Hometowne Associates, L.P. v. Maley

• Decision Date: 16 December 2005
• Docket Number: No. 49T10-0208-TA-98.,49T10-0208-TA-98.
• Parties: HOMETOWNE ASSOCIATES, L.P. d/b/a Unity Park, Petitioner, v. James P. MALEY, Jr., Township Assessor of Center Township, Marion County, Respondent.
• Court: Indiana Tax Court

Page 269

839 N.E.2d 269

HOMETOWNE ASSOCIATES, L.P. d/b/a Unity Park, Petitioner, v. James P. MALEY, Jr., Township Assessor of Center Township, Marion County, Respondent.

No. 49T10-0208-TA-98.

Tax Court of Indiana.

December 16, 2005.

Larry J. Stroble, Barnes & Thornburg, Indianapolis, for Petitioner.

Steve Carter, Attorney General of Indiana, Robert B. Wente, Deputy Attorney General, Indianapolis, for Respondent.

FISHER, J.

Hometowne Associates, L.P. d/b/a Unity Park (Unity Park) appeals from a final determination of the Indiana Board of Tax Review (Indiana Board) valuing its real property for the 2001 assessment (the year at issue). The sole issue for the Court to decide is whether the Indiana Board erred in denying an obsolescence adjustment to Unity Park.

FACTS AND PROCEDURAL HISTORY

Unity Park is a scattered-site,¹ low-income housing development located just north of downtown Indianapolis. The development consists of 60 rental units, each with either two, three, or four bedrooms, and is located in an area designated by the City of Indianapolis as "blighted."

Constructed in the mid 1990's, Unity Park was financed and operates under two federal housing programs. First, Unity Park was designed as low-income housing to qualify for tax credits pursuant to section 42 of the Internal Revenue Code.² Under this program, Unity Park's developers received approximately $5.3 million in tax credits to award to investors³ who provided financing for the project. In addition, Unity Park is subject to the provisions of Section 8 of the United States Housing Act of 1937, which is administered by the Department of Housing and Urban Development (HUD). See, generally, 42 U.S.C. § 1437 (2005). By participating in this program, Unity Park agrees to charge only those rental rates as dictated by HUD.⁴ In turn, however, HUD subsidizes approximately 70% of those rental charges.

For the 2001 assessment, James P. Maley, Jr., the Center Township Assessor (Assessor), assigned Unity Park an assessed value of $2.2 million. Believing this value to be too high, Unity Park filed an appeal with the Marion County Property Tax Assessment Board of Appeals (PTABOA). On August 24, 2001, the PTABOA sustained the Assessor's valuation of the property.

Unity Park subsequently appealed the PTABOA's determination to the State Board of Tax Commissioners (State Board) alleging that the Assessor failed to recognize that its property was suffering from obsolescence. On February 20 and 27, 2002, the Indiana Board⁵ held an administrative hearing on the matter. On June 20, 2002, the Indiana Board issued a final determination upholding the PTABOA's assessment.

Unity Park filed this original tax appeal on August 1, 2002. The Court heard the parties' oral arguments on May 29, 2003. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

This Court gives great deference to final determinations of the Indiana Board. Wittenberg Lutheran Vill. Endowment Corp. v. Lake County Prop. Tax Assessment Bd. of Appeals, 782 N.E.2d 483, 486 (Ind. Tax Ct.2003), review denied. Consequently, the Court may only reverse a final determination of the Indiana Board if it is:

(1) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

(2) contrary to constitutional right, power, privilege, or immunity;

(3) in excess of statutory jurisdiction, authority, or limitations, or short of statutory jurisdiction, authority, or limitations;

(4) without observance of procedure required by law; or

(5) unsupported by substantial or reliable evidence.

IND. CODE § 33-26-6-6(e)(1)-(5) (West 2005).

The party seeking to overturn the Indiana Board's final determination bears the burden of proving its invalidity. See Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct.1998). In order to meet that burden, the party seeking reversal must have submitted, during the administrative hearing process, probative evidence regarding the alleged assessment error. See id. See also State Bd. of Tax Comm'rs v. Gatling Gun Club, 420 N.E.2d 1324, 1328-29 (Ind.Ct.App.1981) (stating that only evidence submitted at the administrative level is subject to judicial review).

DISCUSSION

In 2001, real property in Indiana was assessed on the basis of its "true tax value." IND. CODE ANN. § 6-1.1-31-6(c) (West 2001). A property's true tax value was not its fair market value, but rather the value as determined under Indiana's own assessment regulations. See id.

