ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
JOSEPH D. GEESLIN, JR. STEVE CARTER
ATTORNEY AT LAW ATTORNEY GENERAL OF INDIANA
Indianapolis, IN Indianapolis, IN
TED J. HOLADAY
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
SANDOR DEVELOPMENT CO., )
v. ) Cause No. 49T10-9811-TA-138
DEPARTMENT OF LOCAL )
ON APPEAL FROM A FINAL DETERMINATION
OF THE STATE BOARD OF TAX COMMISSIONERS
NOT FOR PUBLICATION
February 10, 2003
Sandor Development Co. (Sandor) appeals the final determination of the State Board of
Tax Commissioners (State Board) assessing its commercial property for the March 1, 1995
assessment date. Sandor presents one issue for the Court to decide:
whether its property is entitled to an economic obsolescence adjustment because it is
encumbered by a long-term lease yielding below-market rent.
FACTS AND PROCEDURAL HISTORY
Sandor owns commercial retail property in Fort Wayne, Indiana. Since 1964, Sandor
has leased the property to another entity (Tenant). Tenant operates a K-Mart
store and auto-service center on the property.
The lease between Sandor and Tenant provided that Tenant was to pay Sandor
$1.29 per square foot in rent for an initial term of 20 years
(until 1984). Thereafter, Tenant could extend the terms of the lease upon
the same terms and conditions for
three additional five-year periods.
The lease also provided that while Tenant
was responsible for all interior maintenance repairs and costs, Sandor was to pay
all taxes, common area maintenance (CAM) costs, and insurance on the property.
For the 1995 assessment, the Allen County Board of Review (BOR) assessed the
property at $937,630 ($170,130 for land and $767,500 for improvements). On March
24, 1997, Sandor filed a Form 131 Petition for Review of Assessment with
the State Board in which it requested an economic obsolescence adjustment. The
State Board held a hearing on December 10, 1997. In its final
determination dated September 21, 1998, the State Board denied Sandors request for economic
Sandor filed an original tax appeal on November 2, 1998. The Court
conducted trial on May 10, 1999. Oral argument was heard on February
15, 2000. Additional facts will be supplied as necessary.
STANDARD OF REVIEW
This Court accords great deference to the State Board when it acted within
the scope of its authority. Wetzel Enters., Inc. v. State Bd. of
Tax Commrs, 694 N.E.2d 1259, 1261 (Ind. Tax Ct. 1998). Accordingly, the
Court will reverse a State Board final determination only if it is unsupported
by substantial evidence, constitutes an abuse of discretion, exceeds statutory authority, or is
arbitrary and capricious. Id.
A taxpayer who challenges a State Board final determination bears the burden of
demonstrating its invalidity. See Clark v. State Bd. of Tax Commrs, 694
N.E.2d 1230, 1233 (Ind. Tax Ct. 1998). To meet that burden, the
taxpayer must present a prima facie case, or one in which the evidence
is sufficient to establish a given fact and which if not contradicted will
remain sufficient. Id. (internal quotation and citation omitted).
DISCUSSION AND ANALYSIS
Economic obsolescence is defined as a loss of property value due to factors
external to the property. Ind. Admin. Code tit. 50, r. 2.2-10-7(e) (1996)
(emphasis added). The State Boards regulations cite a number of examples of
causes of economic obsolescence:
(A) Location of the building is inappropriate for the neighborhood.
(B) Inoperative or inadequate zoning ordinances or deed restrictions.
(C) Noncompliance with current building code requirements.
(D) Decreased market acceptability of the product for which the property was constructed
or is currently used.
(E) Termination of the need of the property due to actual or
probable changes in economic or social conditions.
(F) Hazards, such as the danger from floods, toxic waste, or other
50 IAC 2.2-10-7(e)(2).
In cases (such as this one) where the State Board held its administrative
hearing prior to this Courts decision in Clark, a taxpayer can make its
prima facie case for economic obsolescence by identifying the cause of the obsolescence.
Louis D. Realty
Corp. v. State Bd. of Tax Commrs, 743 N.E.2d 379, 385-86 (Ind.
Tax Ct. 2001).
Nevertheless, it is important to keep in mind that
the economic obsolescence of a given improvement must be tied to a loss
of value. See Miller Structures, Inc. v. State Bd. of Tax Commrs,
748 N.E.2d 943, 954 (Ind. Tax Ct. 2001). In the commercial context,
this loss of value usually means a decrease in the propertys income generating
ability. See id. at 953. Thus, in making its prima facie
case, Sandor is required to show that factors external to the property have
adversely affected its generation of income. See id. See also Simmons
v. State Bd. of Tax Commrs, 642 N.E.2d 559, 560 (Ind. Tax Ct.
In this case, Sandor contends that its property suffers from economic obsolescence because
it is encumbered by a long-term lease agreement with Tenant that yields below-market
rental income. To support its claim, Sandor submitted at the administrative hearing
a copy of its lease to show that while it pays the CAM
costs, taxes, and insurance in the property, it receives no reimbursement from the
Tenant for those expenses. (Joint Ex. D. at 2.) Sandor also
submitted documentation indicating what it could charge for rent:
If this building were available today, we could probably get $4.00 to $5.00
per square foot on a net net basis, depending on the condition of
the building. The problem is that the building is not available today
as it is encumbered by the lease with Kmart.
