ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
ROBERT M. FRYE    STEVE CARTER    
FOLEY & POOL, LLP    ATTORNEY GENERAL OF INDIANA
Indianapolis, IN     Indianapolis, IN
    
     TED J. HOLADAY
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN

_____________________________________________________________________

     IN THE INDIANA TAX COURT _____________________________________________________________________

SHELBY STREET REALTY CORP.,                                               )
n/k/a MERCHANDISE WAREHOUSE, INC.,                                             )
                                                                               )
    Petitioner,                                                                )
                                                                               )
    v.                                                                         )       Cause No. 49T10-0205-TA-46
                                                                               )
PERRY TOWNSHIP ASSESSOR,                                                       )
                                                                               )
    Respondent.                                                                )    
_____________________________________________________________________

ON APPEAL FROM A FINAL DETERMINATION
OF THE INDIANA BOARD OF TAX REVIEW


NOT FOR PUBLICATION
April 26, 2004


FISHER, J.

Shelby Street Realty Corp., n/k/a Merchandise Warehouse, Inc. (MWI), appeals the final determination of the Indiana Board of Tax Review (Indiana Board) valuing its real property for the March 1, 1997 assessment date. The sole issue before the Court is whether the Indiana Board erred in its application of obsolescence depreciation adjustments to MWI’s improvements.
FACTS AND PROCEDURAL HISTORY

MWI owns ten multi-tenant warehouses in Perry Township, Marion County, Indiana. The warehouses were constructed between 1920 and 1967.
For the 1997 assessment, the Perry Township Assessor (Assessor) assigned five of the warehouses 10% obsolescence depreciation adjustments; three warehouses received no obsolescence adjustments at all. See footnote
Believing these eight warehouses were entitled to additional obsolescence, MWI filed a Form 130 Petition for Review with the Marion County Property Tax Assessment Board of Appeals (PTABOA) challenging the assessment. The PTABOA denied MWI’s challenge.
On May 24, 2000, MWI filed a Form 131 Petition for Review with the State Board of Tax Commissioners (State Board) asserting that each of its improvements were entitled to, at the least, a 50% obsolescence depreciation adjustment. The State Board conducted an administrative hearing on MWI’s appeal on March 8, 2001. On March 21, 2002, the Indiana BoardSee footnote issued a final determination in which it affirmed the Assessor’s obsolescence adjustments.
On May 6, 2002, MWI initiated an original tax appeal. On October 31, 2003, this Court heard the parties’ oral arguments. Additional facts will be supplied as needed.
ANALYSIS AND OPINION
Standard of Review

This Court gives great deference to final determinations of the Indiana Board when it acts within the scope of its authority. Wittenberg Lutheran Vill. Endowment Corp. v. Lake County Prop. Tax Assessment Bd. of Appeals, 782 N.E.2d 483, 486 (Ind. Tax Ct. 2003), review denied. Consequently, the Court may reverse a final determination of the Indiana Board only if it is:
(1)    arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

(2)    contrary to constitutional right, power, privilege, or immunity;

(3)    in excess of statutory jurisdiction, authority, or limitations, or short of statutory jurisdiction, authority, or limitations;

(4)    without observance of procedure required by law; or
(5)    unsupported by substantial or reliable evidence.
Ind. Code Ann. § 33-3-5-14.8(e)(1)-(5) (West Supp. 2003). The party seeking to overturn the Indiana Board’s final determination bears the burden of proving its invalidity. See Osolo Township Assessor v. Elkhart Maple Lane Assocs., L.P., 789 N.E.2d 109, 111 (Ind. Tax Ct. 2003).

