ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN    STEVE CARTER
ATTORNEY AT LAW    ATTORNEY GENERAL OF INDIANA
Indianapolis, IN    Indianapolis, IN
    
     TED J. HOLADAY
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
_____________________________________________________________________

    IN THE INDIANA TAX COURT _____________________________________________________________________

FORT WAYNE JOINT                                                          )
VENTURE – BEST INNS,                                                      )
                                                                               )
    Petitioner,                                                                )
                                                                               )
    v.                                                                         )   Cause No. 49T10-9803-TA-26
                                                                               )
DEPARTMENT OF LOCAL                                                            )
GOVERNMENT FINANCE, See footnote         )
            )
    Respondent.                )
                )    
______________________________________________________________________________

ON APPEAL FROM A FINAL DETERMINATION
OF THE STATE BOARD OF TAX COMMISSIONERS

______________________________________________________________________________

NOT FOR PUBLICATION
March 7, 2003

FISHER, J.

    The Petitioner, Fort Wayne Joint Venture – Best Inns (Best Inns), appeals the final determination of the State Board of Tax Commissioners (State Board) establishing the assessed value of its real property as of March 1, 1995. The Court restates the issues as:
Whether the State Board properly applied a C grade to Best Inns’ improvement; and

Whether the State Board properly denied an economic obsolescence depreciation adjustment to Best Inns’ improvement. See footnote

    For the reasons stated below, the Court REVERSES the State Board’s final determination on Issue I and REMANDS this issue to the Indiana Board of Tax Review (Indiana Board). See footnote The Court AFFIRMS the State Board’s final determination on Issue II.

FACTS AND PROCEDURAL HISTORY

    Best Inns owns a motel located in Fort Wayne, Indiana. Best Inns’ motel was assessed using the General Commercial Residential (GCR) model See footnote and was given a grade of C. Best Inns appealed to the Allen County Board of Review (BOR), and the BOR made no change to the assessment.
    Best Inns then appealed to the State Board, arguing, among other things, that its C grade was excessive and that it should receive an obsolescence depreciation adjustment because of its low occupancy rates. The State Board held a hearing and issued its final determination on February 5, 1998, affirming the BOR’s determination.
    On March 23, 1998, Best Inns filed an original tax appeal. This Court conducted a trial and heard oral arguments. Additional facts will be supplied as needed.
ANALYSIS AND OPINION
Standard of Review

    The Court gives great deference to the State Board’s final determinations when it acts within the scope of its authority. Miller Structures, Inc. v. Indiana State Bd. of Tax Comm’rs, 748 N.E.2d 943, 947 (Ind. Tax Ct. 2001). Accordingly, this Court reverses final determinations of the State Board only when those decisions are unsupported by substantial evidence, are arbitrary or capricious, constitute an abuse of discretion, or exceed statutory authority. Id.
    The taxpayer bears the burden of demonstrating the invalidity of the State Board’s final determination. Id. The taxpayer must present a prima facie case, i.e., a case in which the evidence is “sufficient to establish a given fact and which if not contradicted will remain sufficient.” Id. (citation and internal quotation marks omitted). To establish a prima facie case, the taxpayer must offer probative evidence concerning the alleged error. Id. “Once the taxpayer carries the burden of establishing a prima facie case, the burden shifts to the State Board to rebut the taxpayer’s evidence and justify its decision with substantial evidence.” Id. (quoting Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct. 1998)). The State Board must do more, however, than merely assert that it assessed the property correctly. Miller, 748 N.E.2d at 948. Instead, it must offer an authoritative explanation of its decision to rebut the taxpayer’s prima facie showing. Id.
Discussion
I. Grade