Under these assessment regulations, a commercial improvement's true tax value was equal to its reproduction cost less any physical and/or obsolescence depreciation present therein. See IND. ADMIN. CODE tit. 50, r. 2.2-10-7(e) (1996). Reproduction cost was defined as the "whole-dollar cost of reproducing the item." IND. ADMIN. CODE tit. 50, r. 2.2-10-5(d)(13) (1996). Nevertheless, the reproduction cost of an improvement was not the actual cost of reproducing the item but rather the cost as specified in the assessment regulations. See IND. ADMIN. CODE tit. 50, r. 2.2-10-6.1 (1996); IND. ADMIN. CODE tit. 50, r. 2.2-11-5.1 (1996); IND. ADMIN. CODE tit. 50, r. 2.2-11-6 (1996).

In turn, the assessment regulations defined obsolescence depreciation as either the functional or economic loss of value to a property. 50 IAC 2.2-10-7(e). For instance, functional obsolescence (or a loss of value resulting from factors internal to the property) could be caused by the fact that an improvement had limited use due to an irregular or inefficient floor plan, inadequate or unsuited utility space, or an excessive/deficient load capacity. See id. In contrast, economic obsolescence (or a loss of value resulting from factors external to the property) could be caused by the fact that an improvement was located in an inappropriate area, subject to inoperative or inadequate zoning ordinances or deed restrictions, constructed for a need which has subsequently been terminated due to actual or probable changes in economic or social conditions, or the manufacture of the product for which the improvement was originally constructed has suffered from decreased market acceptability. Id.

While the assessment regulations explained that obsolescence depreciation was to be applied as a percentage reduction (ranging from 0% to 95%) against an improvement's reproduction cost, they provided no explanation as to how to calculate how much obsolescence was actually present in an improvement. Nevertheless, this Court has held that because the assessment regulations tied the definition of obsolescence directly to that as applied by professional appraisers in calculating a property's fair market value, obsolescence under the true tax value system necessarily incorporated market value concepts. See Canal Square Ltd. P'ship v. State Bd. of Tax Comm'rs, 694 N.E.2d 801, 806, n. 8 (Ind. Tax Ct.1998). Consequently, the Court has accepted the use of generally recognized appraisal methods for quantifying obsolescence as a permissible means of quantifying obsolescence under the true tax value system. See Clark, 694 N.E.2d at 1242, n. 18. See also Lacy Diversified Indus., Ltd. v. Dep't of Local Gov't Fin., 799 N.E.2d 1215, 1223 (Ind. Tax Ct.2003); Inland Steel Co. v. State Bd. of Tax Comm'rs, 739 N.E.2d 201, 211 (Ind. Tax Ct.2000), review denied; Canal Square, 694 N.E.2d at 806-807; Thorntown Tel. Co. v. State Bd. of Tax Comm'rs, 588 N.E.2d 613, 619 (Ind. Tax Ct.1992).

When a taxpayer seeks an obsolescence adjustment, it is required to make a two-pronged showing: first, it must identify the causes of the obsolescence, and second, it must quantify the amount of obsolescence to be applied. See Clark, 694 N.E.2d at 1238. Each of these prongs, however, requires a connection to an actual loss in property value. For example, when identifying causes of obsolescence, a taxpayer must provide probative evidence that identifies the existence of specific factors that are causing obsolescence in its improvement. Id. In other words, the taxpayer must show how these factors are causing an actual loss of value to its property. See Miller Structures, Inc. v. State Bd. of Tax Comm'rs, 748 N.E.2d 943, 954 (Ind. Tax Ct.2001). In the commercial context, this loss of value usually means a decrease in the property's income-generating ability. See id. at 953. Only after this showing has been made does the taxpayer proceed to the second-prong: the quantification of obsolescence.⁶ This prong requires the taxpayer to convert the actual loss of value (shown in the first prong) into a percentage reduction and apply it against the improvement's overall true tax value. See Lacy Diversified, 799 N.E.2d at 1223.

At the administrative hearing, Unity Park presented, inter alia, the testimony of an expert witness, Mr. Hank Rassel, an appraiser certified as a Member of the Appraisal Institute (MAI), together with his appraisal⁷ valuing Unity Park as of August 1, 2001. In both his appraisal and his testimony, Mr. Rassel claimed that six different factors were negatively impacting Unity Park's ability to generate income:

1. Excess Operating Expenses[:]... the main cause of obsolescence affecting [Unity Park] was that the contract rents permitted by the HUD contract were not sufficient to offset [its] operating expenses[.] The scattered[-]site nature of the project caused higher expenses, such as insurance costs, repair and maintenance costs, and administrative costs, than a typical apartment complex.

* * * * * *

2. Location[:] ... the area in which Unity Park is located is not a particularly desirable area, having a relatively high crime rate and many burned out and abandoned buildings.... "[N]egative activity" in the area ... affected the subject property and contributed to lower obtainable rent, higher expenses, and higher vacancy.

3. Four-Bedroom Units[:] ... four-bedroom units ... could be considered an "overimprovement" of the property.... The four-bedroom units were difficult...