MERIDIAN TOWERS v. WASHINGTON TP. ASSESSOR

Decision Date23 December 2003
Docket NumberNo. 49T10-0206-TA-58.,49T10-0206-TA-58.
Citation805 N.E.2d 475
PartiesMERIDIAN TOWERS EAST & WEST, A Limited Liability Company, Petitioner, v. WASHINGTON TOWNSHIP ASSESSOR, Marion County, Respondent.
CourtIndiana Tax Court

Sandra K. Bickel, Attorney at Law, Indianapolis, IN, Attorney for Petitioner.

Steve Carter, Attorney General of Indiana, Joel Schiff, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

FISHER, J.

Meridian Towers East & West, a Limited Liability Company (Meridian), appeals the Indiana Board of Tax Review's (Indiana Board) final determination valuing its real property for the 1998 tax year. The issue is whether Meridian's improvements should have been awarded a 74% obsolescence depreciation adjustment. For the following reasons, the Court REVERSES the Indiana Board's final determination.

FACTS AND PROCEDURAL HISTORY

Meridian owns two apartment buildings, known as Meridian Towers Apartments, in Indianapolis, Indiana. For the 1998 assessment year, the Washington Township Assessor (Assessor) applied a 10% obsolescence depreciation adjustment to each of Meridian's buildings. Meridian appealed its assessments to the Marion County Board of Review (BOR); the Marion County Property Tax Assessment Board of Appeals1 (PTABOA) denied Meridian's appeals.

Meridian appealed the PTABOA's denial to the State Board of Tax Commissioners (State Board), alleging that the buildings were entitled to additional obsolescence depreciation. On April 18, 2002, following an administrative hearing, the Indiana Board2 issued a final determination3 denying Meridian's requested relief.

On June 3, 2002, Meridian initiated an original tax appeal. On September 3, 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 the scope of its authority. 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 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 § 33-3-5-14.8(e)(1)-(5) (West Supp.2003). The party seeking to overturn the Indiana Board's final determination bears the burden of proving its invalidity. See Osolo Township Assessor v. Elkhart Maple Lane Assocs., L.P., 789 N.E.2d 109, 111 (Ind. Tax Ct.2003)

.

Discussion

Meridian contends that the Indiana Board erred when it upheld the Assessor's refusal to award additional obsolescence depreciation to its improvements. Meridian is correct.

Obsolescence is the functional or economic loss of property value; it is expressed as a percentage reduction in the remaining value of the subject improvement. Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1238 (Ind. Tax Ct.1998) ("Clark I"). See also IND. ADMIN. CODE tit. 50, r. 2.2-10-7(f) (1996). Functional obsolescence is caused by factors internal to the property; economic obsolescence is caused by external factors. See IND. ADMIN. CODE tit. 50, r. 2.2-10-7(e) (1996).

In order to make a prima facie case for obsolescence, a taxpayer bears the burden of identifying causes of obsolescence as well as quantifying the amount of obsolescence to be applied to its improvements. See Clark v. State Bd. of Tax Comm'rs, 742 N.E.2d 46, 51 (Ind. Tax Ct.2001)

("Clark II"), review denied. In this case, both Meridian and the Assessor agreed that causes of obsolescence existed within Meridian's improvements. (See Cert. Admin. R. at 158-59.) Accordingly, Meridian was required to quantify the amount of obsolescence depreciation to be applied to its improvements. See Heart City Chrysler v. State Bd. of Tax Comm'rs, 714 N.E.2d 329, 333 (Ind. Tax Ct.1999) (stating that when parties agree as to the existence of certain causes of obsolescence, the only issue to consider is the quantification of obsolescence).

To quantify the amount of obsolescence to which it believes it is entitled, a taxpayer may use professional appraisal techniques. See Clark I, 694 N.E.2d at 1242 n. 18

. At the administrative hearing, Meridian presented a "Property Tax Consultation Report" (Appraisal). The Appraisal was prepared by Douglas E. Rogers, a Certified General Real Estate Appraiser. The Appraisal first describes how the location, lack of tenancy, and "inferior state of renovation" have caused Meridian's improvements to suffer an actual loss in value. (Cert. Admin. R. at 111, 117-18.) To translate that loss of value into an obsolescence adjustment, the Appraisal then compares the fair market value4 of Meridian's improvements as calculated under both the cost approach and income capitalization approach.5

