Pedcor Investments-1990-XIII, LP v. State Bd. of Tax Comm'rs

• Decision Date: 02 September 1999
• Docket Number: No. 49T10-9602-TA-00017, No. 49T10-9609-TA-00103.
• Citation: 715 N.E.2d 432
• Parties: PEDCOR INVESTMENTS-1990-XIII, L.P., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.
• Court: Indiana Tax Court

715 N.E.2d 432

PEDCOR INVESTMENTS-1990-XIII, L.P., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.

Nos. 49T10-9602-TA-00017, 49T10-9609-TA-00103.

Tax Court of Indiana.

September 2, 1999.

Marc A. Hetzner, Frank A. Hoffman, Michael J. Messaglia, Krieg Devault Alexander & Capehart, Indianapolis, Indiana, Attorneys for Petitioner.

Jeffrey A. Modisett, Attorney General of Indiana, Angela L. Mansfield, Deputy Attorney General, Indianapolis, Indiana, Attorneys for Respondent.

FISHER, J.

Pedcor Investments-1990-XIII, L.P. (Pedcor) appeals two final determinations of the State Board of Tax Commissioners (State Board) fixing the assessed value of Pedcor's 13-acre, 160-unit apartment complex as of the March 1, 1992 and March 1, 1993 assessment dates.

FACTS AND PROCEDURAL HISTORY

Federal law provides a number of tax incentives to encourage the production of affordable housing for individuals with lower incomes.¹ Seeking to take advantage of these incentives, Pedcor entered into an agreement with the City of Franklin, Indiana, under which Pedcor would build an apartment complex that would serve low and moderate income tenants in Franklin. The agreement called for a number of land use restrictions and covenants,² the most significant of which is that 40%³ of the rental units in the apartment complex are to be rented to low and moderate income tenants.

At some point after entering into the agreement, Pedcor began construction of the apartment complex. As of the March 1, 1992 assessment date, the apartment complex was not yet complete and, as a result, none of the rental units were occupied. The township assessor fixed the assessed value of the land and the uncompleted improvements as of the March 1, 1992 assessment date at $586,360. On the March 1, 1993 assessment date, the township assessor fixed the assessed value of the land and the fully completed apartment complex at $1,204,130. Pedcor challenged both of these assessments by filing two Form 130 petitions (one for the March 1, 1992 assessment and one for the March 1, 1993 assessment) with the Johnson County Board of Review (BOR). Unsatisfied with the BOR's disposition of those petitions, Pedcor filed two Form 131 petitions with the State Board challenging the BOR's findings for each assessment year.

In both Form 131 petitions, Pedcor alleged that the apartment complex suffered from obsolescence due to the requirement that 44% of the rental units be leased to lower-income tenants and the effect that requirement had on the marketability of the remaining rental units. In addition, Pedcor alleged that the apartment complex was incorrectly graded and that the land value was excessive when compared to allegedly similarly situated apartment complexes.⁴ In the Form 131 petition challenging the March 1, 1992 assessment, Pedcor alleged that, because the apartment complex was vacant on the March 1, 1992 assessment date, the apartment complex suffered obsolescence on that date and a one-time obsolescence adjustment should have been made. The State Board held two separate hearings on these Form 131 petitions. On January 12, 1996, the State Board issued its final determination for the March 1, 1992 assessment date, and on July 26, 1993, the State Board issued its final determination for the March 1, 1993 assessment date. Pedcor then filed an original tax appeal for each State Board final determination. These appeals were consolidated. See IND. T.R. 42(A). Both parties have filed summary judgment motions.

ANALYSIS AND OPINION

Standard of Review

The State Board is afforded great deference when it acts within the scope of its authority. Accordingly, the Court reverses final determinations of the State Board only when those determinations are unsupported by substantial evidence, are arbitrary or capricious, constitute an abuse of discretion, or exceed statutory authority. See Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct.1998)

. Summary judgment is only appropriate where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. See IND. T.R. 56(C); Hyatt Corp. v. Department of State Revenue, 695 N.E.2d 1051, 1053 (Ind. Tax Ct.1998),

review denied. Cross-motions for summary judgment do not alter this standard. See Hyatt Corp.,

695 N.E.2d at 1053.

Discussion

The True Tax Value of a commercial improvement is its reproduction cost (as calculated under the State Board's regulations) minus physical depreciation and obsolescence depreciation. See IND. ADMIN. CODE tit. 50, r. 2.1-5-1 (1992) (codified in present form at id. r. 2.2-10-7(f) (1996)); Loveless Constr. Co. v. State Bd. of Tax Comm'rs, 695 N.E.2d 1045, 1047 (Ind. Tax Ct.1998), review denied; Western Select Properties, L.P. v. State Bd. of Tax Comm'rs, 639 N.E.2d 1068, 1070 (Ind. Tax Ct.1994)

