable claims arising out of the contract – they only have claims arising out of the deed. This largely shifts the burden to the parties, making it incumbent upon them to do their due diligence in making sure all of the respective contractual obligations have been met prior to closing. For example, if a contract addendum calls for the seller to make certain repairs prior to closing, but the seller fails to fulfill this obligation and the closing occurs anyway, the buyer cannot later sue the seller for breach of contract in failing to make the repairs. This is because the contract “merged” with the deed, and the deed did not call for any repairs. The court in Lone Star applied this doctrine of merger by deed to rule in favor of the seller as to the buyer’s breach of contract claim.

Perhaps two of the most common exceptions to the doctrine of merger by deed are (a) explicit contractual language dictating a specific contractual term shall “survive the closing” and/or “survive delivery of the deed” (this defies the doctrine’s “acceptance, without qualification, of the deed” requirement), and (b) fraud. In the Lone Star case, there was no contractual language indicating that the tax provision would survive closing and/or delivery of the deed. Likewise, the court found no fraud on the part of the seller.

One of the required elements to prove a fraud claim is “justifiable reliance.” See Lone Star, at ¶ 59, citing Volbers-Klarich v. Middletown Mgmt., 125 Ohio St.3d 494, 2010-Ohio-2057, 929 N.E.2d 434, ¶ 27; Burr v. Board of County Comm’rs, 23 Ohio St. 3d 69, 73, 23 Ohio B. 200, 491 N.E.2d 1101 (1986). A party cannot justifiably rely on any representation when he or she is on notice to the contrary. Because BOR and BTA proceedings are matters of public record, the buyer was put on constructive notice of the school district’s efforts to have the property’s taxable value increased, even if the seller had a duty to and failed to disclose these proceedings (which was not specifically addressed). Lone Star, at ¶ 65. Because neither of these exceptions applied, the contract merged with the deed at closing, and the buyer could not prevail on its breach of contract claim or its fraud claim.

Finally, the court addressed whether the retroactive tax assessment constituted an encumbrance insofar as it applied relative to periods prior to closing. Answering that question in the negative, the court found that “the tax lien does not attach and become an encumbrance on property until the time that a final determination of valuation is made, and the current property owner, not the former owner, will be responsible for the taxes that have attached.” (i.e., the “‘relation back’ concept in R.C. 5715.19(D) does not mean that the taxes would have attached as a lien prior to the closing.”). Id., at ¶ 53-55. Because the tax assessment did not constitute an encumbrance until after the closing when the BTA made its final determination as to the value of the property, it was not an encumbrance as of the date of closing and, thus, there was no breach of the general warranty deed covenants.

The Lone Star case is a cautionary example of what can happen should the buyer fail to do its diligence in checking for tax appeals and/or insist upon the language discussed in this entry to protect him or her in the event of a post-closing tax assessment. As a firm, we regularly represent both property owners and school districts in BOR and BTA proceedings, and we also have several seasoned real estate attorneys who can help you explore the tax implications of a transaction or post-closing tax assessment.

Conclusion

For help with your commercial or residential real estate contracting matter, including the intricacies of Ohio and Kentucky tax prorations, contact Isaac T. Heintz (513.943.6654), Eli N. Krafte-Jacobs (513.797.2853), or Casey Jones (513.943.5673) of our real estate group.

Cincinnati Community Reinvestment Area tax abatements for renovations of existing residential structures

Author By Jennings D. KleemanPosted on

Cincinnati homeowners may obtain a Community Reinvestment Area (“CRA”) tax abatement by renovating existing residential structures. This practice is common and reduces tax liability for homeowners who make such renovations. That said, recently, various homeowners with existing CRA Tax Abatements suffered a reduction in their existing CRA Tax Abatement. This issue was as new to us as it may be to you.