Under the cost approach, the cost to construct a replacement of the existing structure is estimated, less deductions for all accrued depreciation present in the property being appraised. See Canal Square Ltd. P'ship v. State Bd. of Tax Comm'rs, 694 N.E.2d 801, 805 (Ind. Tax Ct.1998)

. See also Inland Steel Co. v. State Bd. of Tax Comm'rs, 739 N.E.2d 201, 212-13 (Ind. Tax Ct.2000),

review denied; S. Indiana Gas and Elec. Co. v. Russell, 451 N.E.2d 673, 676 (Ind. Ct. App.1983). In using this approach, the Appraisal calculates the total cost to reproduce Meridian's improvements as $13,642,870. (See Cert. Admin. R. at 120-21.) The improvements were valued using the "Marshall & Swift Valuation Service" cost index, with adjustments in the base price for differences in the heating and cooling system, basement parking garages, and presence of balconies and canopies. (Cert. Admin. R. at 119.) After deducting $6,821,434 in physical depreciation, the Appraisal concludes that the total replacement cost of Meridian's improvements is $6,820,000. (Cert. Admin. R. at 120-21.)

Under the income capitalization approach, the fair market value of a property is determined by capitalizing the net income that the property produces; the process of capitalization converts net income at a reasonable rate of return to arrive at an overall indication of value. See Lacy Diversified Indus., Ltd. v. Dep't Local Gov't Fin., 799 N.E.2d 1215, 1223 (Ind. Tax Ct.2003)

. See also Lucre Corp. v. County of Gibson, 657 N.E.2d 150, 153 (Ind.Ct.App.1995),

trans. denied. Under the income capitalization approach, the Appraisal calculates the net income for Meridian's improvements at $871,439. (See Cert. Admin. R. at 125.) The Appraisal applied a 12% capitalization rate to Meridian's net income, and arrived at an estimated fair market value of $1,765,000. (Cert. Admin. R. at 125.)

In comparing the value of the improvements based on the cost approach and the income capitalization approach, the Appraisal attributed the difference— $5,055,000, or 74% of the total replacement cost of the improvements (after physical depreciation)—to obsolescence. (Cert. Admin. R. at 126.) Accordingly, Meridian contends that it is entitled to a 74% obsolescence reduction against its improvements' true tax value.6 As this Court has previously held, this is a valid methodology for estimating obsolescence. See Canal Square, 694 N.E.2d at 807

. See also Thorntown Tel. Co., Inc. v. State Bd. of Tax Comm'rs, 588 N.E.2d 613, 619 (Ind. Tax Ct.1992).

By introducing an appraisal quantifying obsolescence in accordance with generally recognized appraisal principles, Meridian established a prima facie case that its improvements were entitled to a 74% obsolescence depreciation adjustment.7 See Canal Square, 694 N.E.2d at 807

. Thus, it was incumbent on the Assessor to rebut Meridian's prima facie case. See Clark I, 694 N.E.2d at 1233 (stating that once a taxpayer presents a prima facie case, it must be rebutted with substantial evidence). This the Assessor did not do.

At the administrative hearing, the Assessor questioned Rogers regarding the sources of his calculations and various statements made in the Appraisal. In none of these exchanges, however, did the Assessor offer evidence rebutting the validity of Rogers' calculations or offer alternate calculations of his own. Rather, he merely asked open-ended questions; for instance:

When you did the [potential] gross income, is there a reason you didn't use any information from the apartment association? I mean it just says Institute of Real Estate Management apartment survey.
* * * * *
In your financial information you stated you had [zero] in bad debts and collections and your average lease rent to street rent was 92% and that is only 7% off the normal average. Doesn't that seem [like] that it is in accordance with rents [] applicable in that area[?]

(Cert. Admin R. at 200, 206.)

In addition, the Assessor also submitted a glossary definition for the term "net operating income"; a "Standards for the Application of Obsolescence" used by Marion County assessing officials; and the Indianapolis Business Journal's 1998 "Most-Expensive Indianapolis-Area Apartment Communities" list. (See Cert. Admin. R. at 150-52.) The Assessor explained that the glossary definition, obtained at an appraisal course he attended, defined net operating income as "the income expected from a property after deduction of allowable operating expense[.]" (Cert. Admin. R. at 210.) The Assessor then stated, "I think the key word is expected, not promised." (Cert. Admin. R. at 210). The Assessor also stated that the 10% obsolescence adjustments Meridian received were in accordance with the application standards, and he wondered why Meridian declined to...

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