HCP EMOH (Owner) owns a seven-acre property improved with an 89-unit assisted-living facility. The units range in size from 286 to 363 square feet, and each unit contains a kitchenette, a shower, and toilet facilities. Common areas make up roughly half the facility's space, including lounges, multipurpose rooms, dining rooms, and a commercial kitchen. The facility provides numerous services, including meals, medical assistance, and recreational activities.
The county auditor valued the property at $6 million, a value with which the Owner disagreed. At the Board of Review, the Owner presented an analysis using the sales comparison and income approaches to value based on apartment data, arriving at a valuation of $2.9 million. The Board of Review retained the auditor's valuation, and the Owner appealed to the Board of Tax Appeals (BTA).
Before the BTA, the Owner presented an appraisal report opining that the property's highest and best use as improved was as continued multifamily use. He applied both a sales comparison approach and an income approach, both drawing from apartment data. He justified his reliance on apartment data rather than assisted-living facility data based on what he viewed as the distortive effects that the facility's services have on the value of the realty. Including the value of the services in the analysis would generate rental rates far above what would be sustainable in the market. He concluded to a value of $3.55 million.
The county's appraiser valued the property as an assisted-living facility. In his income approach, his primary criterion was to find comparable properties offering assisted-living services. He began by computing a net operating income (NOI) for the going concern, then sought to isolate the cash flow to the real estate using a "lease coverage analysis." To perform this analysis, the county's appraiser evaluated nine market transactions, identifying the NOI per unit for the going concern and the rent per unit under the terms of an absolute net lease for each. After applying the resulting ratio to his estimate of the NOI for the subject's going concern, he concluded to a value of $9.1 million for the real estate.
The BTA adopted the county's appraisal, and the Owner appealed to the Ohio Supreme Court. The Owner first argued that prior case law required reliance on apartment comparables when valuing an assisted-living facility. In that earlier case, the court endorsed the use of apartment buildings as...