ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
INDIANA TAX COURT
SANDRA K. BICKEL STEVE CARTER
ATTORNEY AT LAW ATTORNEY GENERAL OF INDIANA
Indianapolis, IN Indianapolis, IN
DEPUTY ATTORNEY GENERAL
MERIDIAN TOWERS EAST & WEST, )
A LIMITED LIABILITY COMPANY, )
v. ) Cause No. 49T10-0206-TA-58
WASHINGTON TOWNSHIP ASSESSOR, )
MARION COUNTY, )
ON APPEAL FROM A FINAL DETERMINATION OF
THE INDIANA BOARD OF TAX REVIEW
December 23, 2003
Meridian Towers East & West, a Limited Liability Company (Meridian), appeals the Indiana
Board of Tax Reviews (Indiana Board) final determination valuing its real property for
the 1998 tax year. The issue is whether Meridians improvements should have
been awarded a 74% obsolescence depreciation adjustment. For the following reasons, the
Court REVERSES the Indiana Boards final determination.
FACTS AND PROCEDURAL HISTORY
Meridian owns two apartment buildings, known as Meridian Towers Apartments, in Indianapolis, Indiana.
For the 1998 assessment year, the Washington Township Assessor (Assessor) applied a
10% obsolescence depreciation adjustment to each of Meridians buildings. Meridian appealed its
assessments to the Marion County Board of Review (BOR); the Marion County Property
Tax Assessment Board of Appeals
See footnote (PTABOA) denied Meridians appeals.
Meridian appealed the PTABOAs denial to the State Board of Tax Commissioners (State
Board), alleging that the buildings were entitled to additional obsolescence depreciation. On
April 18, 2002, following an administrative hearing, the Indiana BoardSee footnote issued a final
determinationSee footnote denying Meridians requested relief.
On June 3, 2002, Meridian initiated an original tax appeal. On September
3, 2003, this Court heard the parties oral arguments. Additional facts will
be supplied as necessary.
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:
arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
contrary to constitutional right, power, privilege, or immunity;
in excess of statutory jurisdiction, authority, or limitations, or short of statutory jurisdiction,
authority, or limitations;
without observance of procedure required by law; or
unsupported by substantial or reliable evidence.
Ind. Code § 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).
Meridian contends that the Indiana Board erred when it upheld the Assessors refusal
to award additional obsolescence depreciation to its improvements. Meridian is correct.
Obsolescence is the functional or economic loss of property value; it is expressed
as a percentage reduction in the remaining value of the subject improvement.
Clark v. State Bd. of Tax Commrs, 694 N.E.2d 1230, 1238 (Ind. Tax
Ct. 1998) (Clark I). See also Ind. Admin. Code tit. 50, r.
2.2-10-7(f) (1996). Functional obsolescence is caused by factors internal to the property;
economic obsolescence is caused by external factors. See Ind. Admin. Code tit.
50, r. 2.2-10-7(e) (1996).
In order to make a prima facie case for obsolescence, a taxpayer bears
the burden of identifying causes of obsolescence as well as quantifying the amount
of obsolescence to be applied to its improvements. See Clark v. State
Bd. of Tax Commrs, 742 N.E.2d 46, 51 (Ind. Tax Ct. 2001) (Clark
II), review denied. In this case, both Meridian and the Assessor agreed
that causes of obsolescence existed within Meridians improvements. (See Cert. Admin. R.
at 158-59.) Accordingly, Meridian was required to quantify the amount of obsolescence
depreciation to be applied to its improvements. See Heart City Chrysler v.
State Bd. of Tax Commrs, 714 N.E.2d 329, 333 (Ind. Tax Ct. 1999)
(stating that when parties agree as to the existence of certain causes of
obsolescence, the only issue to consider is the quantification of obsolescence).
