Meadowbrook North Apartments v. Conner

• Decision Date: 04 August 2005
• Docket Number: No. 49T10-0203-TA-35.,49T10-0203-TA-35.
• Citation: 854 N.E.2d 950
• Parties: MEADOWBROOK NORTH APARTMENTS, an Indiana Limited Partnership, Petitioner, v. Brenda CONNER, Assessor of Noble Township, Wabash County, Respondent.
• Court: Indiana Tax Court

854 N.E.2d 950

MEADOWBROOK NORTH APARTMENTS, an Indiana Limited Partnership, Petitioner, v. Brenda CONNER, Assessor of Noble Township, Wabash County, Respondent.

No. 49T10-0203-TA-35.

Tax Court of Indiana.

August 4, 2005.

Ordered Published October 3, 2006.

COPYRIGHT MATERIAL OMITTED

Brent A. Auberry, Vickie L. Norman, Baker & Daniels, Indianapolis, IN, for Petitioner.

Steve Carter, Attorney General of Indiana, Linda I. Villegas, Deputy Attorney General, Indianapolis, IN, for Respondent.

FISHER, J.

Meadowbrook North Apartments, an Indiana Limited Partnership (Meadowbrook), appeals the Indiana Board of Tax Review's (Indiana Board) final determination valuing its real property as of March 1, 1995. The sole issue for the Court to decide is whether Meadowbrook is entitled to an adjustment to account for economic obsolescence.¹ For the following reasons, the Court REVERSES the Indiana Board's final determination.

FACTS AND PROCEDURAL HISTORY

Meadowbrook owns and operates a subsidized housing complex (complex) in Wabash County, Indiana, which was developed under the U.S. Department of Housing and Urban Development's (HUD) 236 Program. The 236 Program is a mortgage interest subsidy program designed as a means to encourage developers to produce below-market housing for low-income individuals. Consequently, HUD determines the maximum rent chargeable for each housing unit based upon the complex's operating expenses and Meadowbrook's mortgage debt and dividend equity. While the 236 Program does not entitle Meadowbrook to any federal tax incentives, it does entitle it to a monthly reduction in its mortgage interest payments and a limited return on investment.²

As of the March 1, 1995 assessment date, the township assessor (Assessor) fixed the assessed value of the complex at $611,100. In arriving at that value, the Assessor did not assign an economic obsolescence adjustment to the complex. On March 27, 1996, Meadowbrook challenged its assessment by filing a Petition for Review of Assessment (Form 130) with the Wabash County Board of Review (BOR). In its final determination, the BOR reduced the assessed value of the complex, but affirmed the Assessor's denial of an obsolescence adjustment.

Still believing its assessment to be too high, Meadowbrook appealed to the State Board of Tax Commissioners (State Board) by filing a Petition for Review of Assessment (Form 131). In its Form 131, Meadowbrook alleged, among other things, that the apartment complex suffered from obsolescence as a result of the HUD-imposed rent restrictions. The State Board conducted an administrative hearing on Meadowbrook's Form 131 petition on October 13, 2000. On February 8, 2002, the Indiana Board of Tax Review (Indiana Board) issued a final determination denying Meadowbrook's request for relief.³ Meadowbrook subsequently filed a Request for Rehearing with the Indiana Board, which was ultimately denied.

On March 21, 2002, Meadowbrook filed an original tax appeal. On April 14, 2003, this Court heard the parties' oral arguments. Additional facts will be supplied as necessary.

ANALYSIS AND OPINION

Standard of Review

This Court gives great deference to final determinations of the Indiana Board when it acts within its scope of authority. IND.CODE ANN. § 33-26-6-3(b) (West 2005). See also Meridian Towers East & West v. Washington Township Assessor, 805 N.E.2d 475, 477 (Ind. Tax Ct.2003) (citation omitted). Consequently, the Court will reverse a final determination of the Indiana Board only 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 ANN. § 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. A.I.C. § 33-26-6-6(b). See also Meridian Towers, 805 N.E.2d at 477. 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. Osolo Township Assessor v. Elkhart Maple Lane Assocs. L.P., 789 N.E.2d 109, 111 (Ind. Tax Ct.2003) (footnote and citations omitted). Probative evidence is evidence sufficient to establish a given fact that, if not contradicted, will remain sufficient. Id. at n. 4. Once the party seeking reversal demonstrates a prima facie case, the burden shifts to the other party to rebut that evidence. See Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d at 1230, 1233 (Ind. Tax Ct.1998) (citation omitted) ("Clark I").

