By:
Stephen D. Richman, Esq. – Senior Counsel, Kohrman, Jackson & Krantz
That old adage, “if it
looks like a duck, swims like a duck, and quacks like a duck,
then it probably is a duck” holds true for…waterfowl and a host of persons,
places and things, but not for greenhouses in the recent Ohio Board of Tax
Appeals decision, Viola Associates, LLC v.
Lorain County Board of Revision, Case Nos. 2016-1273, 1274 and 1275.
The facts of the case are simple enough; the law,
not so much.
Facts of the Case
Green Circle Growers Inc. and Viola Associates,
LLC (collectively, “Green Circle”) own approximately 186 acres of land improved
with greenhouses, packing and storage facilities, a residence and barn. Lorain
County valued (in 2016) the property for tax purposes at approximately $40
Million. Green Circle
filed complaints with the Lorain County Board of Revision (“BOR”) seeking a
reduction in value to approximately $22 Million. Shortly thereafter, the
appellee, Firelands Local Schools Board of Education (“BOE”) filed a counter
complaint in support of maintaining the auditor’s $40 Million value. The
primary issue addressed by the BOR (and afterwards, by the Board of Tax Appeals)
was whether the greenhouses situated on the property should be treated as real
property, and accordingly included in the assessment of the subject property’s
total true value; or as personal property that should be excluded from the
subject’s value for purposes of real estate taxation.
At
the BOR hearing, Green Circle claimed that the greenhouses, while attached to
the land, are removable, and therefore constitute personal property that should
not be included in the auditor’s valuation. Green Circle presented testimony from
several witnesses who testified that “the
method by which a greenhouse is affixed to the ground and constructed is
similar to an erector set, in that it can be deconstructed and reconstructed
with limited damage” and that “there
is an active secondary market for the
resale of greenhouses, which are deconstructed and then sold to again be used
for horticulture.” Green Circle also offered testimony from an appraiser
who opined that the greenhouses were personal property and should not be
included in the value of the subject real property because they could be
removed from the property with relative ease, and would yield little value to
anyone other than someone in the horticulture business. The BOE cross-examined
Green Circle’s witnesses, but did not offer any independent evidence of value.
In
spite of all of the testimony, the BOR ruled that Green Circle presented
insufficient evidence to support a reduction in value, and that therefore, the
initial assessed valuation of $40 Million was to be maintained. Green Circle
then appealed the BOR decision to the Ohio Board of Tax Appeals.
Applicable Law
Distinguishing between personalty and realty is a
vexing issue in many real estate and tax related arenas. In landlord-tenant
law, for example, the issue usually centers on who is entitled to remove and/or
retain the item in question (e.g., a supplemental HVAC system bolted to the
roof) at the end of the lease. In a foreclosure, the issue is whether or not
the item is realty, and can be foreclosed upon, or personalty, and not part of
the property being foreclosed. The distinction in tax law can determine what
are qualifying REIT assets, the amount of a taxpayer’s Investment Tax Credit,
what gets capitalized and whether or not property qualifies as a 1031 Exchange.
At early common law, the general rule was that
everything attached to realty became part of the realty, and therefore was deemed
irremovable. Friedman
on Leases, Sec. 24.1 at 1414
(2005). In modern times, as is the case with many “general rules,” the
exception (removability) seems more general rule than exception. While most
would agree that a 20 story office building is realty and a lawn mower is
personalty, between the extremes is much more difficult to assess. In other
words, how does one classify grain bins, silos, electronic billboards, cold
storage cooler rooms, oil tanks and amusement park rides?
Unfortunately, there is no one size fits all
definition. In Ohio, the answer for landlord-tenant issues can be found in
common law decisions. See, e.g., Perez Bar & Grill v. Schneider,
2012-Ohio-5820; Household
Finance Corp. v. The Bank of Ohio, 62 Ohio App. 3d 691, 694 (1989) and
Friedman on Leases,
Sec. 24.1 at 1414 (2005). The
definition of real property for various income tax issues can be found in the U.S.
Tax Code and corresponding regulations for the applicable tax issue.
In determining whether a landowner’s real estate
should increase in value for real estate tax purposes (or not be affected
because the item in question is personal property), county auditors must look
to the statutory definitions of real property and personal property in the Ohio
Revised Code.
R.C. 5701.02 defines “real property” (as used in Title LVII of the Revised
Code [Taxation]) as follows:
“(A) 'Real
property,' 'realty,' and 'land' include land itself . . . with all things
contained therein, and, unless otherwise specified in this section or 5701.03
of the Revised Code, all buildings, structures, improvements, and fixtures of
whatever kind on the land…”
The definitions of “buildings”, “fixtures”, “improvements”
and “structures” appear in R.C. 5701.02
(B) - (E), respectively.
R.C.
5701.03 defines “personal property” (as used in Title
LVII of the Revised Code [Taxation]) as follows:
“(A)
‘Personal property’ includes every tangible thing that is the subject of
ownership . . . including a business fixture, and that does not constitute real
property as defined in Section 5701.02 of the Revised Code.