To quantify the amount of obsolescence to which it believes it is entitled,
a taxpayer may use professional appraisal techniques. See Clark I, 694 N.E.2d
at 1242 n.18. At the administrative hearing, Meridian presented a Property Tax
Consultation Report (Appraisal). The Appraisal was prepared by Douglas E. Rogers, a
Certified General Real Estate Appraiser. The Appraisal first describes how the location,
lack of tenancy, and inferior state of renovation have caused Meridians improvements to
suffer an actual loss in value. (Cert. Admin. R. at 111, 117-18.)
To translate that loss of value into an obsolescence adjustment, the Appraisal
then compares the fair market value
See footnote of Meridians improvements as calculated under both
the cost approach and income capitalization approach.See footnote
Under the cost approach, the cost to construct a replacement of the existing
structure is estimated, less deductions for all accrued depreciation present in the property
See Canal Square Ltd. Pship v. State Bd. of Tax
Commrs, 694 N.E.2d 801, 805 (Ind. Tax Ct. 1998). See also Inland
Steel Co. v. State Bd. of Tax Commrs, 739 N.E.2d 201, 212-13 (Ind.
Tax Ct. 2000), review denied; S. Indiana Gas and Elec. Co. v. Russell,
451 N.E.2d 673, 676 (Ind. Ct. App. 1983). In using this approach,
the Appraisal calculates the total cost to reproduce Meridians improvements as $13,642,870.
(See Cert. Admin. R. at 120-21.) The improvements were valued using the
Marshall & Swift Valuation Service cost index, with adjustments in the base price
for differences in the heating and cooling system, basement parking garages, and presence
of balconies and canopies. (Cert. Admin. R. at 119.) After deducting
$6,821,434 in physical depreciation, the Appraisal concludes that the total replacement cost of
Meridians improvements is $6,820,000. (Cert. Admin. R. at 120-21.)
Under the income capitalization approach, the fair market value of a property is
determined by capitalizing the net income that the property produces; the process of
capitalization converts net income at a reasonable rate of return to arrive at
an overall indication of value. See Lacy Diversified Indus., Ltd. v. Dept
Local Govt Fin., No. 49T10-0103-TA-29, slip op. at 13 (Ind. Tax Ct. Dec.
5, 2003). See also Lucre Corp. v. County of Gibson, 657 N.E.2d
150, 153 (Ind. Ct. App. 1995), trans. denied. Under the income capitalization
approach, the Appraisal calculates the net income for Meridians improvements at $871,439.
(See Cert. Admin. R. at 125.) The Appraisal applied a 12% capitalization
rate to Meridians net income, and arrived at an estimated fair market value
of $1,765,000. (Cert. Admin. R. at 125.)
In comparing the value of the improvements based on the cost approach and
the income capitalization approach, the Appraisal attributed the difference $5,055,000, or 74%
of the total replacement cost of the improvements (after physical depreciation) to
obsolescence. (Cert. Admin. R. at 126.) Accordingly, Meridian contends that it
is entitled to a 74% obsolescence reduction against its improvements true tax value.
As this Court has previously held, this is a valid methodology for
See Canal Square, 694 N.E.2d at 807. See also
Thorntown Tel. Co., Inc. v. State Bd. of Tax Commrs, 588 N.E.2d 613,
619 (Ind. Tax Ct. 1992).
By introducing an appraisal quantifying obsolescence in accordance with generally recognized appraisal principles,
Meridian established a prima facie case that its improvements were entitled to a
74% obsolescence depreciation adjustment.
See Canal Square, 694 N.E.2d at 807.
Thus, it was incumbent on the Assessor to rebut Meridians prima facie case.
See Clark I, 694 N.E.2d at 1233 (stating that once a taxpayer
presents a prima facie case, it must be rebutted with substantial evidence).
This the Assessor did not do.
At the administrative hearing, the Assessor questioned Rogers regarding the sources of his
calculations and various statements made in the Appraisal. In none of these
exchanges, however, did the Assessor offer evidence rebutting the validity of Rogers calculations
or offer alternate calculations of his own. Rather, he merely asked open-ended
questions; for instance:
When you did the [potential] gross income, is there a reason you didnt
use any information from the apartment association? I mean it just says
Institute of Real Estate Management apartment survey.