    The first issue is whether the State Board properly applied a C grade to Best Inns’ improvement. Best Inns argues that the C grade was excessive because its improvement’s wall heights were less than the heights presumed in the GCR models used to assess it. Although the State Board concedes that Best Inns’ wall heights are less than those in the GCR models, it still contends that Best Inns did not present a prima facie case.
    Under Indiana’s true tax value system, improvements are assigned various grades based on a building’s design and the quality of its materials and workmanship. See Ind. Admin. Code tit. 50, rr. 2.2-1-30; 2.2-10-3 (1996). See also Miller, 748 N.E.2d at 952. The grades, which range from A to E, represent multipliers that are applied to the base rate of an improvement. See footnote See 50 IAC 2.2-10-3; Miller, 748 N.E.2d at 952. The C grade, which is the norm, “conform[s] with the base specifications used to develop the pricing schedules” and is assigned when a building is “moderately attractive and constructed with average quality materials and workmanship.” 50 IAC 2.2-10-3(a)(3); see also 50 IAC 2.2-10-3(b). A building with a C grade has “an average quality interior finish with adequate built-ins, standard quality fixtures, and mechanical features.” 50 IAC 2.2-10-3(a)(3).
    The regulations provide that “[a]n adjustment [to the base rate] is [to be] made based on [an improvement’s] actual wall height as compared to the model height. Each foot of height variation is either added or deducted based on the finish type of the specific model.” Ind. Admin. Code tit. 50, r. 2.2-10-6.1(a)(6). The GCR model, however, does not set forth the cost of wall height to be added or deducted to account for an improvement’s variation from the model as do some of the other models contained in the regulations. Compare Ind. Admin. Code tit. 50, r. 2.2-11-6, Sched. A.3 (GCR) with 50 IAC 2.2-11-6, Scheds. A.1 (General Commercial Mercantile) and A.2. (General Commercial Industrial)). “When an improvement deviates from the model and associated cost schedule used to assess the improvement, the deviation often has an effect on the reproduction cost of the improvement.” Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1117 (Ind. Tax Ct. 1998), review denied. Therefore, when an improvement deviates from the model, an assessor may account for that deviation by adjusting the grade of the improvement. See footnote See id. The burden was on Best Inns to submit probative evidence showing that the State Board either improperly graded its building or improperly denied the grade which Best Inns sought. See footnote See Deer Creek Developers, Ltd. v. Dep’t of Local Gov’t Fin., 769 N.E.2d 259, 265-66 (Ind. Tax Ct. 2002).
    In examining the evidence presented, the Court determines that Best Inns has met its burden of presenting a prima facie case on grade by showing an error in the C grade assigned by the State Board. Best Inns was assessed using the GCR motel service and GCR motel unit models. The GCR pricing schedule for motels presumes the existence of twelve foot wall heights in the GCR motel service model and nine foot wall heights in the GCR motel unit model. See Ind. Admin. Code tit. 50, rr. 2.2-11-3(9); 2.2-11-3(11). Best Inns offered evidence, and the State Board concurred, that all of Best Inns’ wall heights were only eight feet high. Because Best Inns has demonstrated that its improvement lacks the wall heights presumed in the GCR models used to assess it, it has made a prima facie showing that the State Board erred in assessing its improvement with a C grade. See Clark, 694 N.E.2d at 1236. See also 50 IAC 2.2-10-6.1(a)(6). Thus, the burden shifts to the State Board to rebut Best Inns’ evidence and to explain why the C grade was appropriate. Clark, 694 N.E.2d at 1233, 1236.
     At trial, the State Board hearing officer testified in a conclusory fashion that the improvement had other features, such as interior wall finish, ceiling finish, interior doors, and window openings, that were above average and exceeded the model’s specifications for a C grade, and he concluded that these features made up for the fact that wall heights were less than those in the model. (Trial Tr. at 15-16, 43-45.) The State Board, however, did not document these reasons in its final determination. Indeed, in its final determination, the State Board stated: “After inspecting the property and considering 50 IAC 2.2-10-3[,] it is determined [that] the structure is moderately attractive, constructed with average quality materials and workmanship with an average quality interior finish with adequate built-ins and mechanical features and is best described as a grade ‘C[.]’” (Def.’s Ex. A at 14.) It is well settled that the State Board, in general, may not offer post hoc rationalizations to support a final determination. Miller, 748 N.E.2d at 954, n.5. Thus, the State Board has not met its burden of rebutting Best Inns’ prima facie case. Accordingly, this Court REVERSES the State Board’s final determination on this issue and REMANDS it to the Indiana Board.
II. Obsolescence

The last issue is whether the State Board properly denied an economic obsolescence depreciation adjustment to Best Inns’ improvement. Best Inns argues that it is entitled to a 30% economic obsolescence depreciation adjustment because its motel had a low occupancy rate of 64% (or, stated another way, that it had a 36% vacancy rate) during the tax year at issue. The State Board contends that Best Inns failed to meet its burden.
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. See footnote Louis D. Realty Corp. v. State Bd. of Tax Comm’rs, 743 N.E.2d 379, 385-86 (Ind. Tax Ct. 2001), review denied. The burden, therefore, was on Best Inns to present probative evidence showing the cause of its improvement’s obsolescence. See Deer Creek, 769 N.E.2d at 263.
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); Louis D. Realty, 743 N.E.2d at 385. Economic obsolescence of a given improvement must be tied to a loss of value. See Miller, 748 N.E.2d at 953. 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, Best Inns is required to show that factors external to the property have adversely affected its generation of income. See id.
    The Court finds that Best Inns has failed to meet its burden. Best Inns submitted a comparative income statement showing that its motel had a 64% occupancy rate during the 1995 tax year. Best Inns contends that it is entitled to an economic obsolescence adjustment merely because it had a 36% vacancy rate. However, vacancy by itself does not prove any obsolescence. Deer Creek, 769 N.E.2d at 263. While vacancy may signify the possible existence of economic obsolescence, a taxpayer seeking an obsolescence reduction because of building vacancy must still present probative evidence showing the reason why its building is vacant. Id. (citing Louis D. Realty, 743 N.E.2d at 387; Damon Corp. v. State Bd. of Tax Comm’rs, 738 N.E.2d 1102, 1109 (Ind. Tax Ct. 2000). Best Inns did not submit any evidence showing why its motel was vacant, nor did it present any evidence of a loss of value. Its mere claim that the motel had a 36% vacancy rate does not, by itself, constitute probative evidence of economic obsolescence. Thus, Best Inns did not make a prima facie case with regard to economic obsolescence. See Deer Creek, 769 N.E.2d at 263; Damon, 738 N.E.2d at 1109. Accordingly, the Court AFFIRMS the State Board’s final determination on this issue.
CONCLUSION