(Joint Ex. D at 19.)
Consequently, Sandor maintains that it has made
a prima facie case for economic obsolescence because it has shown that an
external factor to the property (changes in the commercial rental property market which
now yield higher rents per square foot than in 1964) have adversely affected
its propertys generation of income namely, Sandor can only charge $1.29 per
square foot when it could be charging $4 or $5. (See Petr
Findings of Fact, Conclusions of Law and Br. at 7, 11-13.) The
Court, however, disagrees for several reasons. CONCLUSION
First, Sandor has not established a loss in its actual income stream.
When Sandor and the Tenant initiated the lease in 1964, Sandor charged rent
in the amount of $1.29 per square foot. In 1995, Sandor still
charged $1.29 per foot. Consequently, Sandor has not lost income,
but rather maintained a static income stream. A static income stream does
not establish a loss of value. See Pedcor Inv.-1990-XIII, L.P. v. State
Bd. of Tax Commrs, 715 N.E.2d 432, 440 (Ind. Tax Ct. 1999) (stating
that apartment complex was not entitled to economic obsolescence because income generating ability
from one year to the next remained static).
Furthermore, Sandors evidence established that if it could merely escape from its current
lease obligations, it could lease the property again at a higher rate and
be much more profitable and valuable. This evidence establishes that the property,
after almost thirty years, is still useful and desired as a retail commercial
property. Upon the leases expiration, Sandor will be able to garner even
more rent for the property under more favorable terms. In other words,
the propertys ability to generate income will increase.
Finally, this Court has held that in certain cases where a property owner
has imprudently agreed to or imposed restrictions upon its property, the State Board
can properly determine that an obsolescence adjustment is not warranted. Id. at
437. Such a determination, however, must be considered in light of all
the circumstances affecting the property owners action. Here, was it imprudent for
Sandor to charge $1.29 per square foot in rent in 1964? Probably
not. Was it imprudent for Sandor to permit the Tenant to extend
the lease for almost thirty years upon the same terms and conditions?
In essence, all Sandor has proven is that in 1964 it made a
business decision that it would now like to change. This does not
constitute a prima facie case for economic obsolescence. See Lake County Trust
Co. No. 1163 v. State Bd. of Tax Commrs, 694 N.E.2d 1253, 1258-59
(Ind. Tax Ct. 1998) review denied.
Sandor has not
made a prima facie case with respect to the issue of economic obsolescence.
Thus, for the foregoing reasons, the State Boards final determination is AFFIRMED.
The State Board of Tax Commissioners (State Board) was originally the Respondent
in this appeal. However, the legislature abolished the State Board as of
December 31, 2001. 2001 Ind. Acts 198 § 119(b)(2). Effective January
1, 2002, the legislature created the Department of Local Government Finance (DLGF),
Indiana Code § 6-1.1-30-1.1 (West Supp. 2001)(eff. 1-1-02); 2001 Ind. Acts 198 §
66, and the Indiana Board of Tax Review (Indiana Board). Ind. Code
§ 6-1.5-1-3 (West Supp. 2001)(eff. 1-1-02); 2001 Ind. Acts 198 § 95.
Pursuant to Indiana Code § 6-1.5-5-8, the DLGF is substituted for the State
Board in appeals from final determinations of the State Board that were issued
before January 1, 2002. Ind. Code § 6-1.5-5-8 (West Supp. 2001)(eff. 1-1-02);
2001 Ind. Acts 198 § 95. Nevertheless, the law in effect prior
to January 1, 2002 applies to these appeals. Id. See also
2001 Ind. Acts 198 § 117. Although the DLGF has been substituted
as the Respondent, this Court will still reference the State Board throughout this
During trial, Sandor attempted to present evidence indicating that the State
Board hearing officer, in his report to the State Board, recommended that Sandors
improvement was entitled to an economic obsolescence adjustment. The State Board strenuously
objected to its admissibility, maintaining the deliberative process privilege. (
See Trial Tr.
at 28-31.) While both Sandor and the State Board argued the issue
at trial and in their briefs, given the Courts holding in this case,
the Court finds it need not address the issue.
The Tenant exercised those options, and thus the terms of the
original lease were extended until 1999.
Sandor may only present evidence to this Court that it presented
at the administrative level. See State Bd. of Tax Commrs v. Gatling
Gun Club, Inc., 420 N.E.2d 1324, 1328 (Ind. Ct. App. 1981).
In cases where the State Board held its administrative hearing
after this Courts opinion in
Clark, the taxpayer must not only identify the
cause of obsolescence to make its prima facie case, but it must also
quantify the amount of obsolescence to which it believes it is entitled.
Louis D. Realty Corp. v. State Bd. of Tax Commrs, 743 N.E.2d 379,
385-86 (Ind. Tax Ct. 2001).
Sandor explains that d
ue to its inability to garner a higher
rental rate, it loses money on the property: it pays approximately $1.40
per square foot for taxes, CAM and insurance compared to the $1.29 per
square foot it generates in rental income. The Court notes, however, that
the lease also provides that in addition to the $1.29 per square foot
rental rate, Sandor is also entitled to receive a percentage of Kmarts gross
sales. (See Joint Ex. D at 4.)