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
TED J. HOLADAY
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
DEACONESS HOSPITAL, INC., et al., )
v. ) Cause No. 82T10-9910-TA-203
DEPARTMENT OF LOCAL )
ON APPEAL FROM A FINAL
DETERMINATION OF THE STATE BOARD OF TAX COMMISSIONERS
NOT FOR PUBLICATION
March 11, 2002
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
Whether the State Board erred in assigning a B grade to the Petitioners
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.
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
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 Commrs,
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 Commrs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct. 1998).
DISCUSSION AND ANALYSIS
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. (Petr 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 Indianas 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 Commrs, 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 Commrs, 622 N.E.2d 1058, 1064 (Ind. Tax Ct. 1993). Thus,
in determining grade, the assessor must distinguish significant variations [in an improvements] quality
and design. Ind. Admin. Code tit. 50, r. 2.2-10-3(a). The State
Boards 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).
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 taxpayers 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
Commrs, 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 Boards 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.
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 CPCs grade should be a C+2.
For instance, Dr. John Bazal, M.D., owner and president of the CPC Building
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. Marys and CPC to
A: Well, both from the outside . . . the building just
looks more attractive on the St. Marys 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 weve had . . . with
[CPC]. The neighborhood is certainly a nicer neighborhood.* * * * *
Q: [T]he [St. Marys Medical Office Building], would you say the quality
of material and workmanship are excellent or 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. Marys Medical Office
. . . with regards to the quality of the materials of fixtures,
the interior finish, the exterior . . .[?]
A: In the Saint Marys Building . . . therere [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 theyre comparable . . . with ceramic tile, the
same type of fixtures.
(Stip. Ex. 1 at 1115-1116.) Obsolescence
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 Boards duty to support its final determination with substantial evidence is therefore
not triggered. See id. at 1119-1120. The State Boards determination of
B grade on the CPC building is affirmed.
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
The State Boards 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 Boards 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 Commrs, 748 N.E.2d 943, 953 (Ind. Tax
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.
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.
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 weve 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 propertys 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 Boards
final determination on this basis. Accordingly, the State Boards denial of a
functional obsolescence adjustment is affirmed.
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. (Petr 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 Petr 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.
(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 theres a waiting list for people
to lease . . . at  St. Marys, (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 Boards final determination is affirmed on this matter.
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 Boards final determination is
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.
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
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
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.
The Petitioners submitted the following as comparable properties:
St. Marys 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
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
Forty-O-Four Building: a two-story brick general office building in Evansville, constructed in
1977. The improvement is graded a C+2.
. at 4-5.)
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