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
INDIANA TAX COURT
SHELBY STREET REALTY CORP., )
n/k/a MERCHANDISE WAREHOUSE, INC., )
v. ) Cause No. 49T10-0205-TA-46
PERRY TOWNSHIP ASSESSOR, )
ON APPEAL FROM A FINAL DETERMINATION
OF THE INDIANA BOARD OF TAX REVIEW
NOT FOR PUBLICATION
April 26, 2004
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 MWIs 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.
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 MWIs 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 MWIs appeal on March 8,
2001. On March 21, 2002, the Indiana BoardSee footnote issued a final determination
in which it affirmed the Assessors 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 Boards 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).
Obsolescence, which is a form of depreciation, is defined as a loss of
value and classified as either functional or economic. Freudenberg-NOK Gen. Pship v.
State Bd. of Tax Commrs, 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 Boards 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 Commrs, 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 Miller Structures, Inc. v.
State Bd. of Tax Commrs, 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
that these factors are causing an actual loss of value to its property.
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 improvements 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 Petr Br.
In Supp. of Its Verified Pet. for Judicial Review at 8-10.) MWI
also asserted that the propertys relatively low and varying occupancy rate and .
. . reduction in lease rates is evidence of economic obsolescence. (See
Petr 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 propertys] 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 MWIs 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 MWIs 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 improvements 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.
(Petr 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. (Petr Br. In Supp. of Its Verified
Pet. for Judicial Review at 25.) In other words, MWI contends that
the Indiana Boards final determination affirming the Assessors 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, were
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 MWIs 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. MWIs failure to provide
this evidence is fatal to its claim with respect to the three warehouses
that received no obsolescence in the first instance.
With respect to the five warehouses that received 10% obsolescence adjustments, MWIs 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
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, MWIs appraisal merely
[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 MWIs property.
See Blackbird Farms Apartments, LP v.
Dept of Local Govt 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, taxpayers 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. Dept of Local Govt 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 MWIs 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 Commrs, 704 N.E.2d
1113, 1119 (Ind. Tax Ct. 1998), review denied. The Indiana Boards final
determination must stand.
For the foregoing reasons, the Court AFFIRMS the final determination of the Indiana
The assessments on the remaining two warehouses are not part of
this appeal. (
See Petr Br. In Supp. of Its Verified Pet. For
Judicial Review at 4.)
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 MWIs appeal,
it was issued by the Indiana Board.
Indeed, [w]here there is no cause of obsolescence, there is no
obsolescence to quantify.
Lake County Trust Co. v. State Bd. of Tax
Commrs, 694 N.E.2d 1253, 1257 (Ind. Tax Ct. 1998), review denied.
In the commercial context, this loss of value usually means a
decrease in the propertys income generating ability. See Miller Structures, Inc. v.
State Bd. of Tax Commrs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001).
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.
Corp. v. State Bd. of Tax Commrs, 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. Dept of Local Govt Fin., 769 N.E.2d 259, 263 (Ind. Tax Ct.
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.
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 MWIs 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 Assessors application of obsolescence. Nevertheless,
the Court is limited to reviewing the quantification prong of MWIs case only.
MWIs Appraisal refers to the Appraisal Institutes textbook The Appraisal of
Real Estate. (Cert. Admin. R. at 146-47.) This textbook has therefore
been placed within the parameters of the Indiana Boards review, as well as
this Courts review.
Cf. Meridian Towers East & West, LLC v. Washington
Township Assessor, 805 N.E.2d 475, 480 (Ind. Tax Ct. 2003).
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
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 Commrs, 694 N.E.2d 1230, 1242 n.18 (Ind. Tax Ct. 1998).
Thus, the Indiana Boards general discussion is irrelevant in this matter.