Discussion

    “Obsolescence, which is a form of depreciation, is defined as a loss of value and classified as either functional or economic.” Freudenberg-NOK Gen. P’ship v. State Bd. of Tax Comm’rs, 715 N.E.2d 1026, 1029 (Ind. Tax Ct. 1999), review denied. See also Ind. Admin Code tit. 50, r. 2.2-10-7(e) (1996). Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property itself. See 50 IAC 2.2-10-7(e). Economic obsolescence is caused by factors external to the property. Id. The State Board’s regulations cite several examples of causes of obsolescence. For instance, a building might have a limited use or excessive material and product handling costs due to an irregular or inefficient floor plan (cause of functional obsolescence). Id. In addition, a building might be located in an inappropriate neighborhood (cause of economic obsolescence). Id.
    This Court has previously explained that when a taxpayer seeks an obsolescence adjustment, it must make a two-pronged showing. See Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1241 (Ind. Tax Ct. 1998). First, the taxpayer must identify specific factors that are causing, or have caused, its improvement to suffer a loss of value. See id. at 1238. Only after this showing does the taxpayer proceed to the second prong: quantifying the amount of obsolescence to be applied. See footnote See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 953-54 (Ind. Tax Ct. 2001).
    It is important to recognize, however, that each of these prongs requires a connection to an actual loss in property value. For example, when identifying factors that cause obsolescence, a taxpayer must show through the use of probative evidence
that these factors are causing an actual loss of value to its property. See footnote See id. at 954. Furthermore, when a taxpayer quantifies the amount of obsolescence to which it believes it is entitled, it is required, to convert that actual loss of value (shown in the first prong) into a percentage reduction and apply it against the improvement’s overall value. See Clark, 694 N.E.2d at 1238.
    During the administrative hearing, MWI argued that its improvements suffered from both functional and economic forms of obsolescence. More specifically, MWI complained that: the buildings were between 30 and 80 years old; they had inefficient floor plans; they had ceiling heights ranging from 13 to 80 feet; they had inadequate truck docks and rail access; and they suffered from substantial environmental contamination, including asbestos. (See Cert. Admin. R. at 175-80.) (See also Pet’r Br. In Supp. of Its Verified Pet. for Judicial Review at 8-10.) MWI also asserted that the property’s “relatively low and varying occupancy rate and . . . reduction in lease rates” is evidence of economic obsolescence. (See Pet’r Br. In Supp. of Its Verified Pet. for Judicial Review at 10.) (See also Cert. Admin. R. at 179-80.) As a result, MWI claims these causes of obsolescence “really drive[] up the cost of operating this type of business” and contribute to a “decrease in [the property’s] market value.” (Cert. Admin. R. at 180).
    To translate this “loss of value” into an obsolescence adjustment, MWI presented an appraisal report (Appraisal) prepared by Stephen Cobb, a certified general appraiser. (See Cert. Admin. R. at 143-169.) The Appraisal indicated that, on the basis of the market extraction method for determining depreciation, each of MWI’s improvements were entitled to an obsolescence adjustment of between 50 and 70%. (See Cert. Admin. R. at 159.)
    More specifically, the Appraisal first identified four allegedly comparable properties (comparables) in Marion County. The Appraisal states that in selecting the comparables, “age of the improvements [was] a critical factor in the selection process [because] . . . [c]omparables similar in age to the subject property would best represent the annual amount of depreciation that would be considered applicable to the subject improvement.” (Cert. Admin. R. at 147.) In addition, “[b]uildings with design and utility characteristics similar to the subject were determined to be the most applicable for this assignment.” (Cert. Admin. R. at 147.)
    The Appraisal then estimated the amount of obsolescence present in those comparable improvements, and applied that range to MWI’s property. Indeed, as MWI explained:
[f]or example, in regard to the first comparable property[, we]: (1) took the total price for which the comparable property last sold and allocated it between the cost of the land and the cost of the improvements to that comparable, using average land prices for the type of real estate involved at the time the property was sold; (2) then, utilizing . . . the Indiana [] assessment manual, [w]e determined the appropriate replacement cost per square foot [of the improvement] and multiplied that by the amount of square footage of the improvements; (3) next, from the result in step [two w]e deducted the value of the improvements determined in step [one], leaving an amount indicating the total loss in value of the property; (4) again using available tables in the [assessment] manual, [w]e selected a physical depreciation factor based upon the improvement’s age, which [w]e multiplied by the replacement cost new determined in step [two] to calculate the depreciated value of the improvement; (5) then, from the depreciated value determined in step [four w]e deducted the indicated improvement value determined in step [one], the result of which is that portion of total depreciation attributable to factors other than physical depreciation, namely, functional and economic obsolescence.

