ATTORNEYS FOR PETITIONERS:    ATTORNEYS FOR RESPONDENT:
G. MICHAEL SCHOPMEYER    STEVE CARTER    
MARK S. SAMILA    ATTORNEY GENERAL OF INDIANA
KAHN, DEES, DONOVAN & KAHN, LLP    Indianapolis, IN
Evansville, IN

     TED J. HOLADAY
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN

_____________________________________________________________________

    IN THE INDIANA TAX COURT _____________________________________________________________________ 

DEACONESS HOSPITAL, INC., et al.,                                  )
                                                                               )
    Petitioners,                                                               )
                                                                               )
    v.                                                                         )   Cause No. 82T10-9910-TA-203
                                                                               )                
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NOT FOR PUBLICATION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 11, 2002

FISHER, J.     

    Deaconess Hospital, Inc., et al. (“Petitioners”) appeal the final determination of the State Board of Tax Commissioners (“State Board”), valuing their commercial property improvements for the 1995 assessment.
ISSUES

Whether the State Board erred in assigning a B grade to the Petitioners’ improvement; and

Whether the State Board erred in refusing to allow an obsolescence adjustment on the Petitioners’ improvement.

FACTS AND PROCEDURAL HISTORY

    The Petitioners own the Columbia Physicians Center building (“CPC”) in Pigeon Township, Vanderburgh County, Indiana. Constructed in 1978, the CPC is a four-story brick building used as a medical office condominium complex. See footnote For the 1995 assessment, the Pigeon Township Assessor (Assessor) assessed the CPC property at $980,170 ($15,500 for land and $964,670 for improvements). In arriving at that value, the Assessor assigned the CPC building a B grade and no obsolescence depreciation adjustment.
    On December 26, 1995, each of the thirty-three owners of the CPC filed a Form 130 Petition for Review of Assessment, alleging the assessment was erroneous due to improper grading, as well as inadequate obsolescence adjustments. The Vanderburgh County Board of Review (“BOR”) reevaluated the assessment but declined to change the value assigned to the CPC building.
    On July 3, 1996, each of the thirty-three owners of the CPC filed a Form 131 Petition for Review of Assessment with the State Board. The State Board held a hearing See footnote on June 8, 1999. In its final determination of August 31, 1999, the State Board made no change to the CPC assessment.
    The Petitioners filed an original tax appeal with this Court on October 14, 1999. The Court conducted trial on the matter on October 12, 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. Garcia v. State Bd. of Tax Comm’rs, 694 N.E.2d 794, 795-96 (Ind. Tax Ct. 1998). Accordingly, the Court will reverse a final determination by the State Board only if it is unsupported by substantial evidence, constitutes an abuse of discretion, exceeds statutory authority, or is arbitrary and capricious. Id. at 796. The party challenging the propriety of a State Board final determination bears the burden of demonstrating its invalidity by presenting a prima facie case. See Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct. 1998).