Discussion

Meadowbrook contends that the Indiana Board refused to meaningfully consider its evidence when it upheld the Assessor's denial of an economic obsolescence adjustment to its property. Specifically, Meadowbrook maintains that it made a prima facie case in that it "submitted probative evidence, consisting of an income analysis based on generally recognized appraisal principles, along with supporting documents and expert testimony, demonstrating that the [complex] suffered from, at minimum, 31% economic obsolescence[.]" (Pet'r Br. at 4.) In turn, Meadowbrook argues that the Assessor failed to offer any evidence to rebut its claim. The Court agrees.

Obsolescence, a form of depreciation, is the functional or economic loss of property value expressed as a percentage reduction in the remaining value of the subject improvement. IND. ADMIN. CODE tit. 50, r. 2.2-10-7(e), (f) (1996). See also Meridian Towers, 805 N.E.2d at 477-78 (citation omitted). Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property itself whereas economic obsolescence is caused by external factors. 50 IAC 2.2-10-7(e).

In order to establish a prima facie case for obsolescence, a taxpayer must (1) identify factors that are causing obsolescence, and (2) quantify the amount of obsolescence to which it believes it is entitled. Clark I, 694 N.E.2d at 1241 (footnote omitted). The taxpayer must relate the factors (and therefore the quantification) of obsolescence to an actual loss in property value. See Miller Structures, Inc. v. State Bd. of Tax Comm'rs, 748 N.E.2d 943, 953-54 (Ind. Tax Ct.2001). In the commercial context, actual loss corresponds to a reduction in an improvement's income generating ability. Id. at 953 (citations omitted).

I. Meadowbrook's Causes of Obsolescence

Although the regulations list various causes of economic obsolescence, they do not reference the impact of restrictions placed on federally subsidized housing units. See 50 IAC 2.2-10-7(e). The list, however, is illustrative, not exhaustive. See Clark v. State Bd. of Tax Comm'rs, 742 N.E.2d 46, 51 (Ind. Tax Ct.2001) ("Clark II") (citation omitted), review denied. Meadowbrook asserts that, due to the governmentally imposed restrictions of the 236 Program, its potential rental market is limited, and it has higher operating costs than comparable unrestricted properties because of high turnover, additional record keeping and other HUD requirements. (Cert. Admin. R. at 261-62, 264.) In addition, Meadowbrook maintains that HUD restricts any returns on investment to which it may be entitled, sets the maximum rents charged to tenants, and prohibits it from paying off the mortgage without HUD approval. (Cert. Admin. R. at 262-63.) Consequently, Meadowbrook asserts that its income producing ability is limited.

At the administrative level, Meadowbrook presented a report (Report) to support its contention that it sufficiently identified and linked these causes of obsolescence to its reduced ability to generate income. The Report, prepared by Brian Poore, an associate Member of the Appraisal Institute (MAI) and Level II Certified Indiana Assessor-Appraiser (Appraiser), included, among other things, copies of eighteen State Board final determinations illustrating that the State Board had previously granted obsolescence adjustments to subsidized housing complexes; a summary of Meadowbrook's income and expenses; a HUD-issued statement of Meadowbrook's profit and loss for 1992-1994; and a rent schedule and a rent comparability study. (See Cert. Admin. R. at 463-515, 517-21, 524-35.) In addition, Meadowbrook's Report included three different approaches for determining the fair market value⁴ of the complex. These approaches, Meadowbrook contends, reveal that the property is entitled to economic obsolescence adjustment of between 31% and 52%.

II. Meadowbrook's Quantification of Obsolescence

A. Income Capitalization Approach

The income capitalization approach considers the present value of any future benefits of property ownership, and capitalizes the net income that the property produces. See Meridian Towers, 805 N.E.2d at 479 (citations omitted). It converts the net income and any other anticipated benefits of the income-producing property into property value. See id. Based upon its financial statements, Meadowbrook determined its net operating income, before real estate taxes, to be $180,672. (Cert. Admin. R. at 267.) It then applied a capitalization rate of 11.81% to the net income to arrive at an estimated fair market value of $1,529,822. (Cert. Admin. R. at 267.) After subtracting $186,400 for the value of the land as indicated on the 1995 property record card, Meadowbrook arrived at a fair market value of $1,343,422. (Cert. Admin. R. at 267, 271-87.)

B. The Cost Approach

The cost approach estimates the current cost to construct a reproduction of the existing improvement, less deductions for all accrued depreciation present in the property being appraised. Meridian Towers, 805 N.E.2d at 478. Based on the Marshall & Swift valuation guidelines,...