    For the aforementioned reasons, the Court REVERSES the State Board’s final determination on Issue I and REMANDS this issue to the Indiana Board for further proceedings consistent with this opinion. See footnote The Court AFFIRMS the State Board’s final determination on Issue II.


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) and the Indiana Board of Tax Review (Indiana Board). Ind. Code §§ 6-1.1-30-1.1; 6-1.5-1-3 (West Supp. 2001); 2001 Ind. Acts 198 §§ 66, 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. 2002); 2001 Ind. Acts 198 § 95. Moreover, the law in effect prior to January 1, 2002 applies to these appeals. I.C. § 6-1.5-5-8. 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: Best Inns also argues that its assessment should be voided because portions of Indiana’s regulations for taxing tangible property have been declared unconstitutional. Indeed, in 1998, the Indiana Supreme Court affirmed this Court’s determination that “the existing cost schedules . . . violate the Property Taxation Clause of the Indiana Constitution.” State Bd. of Tax Comm’rs v. Town of St. John, 702 N.E.2d 1034, 1043 (Ind. 1998). That same year, however, this Court declared that “[r]eal property must still be assessed, and, until the new regulations are in place, must be assessed under the present system.” Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1121 (Ind. Tax Ct. 1998), review denied; see also Town of St. John v. State Bd. of Tax Comm’rs, 729 N.E.2d 242, 246 & 251 (Ind. Tax Ct. 2000) (ordering real property in Indiana to be reassessed under constitutional regulations as of March 1, 2002 and providing that until then, “real property tax assessments shall be made in accordance with the current system”). The Court, therefore, will not analyze Best Inns’ state constitutional claim in this opinion.


Footnote: All cases that would have previously been remanded to the State Board are now remanded to the Indiana Board of Tax Review. Ind. Code § 6-1.1-15-8. Final determinations made by the Indiana Board are subject to review by this Court pursuant to Indiana Code § 6-1.1-15. Ind. Code §§ 6-1.5-5-7; 33-3-5-2 (West Supp. 2002).

Footnote: Specifically, the General Commercial Residential (GCR) motel service and GCR motel unit models were used to assess Best Inns.

Footnote: The C grade is assigned a multiplier of 100% (i.e., 100% of the reproduction cost as determined under the State Board’s regulations). See Ind. Admin. Code tit. 50, r. 2.2-10-3(b)(3); King Indus. Corp. v. State Bd. of Tax Comm’rs, 699 N.E.2d 338, 340 n.7 (Ind. Tax Ct. 1998). The remaining multipliers are 160% for an A grade, 120% for a B grade, 80% for a D grade, and 40% for an E grade. 50 IAC 2.2-10-3(b).


Footnote: However, the preferred method of accounting for an improvement’s deviation from the model is to use the separate schedules that show the costs of certain components and features present in the model. Whitley, 704 N.E.2d at 1117. Because the use of a grade adjustment requires an assessor’s subjective judgment, the Court generally discourages a grade adjustment to account for deviations from the model. See id. Nonetheless, a grade adjustment is sometimes necessary when the component schedules are not comprehensive (as is the case here where the GCR model does not set forth the cost of wall height to be added or deducted to account for an improvement’s variation from the model). See id.; see also Ind. Admin. Code tit. 50, r. 2.2-11-6, Sched. A.3.


Footnote: Note, however, that a taxpayer who presents a grade issue to the Indiana Board after December 17, 2002, will be required to submit probative evidence of “ what his grade should have been” in order to meet his prima facie burden. See Clark v. Dep’t of Local Gov’t Fin., 779 N.E.2d 1277, 1282 (Ind. Tax Ct. 2002) (emphasis in original).


Footnote: In cases where the State Board held its administrative hearing after this Court’s opinion in Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230 (Ind. Tax Ct. 1998), a 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: The taxpayer is reminded that when it presents its grade issue on remand, it will be required to submit probative evidence of “ what [its] grade should have been” in order to meet its prima facie burden. See Clark, 779 N.E.2d at 1282.