DISCUSSION AND ANALYSIS
I. Grade

    The Petitioners challenge the B grade assigned to their building and affirmed by the State Board. They assert that, despite “establish[ing] a prima facie case[] [that the improvement should be graded a ‘C+2’] . . . [t]he State Board failed to justify its decision with substantial evidence.” (Pet’r Br. at 13). In response, the State Board contends that the Petitioners did not make a prima facie case that the assigned grade was improper.
    Under Indiana’s true tax value system, improvements are assigned various grades based on their materials, design, and workmanship; the grades represent multipliers that are applied to the base reproduction cost of an improvement. Ind. Admin. Code tit. 50, r. 2.2-10-3; Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1116 (Ind. Tax Ct. 1998), review denied. The selection of which grade should be applied to an improvement calls for a subjective judgment and is committed to the discretion of the assessor. Mahan v. State Bd. of Tax Comm’rs, 622 N.E.2d 1058, 1064 (Ind. Tax Ct. 1993). Thus, in determining grade, the assessor must “distinguish significant variations [in an improvement’s] quality and design.” Ind. Admin. Code tit. 50, r. 2.2-10-3(a). The State Board’s regulations define the different characteristics that help assessors differentiate between grades. For instance, “‘B’ grade buildings are architecturally attractive and constructed with good quality materials and workmanship. These buildings have a high quality interior finish with abundant built-in features, very good lighting and plumbing fixtures, and a custom heating and air conditioning system.” Ind. Admin. Code tit. 50, r. 2.2-10-3(a)(2). On the other hand, “‘C’ grade buildings are moderately attractive and constructed with average quality materials and workmanship. These buildings have minimal to moderate architectural treatment . . . an average quality interior finish with adequate built-ins, standard quality fixtures, and mechanical features.” Ind. Admin. Code tit. 50, r. 2.2-10-3(a)(3). See footnote
    When contesting a grade assigned to an improvement, a taxpayer must offer probative evidence concerning the alleged assessment error. Whitley Prods., 704 N.E.2d at 1119. A taxpayer’s conclusory statements concerning the grading of a subject improvement, however, do not constitute probative evidence. Id. Likewise, mere references to photographs or State Board regulations, without explanation, do not qualify as probative evidence for purposes of grading issues. Heart City Chrysler v. State Board of Tax Comm’rs, 714 N.E.2d 329, 333 (Ind. Tax Ct. 1999). In the event that a taxpayer fails to provide the State Board with probative evidence supporting his or her position on a grade issue, the State Board’s duty to support its final determination with substantial evidence is not triggered. Whitley Prods., 704 N.E.2d at 1119-1120.
    In examining the evidence presented to the State Board at the Petitioners’ administrative hearing, the Court determines that the Petitioners have not met their burden of proof. Indeed, at the administrative hearing, the Petitioners submitted documentation on three allegedly comparable properties located in Evansville. See footnote Specifically, the Petitioners submitted photocopies of the comparable properties’ record cards, as well as photocopies of photographs of the comparable buildings’ interiors and/or exteriors. (Stip. Ex. 1 at 711-732.) The Petitioners also submitted the property record card and photographs of the CPC building. (Stip. Ex. 1 at 641-710, 733-737.) Nevertheless, the Petitioners made no written explanation of the photographs, nor did they make any written comparisons of the allegedly comparable buildings to the CPC. As stated earlier, mere references to photographs, without explanation or analysis, do not constitute probative evidence. Heart City Chrysler, 714 N.E.2d at 333.
    In addition to the submitted documentation, the Petitioners also called three witnesses to testify at the administrative hearing. However, the witnesses’ testimony was nothing more than broad, conclusory statements that the CPC’s grade should be a C+2. For instance, Dr. John Bazal, M.D., owner and president of the CPC Building Association, testified:
Q: What is you[r] opinion as to the quality of the interior finish of the [CPC] building?

A: I would call the interior quality average or below. . . . this building is not comparable in structure and heating and air conditioning and parking in neighborhood, it is totally a lesser building than the other buildings . . .

Q: What specifically about the quality of the interior finish do you find inferior . . .?

A: Well the fixtures in the bathrooms on all the floors are defiantly [sic] dated, high degree of maintenance to them. The heating and air conditioning units require very high degree of maintenance and I think . . . perhaps substandard carpeting and walls . . . .

Q: [C]an you compare . . . St. Mary’s and CPC to each other[?]

A: Well, both from the outside . . . the building just looks more attractive on the St. Mary’s campus. The lobby, the halls are nicer, the walls are nicer. They do not have as much trouble with the heating/air conditioning problems that we’ve had . . . with [CPC]. The neighborhood is certainly a nicer neighborhood.

* * * * *


Q: [T]he [St. Mary’s Medical Office Building], would you say the quality of material and workmanship are excellent or average?

A: Average.

(Stip. Ex. 1 at 1107-1109.) Later in the administrative hearing, Mr. William Bartlett, a certified real estate appraiser based in Evansville, testified:
Q: Would you compare the CPC with the St. Mary’s Medical Office . . . with regards to the quality of the materials of fixtures, the interior finish, the exterior . . .[?]

A: In the Saint Mary’s Building . . . there’re [sic] brick construction, while the CPC building has a drivet finish on the outside. But I think the basic construction of the buildings and the quality of the materials in the buildings are very comparable.

