Indianapolis, IN    Indianapolis, IN

    Indianapolis, IN


    IN THE INDIANA TAX COURT _____________________________________________________________________

SANDOR DEVELOPMENT CO.,                                                   )
    Petitioner,                                                                )
    v.                                                                         )   Cause No. 49T10-9811-TA-138
DEPARTMENT OF LOCAL                                                            )                
                                      See footnote 
,            )
    Respondent.            )    



February 10, 2003

FISHER, J.     

    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. See footnote

    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. See footnote 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 Sandor’s request for economic obsolescence.
    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.

    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 Comm’rs, 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 Comm’rs, 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). See footnote

    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 Board’s 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 special hazards.

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 Court’s 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 Comm’rs, 743 N.E.2d 379, 385-86 (Ind. Tax Ct. 2001). See footnote 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 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. 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 Comm’rs, 642 N.E.2d 559, 560 (Ind. Tax Ct. 1994).
    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.) See footnote 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 property’s generation of income – namely, Sandor can only charge $1.29 per square foot when it could be charging $4 or $5. (See Pet’r Findings of Fact, Conclusions of Law and Br. at 7, 11-13.) The Court, however, disagrees for several reasons.
    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 Comm’rs, 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, Sandor’s 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 lease’s expiration, Sandor will be able to garner even more rent for the property under more favorable terms. In other words, the property’s 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 owner’s 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?” Most likely.
    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 Comm’rs, 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 Board’s final determination is AFFIRMED.

Footnote: 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”), see 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 opinion.

Footnote: During trial, Sandor attempted to present evidence indicating that the State Board hearing officer, in his report to the State Board, recommended that Sandor’s 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 Court’s holding in this case, the Court finds it need not address the issue.

Footnote: The Tenant exercised those options, and thus the terms of the original lease were extended until 1999.

Footnote: Sandor may only present evidence to this Court that it presented at the administrative level. See State Bd. of Tax Comm’rs v. Gatling Gun Club, Inc., 420 N.E.2d 1324, 1328 (Ind. Ct. App. 1981).

Footnote: In cases where the State Board held its administrative hearing after this Court’s 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 Comm’rs, 743 N.E.2d 379, 385-86 (Ind. Tax Ct. 2001).

Footnote: 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 Kmart’s gross sales. (See Joint Ex. D at 4.)