(B)
‘Business fixture’ means an item of tangible personal property that has become
permanently attached or affixed to the land or to a building, structure, or
improvement, and that primarily benefits the business conducted by the occupant
on the premises and not the realty. 'Business fixture' includes, but is not
limited to, machinery, equipment, signs, storage bins and tanks, whether above
or below ground. ‘Business fixture’ also means those portions of
buildings, structures, and improvements that are specially designed,
constructed, and used for the business conducted in the building, structure, or
improvement, including, but not limited to, foundations and supports for
machinery and equipment…”
It is important to note that in 1992, the Ohio
General Assembly amended the definition of “personal property” to include
“business fixtures.”
Analysis of the BTA’s
Decision in Viola
To
reach its conclusion that the Green Circle greenhouses were personal property
(and that the BOR decision should be overruled), the Board of Tax Appeals (“BTA”)
in Viola first felt it necessary to
determine if the subject greenhouses could be classified as buildings,
structures or improvements. If so, the analysis would end there, and the greenhouses
would be taxed as real property. The BTA reasoned that the definition of these
items in R.C.
5701.02 (B) - (E) all
shared “an element of permanence in their
original fabrication or construction” (vs. a “fixture” or “business fixture”
that starts out as an item of
tangible personal property, that then becomes attached or affixed to the land
or to a building, structure, or improvement). The BTA then determined the
greenhouses were not buildings, structures or improvements, based upon the
testimony presented by Green Circle’s witnesses that described the greenhouses as
temporary, built to be removed and often sold on a secondary market following
removal. According to the BTA, the greenhouses were a far cry from permanently
constructed buildings built to shelter persons or property, or structures
defined by the Ohio Revised Code to include bridges, dams and silos. The BTA
was not swayed by the appellee’s argument that the greenhouses were permanent
because they were attached to concrete. Although the concrete is incorporated
into the real estate, according to the BTA, “that does not transform the item to which it is attached [to real
estate], such as an… amusement park ride and its shelter, which retains its
character as tangible personal property, albeit permanently affixed to the land.”
Moreover, personal property can include foundations
and supports pursuant to R.C. 5701.03.
Once determined not to be structures, buildings or improvements, the
next threshold question for the BTA to answer was whether or not the Green
Circle greenhouses were “fixtures,” and accordingly, real property; or
“business fixtures”, and accordingly, personal property.
According to the BTA, the “statutory test” for
items not buildings, structures or improvements boils down to whether the item
“primarily benefits” the business or the realty. This makes sense as the
statutory definitions of “fixture” and “business fixture” are identical, except
for the primary benefit language at the end of each definition. In other words,
the greenhouses would be classified as “fixtures” and real property if they
primarily benefit the realty; or “business fixtures” and personal property if they
primarily benefit the business.
The BTA came to the conclusion that the
greenhouses in question primarily benefited the business (vs. the realty),
based on the evidence presented to the BOR and the BTA. As stated by the BTA in Viola, “Green Circle presented testimony from multiple individuals to
demonstrate that the greenhouses in question were designed especially for
growing plants…. primarily benefit Green Circle Growers’ horticulture business
and would provide little value, if any, to another occupant of the land who was
not engaged in the same or very similar business.” Also important to the BTA
was the fact that “the greenhouses are
outfitted with computer systems, shade cloths, irrigation systems, retractable
roofs, and a number of other components that are specific to the sophisticated
operation taking place at the property… that would [not] benefit the land or
any other occupant of the property that was not engaged in a commercial
horticulture business.”
What about precedent
(prior decisions on point)? In fact, the BOE strongly argued that the Supreme
Court of Ohio, in Green Circle Growers,
Inc. v. Lorain Cty. Bd. Of Revision, 35 Ohio St. 3d 38 (1988) decided that
these very same greenhouses were real property and should be taxed as such (for
the applicable tax years in question). The BTA in Viola easily distinguished this case, however, because it was
decided prior to the 1992 amendment to R.C.
5701.02 and 5701.03 that revised
the definitions of real and personal property for taxation purposes, most
notably adding the newly defined “business fixture,” which the Ohio General
Assembly specifically excluded from the definition of real property. According to
the BTA in Viola, “these definition changes demand
reconsideration of the issue and lead to a different result.” Namely, that
the greenhouses should be deemed personal property and not part of the real
estate.
Adding “insult to injury”,
the BTA in Viola also described two
cases decided after the 1988 Green Circle case (and after the afore-mentioned
1992 amendments), in which the Supreme Court of Ohio held that the items of
property in question were business fixtures and not real property fixtures. See Metamora Elevator Co. v. Fulton Cty. Bd.
of Revision, 143 Ohio St.3d 359, 2015-Ohio-2807 (Grain Bins were held to be
business fixtures and not real property); and Funtime, Inc. v. Wilkins, 105
Ohio St.3d 74, 2004-Ohio-6890 (amusement park rides and their accoutrements
were held to be business fixtures and not real property).
Having found that the
greenhouses in Viola are business
fixtures and, therefore, should not be taxed as real property, the BTA’s final
task was to examine the appraisals of the BOE and Green Circle and determine
the appropriate value of the real property. Using the appellant’s cost approach
for the residential property, and sales comparison approach for the commercial
property, the BTA arrived at a total value of $10,200,000.
With an approximate $30
Million difference between the BOE’s opinion of value and the BTA’s
determination of value, the appellee, reportedly has petitioned the Ohio
Supreme Court to consider the matter. Only then will we know if what looked
like a greenhouse building to the Ohio Supreme Court in 1988 is still a
greenhouse building in 2018, or a business fixture as determined by the BTA in Viola.
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