Ohio Supreme Court Finds Sale of LLC Interests May Be Real Estate Value for Tax Increase Complaints
On Feb. 6, 2020, the Ohio Supreme Court affirmed a decision of the Ohio Board of Tax Appeals (“BTA”), finding the sale price of interests in a limited liability company (“LLC”) was the best evidence of the true value of the LLC’s real property for tax purposes.
In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2020-Ohio-353, the Ohio Supreme Court found the sale of LLC interests by means of a traditional commercial real estate purchase agreement reflected the parties’ primary intent to transfer the real property owned by the LLC, and therefore the sales price of the LLC interests could be presumed the best evidence of true value of the LLC’s real property for tax purposes.
In light of this ruling and the ability of school boards to identify these “drop down LLC sale” or “drop and swap” sale structures through other publicly recorded instruments, parties purchasing or selling real property or other businesses through LLCs or other entities should account for this increased risk of a real property tax adjustment when structuring and documenting their sale transactions in Ohio.
In 2015, Palmer Square, LLC agreed to sell the real estate at issue in this case, a 264-unit apartment complex, to PPG Manhattan Real Estate Partners LLC for $35,250,000. The Purchase and Sale Agreement, documented using a classic form of purchase agreement for commercial real estate, gave the buyer the option to consummate the transaction as a “Drop Down LLC sale,” in which the seller would organize a single member LLC, transfer the real estate to that LLC, have the LLC assume the mortgage on the property, and then assign all interests in the LLC to the buyer. The property ostensibly transferred in such a transaction on Oct. 6, 2015.
A school board seeking to file increase complaints may identify sales of real property in excess of a county auditor’s value by reviewing the sales prices listed on conveyance fee statements. In this case, the Columbus City Schools Board of Education (the “School Board”) filed a complaint based on an exempt conveyance fee statement (showing no consideration paid) coupled with the filing of a mortgage that implied a value in excess of the Franklin County auditor’s $16 million value for the property. While this limited evidence was insufficient to prove value before the Franklin County Board of Revision, through discovery before the BTA the School Board obtained copies of the Purchase and Sale Agreement, the settlement statement evidencing the sale and a financing appraisal prepared in connection with the mortgage loan. The BTA found this evidence together with the evidence before the Board of Revision was sufficient to establish the sale price of the real property.
The Court’s Analysis
The court factually distinguished this case from a line of cases in which it had previously found the sales price for an equity transfer in an entity did not establish the sales price for the real property owned by such entity because the buyer’s intent in this case was clearly to buy the underlying real estate. Specifically, the court found its prior ruling in Salem Med. Arts & Dev. Corp. v. Columbiana Cty. Bd. of Revision, 82 Ohio St.3d 193 (1998), did not apply here because Salem involved a transfer of entity interests in a less-than-fully-voluntary sale, did not involve open-market negotiation, and was potentially part of a sale-leaseback transaction. It also declined to apply Gahanna-Jefferson Pub. Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 89 Ohio St.3d 450 (2000), finding the evidence of the entity transfers at issue in that case either did not sufficiently establish contract terms or did not support finding the transaction was at arm’s length. The overriding distinction between the transactions in that case and this one was the contracts in those transactions “provided for sales of corporate shares or partnership interests without explicit reference to an intent to sell and buy the real estate itself.” Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2020-Ohio-353, at ¶37. In this case, the contract identified itself as a sale of the real estate at issue, was structured as a traditional real estate sale, and contained an explicit provision allowing the parties to elect to consummate the transaction as an LLC transfer.
Although the court allowed the property owner’s appraisal as evidence of the personal property transferred in connection with the sale, which ultimately reduced the value, the court did not consider the appraisal as evidence of the property’s value to rebut the sale price. Instead it found it was proper for the BTA to have ignored the appraisal as evidence of value of the real property because the appraisal did not take into account the LLC transfer value and in doing so, did not explain why that value should not be afforded any weight.
Going forward, this case is likely to encourage school boards to continue the practice of filing increase complaints whenever there are public records of a deed transferring real property to an LLC exempt from the conveyance fee, and those records are filed close in time to a mortgage of the real property or mortgage assumption by that LLC. Parties selling businesses through the transfer of interests in an LLC that owns real property in Ohio should properly manifest their intent in the legal documents transferring the business to avoid having the sale price of the entire business offered as evidence to increase the property tax value of that Ohio real estate.