* * * * *


Q: What about the [plumbing] fixtures within the building?

A: I think they’re comparable . . . with ceramic tile, the same type of fixtures.

(Stip. Ex. 1 at 1115-1116.)
    Testimonial statements that one building “looks nicer,” or that fixtures “are comparable” or that the “interior quality is average” are nothing more than a conclusions. Conclusory statements do not qualify as probative evidence. Whitley Prods., 704 N.E.2d at 1119. Because the Petitioners have failed to provide the State Board with probative evidence to support their position on the grade issue, the State Board’s duty to support its final determination with substantial evidence is therefore not triggered. See id. at 1119-1120. The State Board’s determination of B grade on the CPC building is affirmed.

Obsolescence

    The Petitioners have requested a 32.5% obsolescence adjustment for the CPC building. More specifically, the Petitioners claim that obsolescence exists for two reasons: inadequate parking and the preference of physicians to lease, rather than own, their office space.
    The State Board’s regulations define obsolescence as a functional and economic loss of value. Ind. Admin. Code tit. 50, r. 2.2-10-7(e). Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property. Id. Economic obsolescence is caused by factors external to the property. Id. The State Board’s regulations cite a number of examples of causes of obsolescence, such as poor land to building ratio (functional) and a termination of the need for the property due to changing economic or social conditions (economic). Id. It is important to keep in mind, however, that the obsolescence of a given improvement must be tied to a loss of value. In the commercial context, that loss of value usually means the loss of income generated by the property. Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001).
    The regulations state that an “[a]ccurate determination of obsolescence depreciation requires the assessor to recognize the symptoms of obsolescence and to exercise sound judgment in equating his or her observation of the property to the correct deduction in value.” Ind. Admin. Code tit. 50, r. 2.2-10-7(e). Thus, under this regulation, the determination of obsolescence is a two-step inquiry: the assessor must first identify the causes of obsolescence and then quantify the amount of obsolescence to be applied. In turn, taxpayers may challenge the obsolescence depreciation awarded a particular improvement in two ways: they may argue that there were causes of obsolescence not accounted for in the State Board final determination, or they may argue that the quantification of obsolescence is not supported by substantial evidence.
A. Functional Obsolescence

    The Petitioners contend that the State Board failed to account for functional obsolescence caused by inadequate parking. More specifically, the Petitioners claim that while under current zoning requirements the CPC is required to have 290 parking spaces, it only has 127. Due to the 163 parking space shortage, the Petitioners assert that they have made a prima facie showing that the CPC building is entitled to a 12.5% functional obsolescence adjustment. See footnote The Court disagrees.
    While inadequate parking certainly could reduce the income that the CPC would otherwise generate (i.e., economic loss), the Petitioners have presented no evidence to the State Board that such economic loss did indeed occur. For example, no evidence was submitted to show that the CPC owners were subject to a fine or penalty due to the zoning ordinance violations. See footnote No evidence was submitted to show that the salability of the individual condominium units has been adversely affected due to the inadequate parking. No evidence was submitted that the CPC must pay for use of parking elsewhere. Instead, Petitioners merely provided testimony that “we’ve had a lot of complaints from the people in the building about parking.” (See Stip. Ex. 1 at 1125.) This is simply not enough to show an economic loss in the property’s value.
    Having failed to present evidence that the inadequate parking situation at CPC caused the property to lose value, the Petitioners have not upset the State Board’s final determination on this basis. Accordingly, the State Board’s denial of a functional obsolescence adjustment is affirmed.
Economic Obsolescence