(Pet’r Br. In Supp. of Its Verified Pet. for Judicial Review at 11-12 (citation omitted).) After performing this calculation for all four alleged comparables, the Appraisal concluded that “[t]he market extraction method result indicated a depreciation range [in the comparables] of 59% to 81% concerning functional and economic obsolescence.” (Cert. Admin. R. at 159.) Thus, MWI argues, its request for obsolescence adjustments of only 50% “is supportable.” (Pet’r Br. In Supp. of Its Verified Pet. for Judicial Review at 25.) In other words, MWI contends that the Indiana Board’s final determination affirming the Assessor’s application of obsolescence adjustments is erroneous. The Court, however, disagrees for two reasons.
     First, with respect to the three warehouses that received no obsolescence, all MWI has done is provide the Indiana Board with a laundry list of factors that it alleges are causing obsolescence to its improvements and then say because other properties are suffering from between 59% and 81% obsolescence, “we’re entitled to a 50% obsolescence adjustment.” However, MWI needed to link one with the other by showing an actual loss of value. See Miller Structures, Inc., 748 N.E.2d 954. Instead, the administrative record is completely devoid of any evidence indicating and explaining MWI’s actual loss of value. For instance, MWI needed to provide evidence showing how the fact that its improvements had inefficient floor plans caused it (MWI) to lose money. Similarly, MWI needed to provide evidence showing how its improvements’ ceiling heights ranging from 13 to 80 feet caused it to lose money. MWI’s failure to provide this evidence is fatal to its claim with respect to the three warehouses that received no obsolescence in the first instance. See footnote
    With respect to the five warehouses that received 10% obsolescence adjustments, MWI’s claim that they should have received 50% fails for a different reason.See footnote Specifically, MWI failed to present evidence that the four alleged comparables suffered from comparable causes of obsolescence. See Appraisal Institute, The Appraisal of Real Estate 391 (12th ed. 2001) (stating that, under the market extraction method, “comparable properties should have similar physical, functional, and external characteristics as the subject, and they should have incurred similar amounts and types of depreciation”). See footnote Instead, MWI’s appraisal merely stated:
[Comparable Property #1:] This parcel was reportedly in average condition as of the sale date. This sale is located in a comparable area to the subject property. This improvement is built of brick, block and metal panel walls, steel frame, with 16’-24’ ceiling heights. This property was reported improved with an obsolete coal fired boiler at the time of sale. This improvement was improved as an automobile manufacturing plant in 1951.

*****


[Comparable Property #2:] This comparable is of similar age and in fair condition at the date of sale. The improvements are a series of connected buildings of concrete block, brick and wood construction. The improvements contain approximately 5% office area, having a ten-foot ceiling height. The balance of the improvement is warehouse\manufacturing area with 12-24 foot ceiling heights. This building was a former auto manufacturing facility of very heavy construction and was on the market of 3+ years.

*****


[Comparable Property #3:] This sale is located within a comparable area on the east side of Indianapolis. The property consists of interior office finish in the amount of 12 percent. This improvement is smaller than the subject, yet provides a good indication in the amount of depreciation that has occurred within the subject property. This property has ceiling heights varying from 16 feet to 24 feet. This property is also improved with a total of 41 truck docks and 15 rail docks. This improve[ment] also has sprinkler system.

*****


[Comparable Property #4:] This parcel was reportedly in fair to average condition as of the sale date. This sale is located in a comparable area to the subject property. This improvement is built of concrete block with brick veneer, with 21 truck high dock doors and rail spur with 12 rail doors. The building is fully sprinklered. This property was reported improved with a gas-fired steam boiler at the time of sale. This improvement was built in 1953.

(Cert. Admin. R. at 148, 151, 154, 157.) Without any explanation whatsoever as to what types of obsolescence these four properties suffered from, the Indiana Board was simply unable to make any correlation between the obsolescence present in the comparable properties and MWI’s property. See Blackbird Farms Apartments, LP v. Dep’t of Local Gov’t Fin., 765 N.E.2d 711, 715 (Ind. Tax Ct. 2002) (stating that without any comparison of lot sizes, shapes, topography, geographical features, lot accessibility, and uses, taxpayer’s assertion that certain parcels of land are “comparable" did not constitute probative evidence).
    A taxpayer cannot quantify its obsolescence depreciation without relating the causes of obsolescence, and the actual loss in value to the improvement incurred as a result of those causes, to the amount of obsolescence it seeks. See Clark, 694 N.E.2d at 1238; see also Miller Structures, Inc., 748 N.E.2d at 954. MWI was required to “carefully, methodically, and in detail brief this Court as to what the amount of obsolescence should be and why.” See Clark v. Dep’t of Local Gov’t Fin., 779 N.E.2d 1277, 1282 n.4 (Ind. Tax Ct. 2002) (emphasis added). While MWI presented an Appraisal stating that it was entitled to additional obsolescence depreciation, the Appraisal bore no relationship to causes of obsolescence depreciation it alleged to exist. Additionally, the Appraisal bore no relationship between the causes of obsolescence present in MWI’s property and that present in the four allegedly comparable properties. Thus, MWI simply did not establish its prima facie case that it was entitled to any additional obsolescence depreciation with respect to the five warehouses that initially received 10% obsolescence adjustments. See Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1119 (Ind. Tax Ct. 1998), review denied. The Indiana Board’s final determination must stand. See footnote

