A Double Bogey for Private Golf Courses in Ohio

The Ohio Golf Course Association’s Policy Statement of Public/Private Competition provides, in pertinent part: “We oppose the development of new, and the expansion of existing government-owned golf facilities that have the potential of displacing business from the private sector”. (See: http://www.buckeyegolf.com/membership).

With golf courses across the country closing at a rate of more than 100 per year, and the recent, “chilly” legislative and judicial climate in Ohio (referred to herein as the “legislative bogey” and the “judicial bogey”), it is easy to understand the association’s opposition.

The “legislative bogey”: A line-item in the 2016-17 Ohio Budget would have given private golf course owners uniform property tax rules, requiring that Ohio’s auditors base golf course tax rates on the income the business generates, period. Currently, such auditors have three ways to evaluate golf courses and other commercial property: compare them with recent sales and similar properties; base the valuation on their highest use; or base the value on the income the property generates. However, the “game changing tax language” was removed from the final budget bill before it left committee.

The “judicial bogey” comes in the form of the recent Ohio Supreme Court decision of Cincinnati v. Testa, Slip Opinion No. 2015-Ohio 1775. The court in Cincinnati v. Testa held that the City of Cincinnati’s contractual arrangement with a for-profit company to manage and operate its public golf courses did not defeat the city’s exemption from property taxes pursuant to Ohio law (OR.C. 5709.08 et seq.); and that such golf courses retain their status as “public property used exclusively for a public purpose”, in spite of such contractual arrangement.

This case was initiated by a complaint from Paul Macke (a private golf-course operator who owns taxable real property in Hamilton County) to the Ohio Tax Commissioner (“Testa”). Macke complained that he had to close one of his courses as a result of increasing expenses (including taxes) and decreasing revenues, based, in part from competition by a nearby city course operated by Golf Management, Inc. (a private, for profit  company). According to Macke, the city-owned course could afford to reduce fees and aggressively compete because they were exempt from taxes, and they should not be exempt because the city course was operated by a private, for-profit entity.

After reviewing Macke’s complaints, the Ohio Tax Commissioner determined that the city’s tax exemption should be revoked and that its golf courses should be subject to real-property tax. The City of Cincinnati appealed to the Board of Tax Appeals (“BTA”), which reversed the commissioner’s determination and allowed the exemption. The tax commissioner then appealed to the Ohio Supreme Court.

The court’s holding in Cincinnati v. Testa was based largely on its interpretation of the statutory provision it deemed most applicable (O.R.C. 5709.121(A)(2)). “Under R.C. 5709.121(A)(2), three elements must be satisfied in order to conclude that the golf courses in this case are used exclusively for a public purpose and are, therefore, entitled to a tax exemption. First, they must be ‘under the direction or control of’ Cincinnati…Second, the property’s use must be ‘in furtherance of or incidental to [Cincinnati’s] public purposes’…Third, the property must be made available to others, not with a view to profit.”

The court deemed the first element satisfied by reiterating the evidence demonstrating extensive direction/control by Cincinnati such as Cincinnati’s authority over rate-setting, approval of marketing, and hours of operation and Cincinnati’s daily to weekly course inspections. The court determined the second element was easily met because the city’s golf courses were used to make golfing available to the general public.

The court reasoned that the third element of the statute was satisfied because Golf Management’s revenues were incidental compared to the fees the city earns from golf operations (including greens fees and cart rental fees, which the city reinvests into its golf facilities). Golf Management’s fees which were largely management fees (totaling $165,000/yr) and a food/beverage minimum (approx. $220,000) paled in comparison to the city’s nearly $6.2 million a year from 2007 to 2012 for golf course operations. The court also pointed out that “over the long haul, the municipal golf fund can fairly be characterized as operating on a close-to-break-even basis.” While the city’s revenues averaged nearly $6.2 million a year, the average expenses were over $6.3 million a year, for an average loss of approximately $150,000 per year for the same six-year period.

The Supreme Court of Ohio in Cincinnati v. Testa bolstered its reasoning by precedent (prior court decisions on point), such as: Carney v. Ohio Turnpike Comm., 167 Ohio St. 273 (1958); whereby a private corporation selling food, drink, gasoline, and other goods at a state owned turnpike plaza did not defeat an exemption for public property operated exclusively for a public purpose. As stated by the court in Testa v Cincinnati, “The focus in those cases was not on the revenue realized as a result of the challenged uses, but on the incidental character of the private use in relation to the public purpose.”

Understandably, private golf course owners are not happy. As claimed by the tax commissioner in Cincinnati v Testa, “The city has used the ‘competitive advantage’ of the tax exemption to harm private competition.” On the other hand, perhaps this is a case of effect vs. intent.  While the effect of the tax exemption is harmful to private golf course owners, is that effect truly what the public entities intend to achieve? The evidence does not seem to support such intent. The testimony in this case established that Cincinnati refused a request by Golf Management to increase greens fees concluding that a rate increase would harm Cincinnati’s public mission. Exemption from taxes means lower costs, the ability to charge lower greens fees, and accordingly, the ability to secure a greater access to everyone. These actions, according to the court “constitute a part of [the city’s] public mission not a refutation of it.”