Summary
In Freshwater v. Belmont Cty. Bd. of Revision (1991), 58 Ohio St.3d 140, 568 N.E.2d 1215, we held that a reserve for replacements was a proper item to consider in valuing real property.
Summary of this case from Fawn Lake Apartments v. Cuyahoga County Board of RevisionOpinion
No. 90-1088
Submitted November 29, 1990 —
Decided March 27, 1991.
Taxation — Reserves for replacement are proper items of expense to be utilized when estimating the true value of real property through an income approach.
APPEAL from the Board of Tax Appeals, No. 88-H-850.
On tax lien day, January 1, 1987, appellant, Ralph D. Freshwater, owned fifty-one apartment units known as the York Terrace Apartments in Shadyside, Ohio.
The Belmont County Auditor determined the true value of the subject property for 1987 to be $684,390. Appellant's request for a reduction in value was rejected by the board of revision.
The case was appealed to the Board of Tax Appeals ("BTA") and appraisal evidence was presented by both sides. Each of the appraisers utilized the income approach to valuation.
Appellant's appraiser initially estimated the true value at $443,100. He later made a correction based upon discovery of a duplication of expense items, arriving at a true value estimate of $463,000. Appellant's appraiser deducted as expenses the following reserves for replacements:
1) Roofing 184 sq./12 yr. life/$170/sq. $ 2,607 2) Ranges 51 ea./10 yr. life/$370 ea. 1,887 3) Refrigerators 51 ea./12 yr. life/$345 ea. 1,466 4) Water Heaters 51 ea./5 yr. life/$450 ea. 4,590 5) Disposals 51 ea./6 yr. life/$105 ea. 893 6) H/AC Systems 51 ea./12 yr. life/$1,900 ea. 8,075 7) Washers 4 ea./10 yr. life/$320 ea. 128 8) Dryers 4 ea./10 yr. life/$265 ea. 106 9) Carpeting 1,320 s.y./4 yr. life/$12/s.y. 3,960 TOTAL $23,712
Appellant's appraiser testified that reserves for replacements are generally accepted for use in short-term projections and are permitted in the income method of appraising real estate. Appellant's appraiser testified on cross-examination:
"Q. You have a reserve for replacement of $23,700?
"A. That's right, which is permitted in the income method.
"* * *
"Q. And that's for 51 ranges, refrigerators, water heaters, disposals, heating and air conditioning units, 51 of each of those?
"A. Correct.
"* * *
"Q. So under the manner in which this has been prepared for the reserves, the assumption is that every single one of them is going to break every single year, correct?
"A. No. You are not reading my analysis.
"Q. You have 51 each at ten years at 370 each for ranges, correct?
"A. We are saying with 51 ranges and they — we're saying that they have a ten-year life, that's correct.
"Q. But the reserve encompasses 51, right, of each one of these items that I referred to?
"A. That's right."
Appellee's appraiser disagreed. Perhaps the disagreement arose from a misunderstanding of appellant's position, which is seen in the testimony of appellee's appraiser on direct examination:
"Q. As far as the reserve for replacement, Jim, would you consider the one year that was provided as a short-term projection?
"A. I certainly will.
"Q. As far as your training and in the areas of expertise that you have in real estate appraisals, would you on a regular basis use a reserve on a short-term projection?
"A. No. I would not.
"Q. And why would you not do that?
"A. Well primarily because — * * * they are just not needed because of the short — because of the one year projection.
"Now, if it was based on a longer term where more detailed information was supplied, then that could be maybe inserted into — ."
The BTA found the true value of the subject property to be $640,710. The BTA states that it adopted the amounts used by appellant's appraiser in valuing the property. However, it rejected deducting the reserves for replacements from income. This action increased net income that the BTA then translated into the higher value.
The cause is before this court upon an appeal as of right.
J. Drew McFarland, for appellant.
Robert W. Quirk, assistant prosecuting attorney, for appellees.
Both parties and the BTA agreed that the income approach was the proper approach to valuation of the subject property. The narrow issue is whether, as appellant contends, the BTA's rejection of appellant's use of reserves for replacements was unreasonable and unlawful. We find that it was.
Appraisal manuals and treatises can help in the valuation of real property.
The BTA acted unreasonably and unlawfully in refusing to consider reserves for replacements. Such reserves are proper items of expense to be utilized when estimating the true value of real property through an income approach. The Appraisal of Real Estate, American Institute of Real Estate Appraisers (9 Ed. 1987) 450-451. "A replacement allowance provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced periodically during the building's economic life * * *. The annual allowance for each component is usually estimated as the anticipated cost of its replacement prorated over its anticipated remaining economic life, provided this does not exceed the remaining economic life of the structure. * * *" Id. at 450. The BTA should analyze the reserves to determine if they include any inappropriate items, or if they are otherwise excessive, which would warrant a modification in the amount deducted as expenses.
The decision of the BTA is reversed and the cause is remanded for reconsideration of the components included in, and the deductibility of, the reserves for replacements and for a redetermination of the true value of the subject property in accordance with this opinion.
Decision reversed and cause remanded.
MOYER, C.J., SWEENEY, HOLMES, DOUGLAS, WRIGHT, H. BROWN and RESNICK, JJ., concur.