Property Tax Alert: Ohio

January 2006

For property tax purposes, the use of sales per square foot to determine external obsolescence as a factor of real property valuation was rejected. The Ohio Supreme Court stated that sales per square foot is not an accurate measure for determining property value.

The taxpayer contended that the replacement value of the attached property, a shopping mall, was approximately $10,695,000. This amount included, among other adjustments, a reduction in the amount of $5,500,000 to account for external obsolescence. The reduction for external obsolescence asserted by the taxpayer was based upon the capitalization of income loss method.

In presenting evidence to establish the capitalization of income loss rate needed to determine external obsolescence, the taxpayer used the rental deficiency formula and the shortfall of sales formula. Both of these formulas relied on the sales per square foot of the underlying property. The court noted that the sales per square foot measure is unreliable because it is an amount not determined by what an interested party would be willing to pay; rather, it is an amount that determines the success of the business. Without the deduction for external obsolescence, the cost-based valuation is not dependent on consideration of sales per square foot.

Finally, the board of tax appeals did not abuse its discretion in accepting the highest and best use of the property as an anchor department store. There was credible evidence in the testimony of the taxpayer's appraiser that the current use, as improved, was the highest and best use.

Please contact Rash & Associates for more information.