CONCLUSION

    For the foregoing reasons, the Court AFFIRMS the final determination of the Indiana Board.



Footnote: The assessments on the remaining two warehouses are not part of this appeal. ( See Pet’r Br. In Supp. of Its Verified Pet. For Judicial Review at 4.)


Footnote: The State Board of Tax Commissioners was abolished by the legislature as of December 31, 2001. 2001 Ind. Acts 198 § 119(b)(2). In its stead, the Indiana Board of Tax Review (Indiana Board) was created. Ind. Code Ann. § 6-1.5-1-3 (West Supp. 2003)(eff. 1-1-02); 2001 Ind. Acts 198 § 95. Consequently, when a final determination was issued on MWI’s appeal, it was issued by the Indiana Board.


Footnote: Indeed, “[w]here there is no cause of obsolescence, there is no obsolescence to quantify.” Lake County Trust Co. v. State Bd. of Tax Comm’rs, 694 N.E.2d 1253, 1257 (Ind. Tax Ct. 1998), review denied.


Footnote: In the commercial context, this loss of value usually means a decrease in the property’s income generating ability. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001).

Footnote: During the administrative hearing, MWI mentioned that its vacancy levels were, at the time of the 1997 assessment, about 40%. (Cert. Admin. R. at 179.) Vacancy, by itself, however, does not prove obsolescence. See Damon
Corp. v. State Bd. of Tax Comm’rs,
738 N.E.2d 1102, 1109 (Ind. Tax Ct. 2000). Vacancy is merely a sign of possible obsolescence; a taxpayer seeking an obsolescence reduction due to vacancy must still present probative evidence showing the reason why its building is vacant. Deer Creek Developers, Ltd. v. Dep’t of Local Gov’t Fin., 769 N.E.2d 259, 263 (Ind. Tax Ct. 2002).


Footnote: By awarding the 10% obsolescence adjustments to the five warehouses, the Assessor agreed that obsolescence was present in those improvements. Therefore, quantification of obsolescence, not the identification of causes thereof, is the issue here. See Phelps Dodge v. State Bd. of Tax Comm'rs, 705 N.E.2d 1099, 1102 (Ind. Tax Ct.1999) (stating that fact that parties agree on causes of obsolescence "obviates [taxpayer's] burden of offering probative evidence showing that the subject improvements experience obsolescence"), review denied. Given MWI’s failure to provide evidence showing an actual loss of value in the first instance, it is difficult for this Court to understand why the Indiana Board affirmed the Assessor’s application of obsolescence. Nevertheless, the Court is limited to reviewing the quantification prong of MWI’s case only.


Footnote: MWI’s Appraisal refers to the Appraisal Institute’s textbook “The Appraisal of Real Estate.” (Cert. Admin. R. at 146-47.) This textbook has therefore been placed within the parameters of the Indiana Board’s review, as well as this Court’s review. Cf. Meridian Towers East & West, LLC v. Washington Township Assessor, 805 N.E.2d 475, 480 (Ind. Tax Ct. 2003).

Footnote: The Court notes that the Indiana Board devoted approximately four pages of its final determination to discussing the credibility and relevancy of evidence regarding obsolescence in light of the United States’ Supreme Court case of Daubert v. Merrell Dow Pharmaceuticals, 113 S.Ct. 2786 (1993). (See Cert. Admin. R. at 65-68). However, this Court has previously held that generally accepted appraisal techniques are acceptable methods by which to quantify obsolescence. Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1242 n.18 (Ind. Tax Ct. 1998). Thus, the Indiana Board’s general discussion is irrelevant in this matter.