In an Ohio Supreme Court case decided on February 6, 2020, the Court recognized that the price paid for the transfer of a 100% equity interest in the LLC owning a 264-unit apartment complex in the New Albany suburb of Columbus should be presumed to constitute the value of the real estate owned by that entity. See Columbus City Schools Bd. of Edn. V. Franklin Cty. Bd. of Revision, Slip Opinion No. 2020-Ohio-253.
The Palmer House apartments were constructed in 2013 and were originally valued at $16,000,000 for real estate tax purposes in 2015. The Columbus City Schools Board of Education (BOE) filed a complaint at the Franklin County Board of Revision to increase the tax value of the Palmer House to $34,000,000 based on a recorded mortgage that secured a loan amount of $25,536,000 by estimating a 75% loan to value ratio. The BOE lost at the Board of Revision level but then appealed the case to the Ohio Board of Tax Appeals or BTA.
At the BTA, the BOE was able to produce through discovery a fully signed Purchase and Sale Agreement (PSA), Settlement Statement and a no-consideration deed to transfer the Palmer House from Palmer Square, LLC to Palmer House Borrower, LLC. A supporting affidavit filed concurrently with the deed explained that “[t]he conveyance of real property constitutes a capital contribution to the Grantee limited liability company.”
Article 15 of the PSA provided the buyer with the option to structure the purchase as a “Drop-Down LLC sale.” The buyer elected the Drop-Down LLC structure and the parties entered into a first amended purchase agreement providing for, among other things, that in lieu of the seller conveying the deed to the real property to the buyer that the seller will sell and the buyer will purchase all of the outstanding membership interests in a newly-formed LLC, which will own the Palmer House at closing, in exchange for the purchase price. Apparently, prior to closing, the seller conveyed the apartment project to a LLC which it controlled and, at the closing, the seller exchanged 100% of the ownership interests in the Palmer House project to the buyer for the purchase price.
The Supreme Court concluded that the documentation in this case made it reasonable for the BTA to find that this sale reflected the parties’ intent to purchase and sell income-producing real estate, and likewise, supported the BTA’s finding that the transfer of entity ownership constituted a contrivance for accomplishing the sale of commercial real estate. Further, the Court concluded that the absence of an officially reported sale price on a conveyance-fee statement was immaterial, and the BTA had an adequate evidentiary basis for applying the sale-price presumption to the consideration set forth in the purchase agreement. The judgment of the BTA was affirmed.
As a result of this case, it seems likely that Boards of Education will be emboldened to try to expose LLC transfers as real estate transfers in the future.
Additionally, school districts and boards of education have become more aggressive in affirmatively filing Complaints Against Valuation to increase real property tax valuations of commercial real estate in Ohio. If contacted early in the process, DBL Law’s real estate attorneys are able to take action to contest such complaints and negotiate tax-saving settlements.
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