The Petitioners also contend that the State Board failed to account for the economic obsolescence from which the CPC building suffers. More specifically, the Petitioners contend that, as a result of the 1986 changes to the federal income tax code, annual depreciation on buildings was cut from seven or eight percent to 2.5 percent, “thereby substantially increasing physicians’ cost of owning their office space.” (Pet’r Br. at 19.) Because “[t]hese tax code changes made condominium office buildings, such as the CPC[,] obsolete,” the Petitioners ask for a twenty percent economic obsolescence adjustment. (See Pet’r Br. at 19.)
To support their claim, the Petitioners first presented an occupancy roster. (Stip. Ex. 1 at 951). The roster indicates that for 1995, approximately fifteen percent of the CPC space was vacant. But, as one witness accurately testified, vacancy in a condominium setting “may not really mean a lot.” See footnote (Stip. Ex. 1 at 1130.) Rather, evidence indicating that the salability of the CPC condominiums has been adversely affected by the tax code changes is required.
While Dr. Bazal testified that “[t]he salability . . . is not [] good [at CPC,]” (Stip. Ex. 1 at 1108), and that “there’s a waiting list for people to lease . . . at [] St. Mary’s,” (Stip. Ex. 1 at 1109), such testimony hardly rises to the level of probative evidence. Indeed, the Petitioners could have called owners to testify about their efforts to sell their condominium units or having to sell units at reduced prices. Likewise, the Petitioners could have called the owners whose spaces are currently “vacant” to explain their reasons for not using the space. Petitioners could have submitted documentation indicating how much tax benefit owners have lost because they owned the property rather than leased. None of this was done, however.
The Petitioners have failed to prove that the CPC building is entitled to economic obsolescence. Accordingly, the State Board’s final determination is affirmed on this matter.
CONCLUSION

The Petitioners have not made a prima facie case with respect to the issues of grade and 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. P.L. 198-2001, § 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); P.L. 198-2001, § 66, and the Indiana Board of Tax Review (“Indiana Board”). Ind. Code § 6-1.5-1-3 (West Supp. 2001)(eff. 1-1-02); P.L. 198-2001, § 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); P.L. 198-2001, § 95. Nevertheless, the law in effect prior to January 1, 2002 applies to these appeals. Id. See also P.L. 198-2001, § 117. Although the DLGF has been substituted as the Respondent, this Court will still reference the State Board throughout this opinion.


Footnote: The CPC is comprised of thirty-three condominium units, each separately owned by an individual Petitioner. While the CPC is assessed as one building, each of the individual condominium owners owes and pays a pro-rated share of the property taxes on the property, based on the percentage interest it has in the CPC.
Footnote: Because all thirty-three petitions raised the same issues, they were consolidated for purposes of the State Board hearing, as well as for proceedings before this Court.
Footnote: “Because structures sometimes fall between major classifications . . . a method of interpolation is built into the system.” Ind. Admin. Code tit. 50, r. 2.2-10-3(c). Therefore:

Plus or minus two (+/- 2) indicates that the grade falls halfway between the assigned grade classification and the grade immediately above or below it. For example, a grade of “C+2” indicates that the quality and design grade classification is estimated to fall halfway between “C” and “B” or average to good construction. . . .

Plus or minus one (+/- 1) indicates that the grade falls slightly above or below the assigned grade classification, or at a point approximately twenty-five percent (25%) of the interval between the assigned grade classification and the grade immediately above or below it. For example, a grade of “C+1” indicates that the quality and design grade classification is estimated to be slightly better than average or approximately halfway between a “C” grade and a “C+2” grade.

Id.

Footnote: The Petitioners submitted the following as comparable properties:

St. Mary’s Medical Office Building: a two building, brick complex used as medical office buildings in Evansville. One building was built in 1974, while the other was built in 1991. Both buildings were assigned a grade of C+2.

Executive Park East: a three-story building constructed in 1975 and used as general office space in Evansville. The building was assigned a grade of B-2.

Forty-O-Four Building: a two-story brick general office building in Evansville, constructed in 1977. The improvement is graded a C+2.

(Pet’r Br . at 4-5.)


Footnote: The Petitioners arrived at an adjustment of 12.5% based on a calculation of how much it would cost to build a parking lot with an additional 163 spaces, as well as a calculation as to how much capitalized income CPC could generate if it had the additional 163 spaces. With respect to the second calculation, however, it is interesting to note that no evidence was submitted in the first place to show that CPC charged for the 127 parking spaces it did have.

Footnote: In fact, the actual zoning ordinance was never even submitted as evidence.
Footnote: In properties where space is leased, a vacancy is usually indicative that rent is not being collected on that space. In a condominium setting, however, a vacancy does not necessarily mean that the space is not owned. Rather, a vacancy may mean, simply, that the space is not being used.