. Under the regulations, obsolescence depreciation represents a "functional and economic loss of value." IND. ADMIN. CODE tit. 50, r. 2.1-5-1; see also Loveless Constr. Co.,

695 N.E.2d at 1047. The functional component of obsolescence depreciation is "caused by factors internal to the property and is `evidenced by conditions within the property.'" Clark, 694 N.E.2d at 1238 (quoting IND. ADMIN. CODE tit. 50, r. 2.1-5-1); see also Western Select Properties, 639 N.E.2d at 1070-71 ("Functional obsolescence is a form of depreciation resulting in loss of value due to lack of utility or desirability inherent in the design of the property.") (quoting INSTITUTE OF PROPERTY TAXATION, PROPERTY TAXATION 114 (Jerrold F. Janata ed. 2d ed.1993)); Michael D. Larson, Identifying, Measuring, and Treating Functional Obsolescence in an Appraisal, J. PROP. TAX MGMT., Spring 1999, at 44. There are numerous possible causes of functional obsolescence, e.g., inefficient floor plans, unnecessary or superadequate construction, inadequate parking, and mechanical inadequacy. See IND. ADMIN. CODE tit. 50, r. 2.1-5-1; id. r. 2.1-6-1 (1992) (codified in present form at id. r. 2.2-1-40 (1996)). The economic component of obsolescence depreciation is caused by factors external to the property. See id. r. 2.1-5-1. Possible causes of economic obsolescence include: "Inoperative or inadequate zoning ordinances or deed restrictions" and "Market acceptability of the product or devices for which the property was constructed or is currently used." Id.

Pedcor contends that for both the 1992 and 1993 assessments, the apartment complex should have received an obsolescence adjustment. For both assessments, Pedcor contends that the State Board failed to consider evidence that the deed restrictions on the property and the decreased market acceptability of the apartment community as a whole were causes of economic obsolescence. For the 1992 assessment, Pedcor contends that the State Board should have applied a one-time obsolescence adjustment due to the vacant state of the property on the assessment date.⁵ For ease of analysis, the Court will first address the deed restrictions and the alleged decreased market acceptability for the 1992 and 1993 assessments. The Court will then address whether the apartment complex should have received a one-time obsolescence adjustment.

The Deed Restrictions and Market Acceptability

In Pedcor's view, the deed restrictions cause the apartment complex economic obsolescence because 44% of the rental units are to be rented at 13% to 20% less than the market rate. According to Pedcor, this loss of income translates into a 7.5% obsolescence figure.⁶ Pedcor further contends that the market acceptability of the apartment community as a whole has decreased, thereby causing the apartment complex to experience additional economic obsolescence. In support of this contention, Pedcor argues that the fact that 44% of the rental units are set aside for lower-income tenants makes the other 56% of the rental units less desirable. Pedcor maintains that an additional 5% obsolescence adjustment is warranted for this reason.⁷ In its final determinations, the State Board did not accept Pedcor's contention that an obsolescence adjustment was warranted due to the deed restrictions. In the final determination for the 1992 assessment, the State Board concluded that the deed restrictions "d[id] not fall within the definition of obsolescence" because they did not constitute "an external influence which affects the usage and operation of the property." (State Bd.1992 Final Determination ¶ 3). The final determination for the 1993 assessment contains a somewhat different analysis: "The evidence along with a review of the area found a lack of market acceptability is not demonstrated. The restrictions as detailed in the evidence are not sufficient justification to support a significant reduction in value." (State Bd.1993 Final Determination ¶ 3). In its representations to the Court, the State Board elaborates on these findings and has altered its stance to a certain degree. While maintaining its position that the deed restrictions cannot constitute economic obsolescence because they are not external to the property, the State Board also points to the fact that Pedcor receives a number of federal tax incentives as a result of the deed restrictions and argues that these tax incentives make up for any loss in rental income resulting from the deed restrictions. Additionally, the State Board notes that Pedcor voluntarily placed the deed restrictions on the property and that Pedcor voluntarily chose to attract low-income tenants and, therefore, in the State Board's view, cannot complain about the decreased market acceptability of its apartment complex.⁸ In essence, the State Board challenges Pedcor's claims of economic obsolescence on three grounds: 1) the deed restrictions cannot constitute economic obsolescence under the definition of economic obsolescence; 2) by entering into the deed restrictions, Pedcor caused any economic obsolescence suffered by the apartment complex, thereby making an...