To preemptively clear up the foregoing issue for others, this blog post will discuss a background of the CRA Tax Abatement Program for existing residential structures, the importance of submitting the application in a timely manner, and how the Hamilton County Auditor’s Office, which has a duty to make appraisals, and can make such appraisals based on its own preferred method, calculates Tax Abatements.

Background

The CRA Tax Abatement Program is meant to stimulate revitalization, retain residents, and attract new homeowners, in the Cincinnati area. To encourage the foregoing types of behavior, the City of Cincinnati Department of Economic Development provides CRA Tax Abatements to certain homeowners who renovate existing residential structures (e.g., residential homes and residential condos, up to three units). To qualify for a CRA Tax Abatement, the cost of renovations must total at least $2,500.00, or $5,000.00, depending on the number of units in the residential structure. Some renovations, which might increase the marketability of a residential structure, are not contemplated in the cost of renovations (e.g., roofing, windows, gutters, vinyl siding, etc.) Likewise, unrelated improvements and tax on the land itself are not contemplated in the cost of renovations.

To apply for the CRA Tax Abatement Program, applicants will need to submit an application to the City of Cincinnati Department of Economic Development. Applicants who are renovating existing residential structures must pay an application fee of $250.00, which may be paid by check, to the “City of Cincinnati.” Also, applicants will need to submit evidence showing that all permits related to the renovations are closed. Applicants may obtain such evidence here. Finally, applicants will need to submit a document evidencing the costs of the renovations. Such evidence should be in the form of a notarized list indicating (i) the general categories of the work completed; (ii) the date such work was completed; and (iii) the expenses, including costs of labor, associated with each category of work completed.

Timing of the Application

Under the CRA Tax Abatement Program, the Hamilton County Auditor’s Office can set a CRA Tax Abatement Period for, at most, ten years, unless homeowners comply with LEED, LBC, or HERS standards, which are not discussed herein. That said, under the CRA Tax Abatement Program, the applicant cannot apply for the abatement until renovations are complete, and the CRA Tax Abatement is not applied to the residential structure until the application has been submitted.  Despite those rules, the abatement period begins when the renovations are commenced. Furthermore, it might take the City of Cincinnati eight weeks to respond to the application. As such, an applicant should complete their renovations and apply as quickly as possible to avoid missing out on their CRA Tax Abatement period.

Calculation of the Abatement

The Hamilton County Auditor’s Office recently started calculating CRA Tax Abatements under the “Percentage Method.” Under the Percentage Method, the Hamilton County Auditor’s Office determines a homeowner’s CRA Tax Abatement amount by dividing the contributed value of all the improvements, at the time construction began, by the value of the home without improvements. The purpose of the Percentage Method is to provide homeowners with a percentage that remains consistent, despite changes in home values.

Before the Percentage Method, the Hamilton County Auditor’s Office calculated CRA Tax Abatements under the “Beginning Value Method.” Under the Beginning Value Method, the Hamilton County Auditor’s Office determined a homeowner’s CRA Tax Abatement amount by subtracting the value of the home without improvements from the contributed value of all the improvements, at the time construction began. The Beginning Value Method created an issue where homeowners were unable to truly appreciate the value of their CRA Tax Abatement, because, when their property value increased, the value of their abatements did not, leaving them with little tax liability savings.

Due to the foregoing issue, the Hamilton County Auditor’s Office reacted by creating the Percentage Method. Despite its best intentions, the Hamilton County Auditor’s Office did not provide for grandfather clause for the various homeowners, with CRA Tax Abatements, who were content with their CRA Tax Abatement Valuation. This gave rise to the issue first described in this blog post, which the Finney Law Firm resolved for similarly situated homeowners. So, if you are a similarly situated homeowner and need professional guidance on how to remedy such issue, call the Finney Law Firm, today!

Ohio property owner alert: Legislature gives a special (COVID) second bite at the apple on property tax valuation reduction in 2021

Author By Christopher P. Finney, Casey A. Jones and Jennings D. KleemanPosted on

There is a significant new development in Ohio property tax challenges directly and narrowly resulting from valuation reduction arising from the COVID-19 pandemic allowing such challenges this year.

As we discussed in a blog entry here, because of the unique timing of real property valuations versus billing, Ohio property owners impacted by COVID-19 rent reductions and closures really could not bring successful COVID-related valuation challenges before Boards of Revision in 2021.

To exacerbate that problem, Hamilton, Clermont, Butler and Montgomery Counties had the first year of the tax triennial in 2020 (for challenges in 2021). Therefore, if a property owner attempted a COVID valuation challenge in 2021 and lost, a property owner would be stuck with a bad (high) valuation for three years (tax years 2020, 2021 and 2022, billed and payable in 2021, 2022 and 2023).

This placed owners of certain properties in significant financial straits: Owners of apartment buildings near a university where student-based occupancy plunged or downtown when nearby office buildings cleared out, owners of large office buildings that could not rent because of COVID-related vacancies, owners of hotels and motels and other properties in the travel and hospitality industry, owners of restaurant properties and owners of malls and retail strip centers.

That all changed two weeks ago when Governor DeWine signed into law S.B. 57 which adds a second challenge period in 2021 narrowly targeted to COVID-related property valuation reduction (i.e., not that of general market conditions).

Here is the quick overview:

  • “Second bite” challenges may be filed with the Auditor only between July 26 and August 25, 2021.
  • “Second bite” challenges must narrowly be tailored to valuation reduction as a result of COVID-19.
  • The target valuation date for “second bite” valuations is October 1, 2020.
  • The “second bite” valuation reduction is retroactive to January 1, 2020 (before the pandemic hit America).
  • The “second bite” valuation reduction will last for the remainder of the triennial (in Hamilton, Clermont, Butler, and Montgomery Counties thru the 2022 tax year, billed and paid in 2023).
  • The bringing, and “win” or “loss,” of a valuation challenge for the “second bite” hearings is in addition to the general challenge filed before March 31, 2021 and does not prejudice non-COVID-related (i.e. general market conditions) challenges in later years.
  • The legal and evidentiary hurdles associated with “second bite” challenges are the same, as we see it, to challenges brought in Ohio, meaning an appraisal (supported by testimony from the appraiser) and presentation by a qualified attorney are strongly recommended.

If you have a “second bite” property that would benefit from a challenge narrowly targeted to COVID-19 economic impact, please quickly contact Chris Finney (513) 943-6655) or Casey Jones (513-943-5673) to allow us to help you secure this tax savings.

Highest commercial and residential tax districts in Hamilton County

Author By Christopher P. FinneyPosted on

Every year, the Auditor of each of Ohio’s 88 counties publishes a chart like this showing the tax rates for each taxing district in each County.

In Hamilton County, there are 241 distinct taxing districts, each having a complex calculation to develop the net residential and commercial rates of taxation (taxing districts being greater in number than either municipalities and townships or school districts, because the boundaries of some frequently overlap one another). Here are the five highest commercial and residential taxing districts in Hamilton County:

Highest Commercial rates
Municipality Township School District Commercial millage Commercial percentage
Wyoming Springfield Finneytown 135.54 4.765%
Colombia Mariemont 131.356 4.618%
Springfield Finneytown 128.589 4.521%
Lincoln Heights Princeton 123.75 4.351%
Mt. Healthy Springfield Mt. Healthy 121.665 4.277%
Highest Residential rates
Municipality Township School District Residential millage Residential percentage
Lincoln Heights Princeton 111.466 3.919%
Wyoming Springfield Finneytown 110.344 3.879%
Mt. Healthy Springfield Mt. Healthy 104.619 3.678%
Springfield Finneytown 103.394 3.635%
Golf Manor Cincinnati 101.26 3.560%

As you can see, several Hamilton County commercial districts well exceed 4.0% in annual tax rates (approaching 5.0%) and the highest residential rates are bumping up against the 4.0% threshold.

 

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