In your financial information you stated you had [zero] in bad debts and
collections and your average lease rent to street rent was 92% and that
is only 7% off the normal average. Doesnt that seem [like] that
it is in accordance with rents  applicable in that area[?]
(Cert. Admin R. at 200, 206.)
In addition, the Assessor also submitted a glossary definition for the term net
operating income; a Standards for the Application of Obsolescence used by Marion County
assessing officials; and the Indianapolis Business Journals 1998 Most-Expensive Indianapolis-Area Apartment Communities list.
(See Cert. Admin. R. at 150-52.) The Assessor explained that the
glossary definition, obtained at an appraisal course he attended, defined net operating income
as the income expected from a property after deduction of allowable operating expense[.]
(Cert. Admin. R. at 210.) The Assessor then stated, I think
the key word is expected, not promised. (Cert. Admin. R. at 210).
The Assessor also stated that the 10% obsolescence adjustments Meridian received were
in accordance with the application standards, and he wondered why Meridian declined to
participate in the apartment listing. (Cert. Admin. R. at 210-11.) Such
statements fail to impeach or rebut Meridians evidence quantifying obsolescence depreciation at 74%.
Consequently, the Assessor failed to rebut Meridians prima facie case.
Nevertheless, the Indiana Board determined that Rogers calculations were severely flawed based on
its own interpretation of appraisal standards. (See Cert. Admin. R. 46-54.)
For instance, the Indiana Board disputed the capitalization rate Rogers used in the
Appraisal. In so doing, the Indiana Board relied on an IAAO
See footnote treatise,
Property Assessment Valuation (2nd ed. 1996). (See Cert. Admin. R. at 52
(discussing that the method by which Rogers calculated a 12% capitalization rate was
not mentioned in the IAAO treatise).) However, the Indiana Boards rejection of
Meridians evidence was erroneous.
The burden was on the Assessor, not the Indiana Board, to rebut Meridians
prima facie case. Because the Assessor did not introduce the IAAO treatise
to dispute Rogers capitalization rate, the Indiana Board was precluded from relying on
it in making its final determination. See Ind. Code § 6-1.1-15-4(j) (West
Supp. 2003) (stating that findings of the Indiana Board must be based exclusively
upon the evidence on the record in the proceedings and on matters officially
noticed in the proceeding). In essence, the Indiana Board exceeded its statutory
authority by attempting to make the Assessors case for him. See Ind.
Code § 6-1.5-4-1(a) (West Supp. 2003) (stating that the Indiana Board shall conduct
an impartial review of all appeals concerning the assessed valuation of tangible property
made from a determination by an assessing official or a county property tax
assessment board of appeals).
The Assessor failed to rebut Meridians quantification of obsolescence; the Indiana Board was
without authority to do so on its own. Consequently, the Indiana Boards
final determination cannot stand.
See Canal Square, 694 N.E.2d at 805 (stating
that a final determination based on unsupported conclusions or findings will be reversed).
For the reasons stated above, the Court REVERSES the final determination of the
Indiana Board and REMANDS it to the Indiana Board in order to instruct
the local assessing officials to award Meridians improvements with a 74% obsolescence adjustment.
Meridian initially filed its appeals with the Marion County Board of Review
(BOR) on May 8, 1998. However, the Legislature reconstituted all county boards
of review as of January 1, 1999, replacing them with property tax assessment
boards of appeal.
See, e.g., 1997 Ind. Acts 6 § 71 (codified
as amended at Ind. Code § 6-1.1-15-1 (West Supp. 2003)). Consequently, the
Marion County Property Tax Assessment Board of Appeals (PTABOA) heard Meridians appeals on
November 4, 1999.
On December 31, 2001, the legislature abolished the State Board of
Tax Commissioners (State Board). 2001 Ind. Acts 198 § 119(b)(2). Effective
January 1, 2002, the legislature created the Indiana Board of Tax Review (Indiana
Board) as successor to the State Board.
Ind. Code §§ 6-1.5-1-3; 6-1.5-4-1;
2001 Ind. Acts 198 § 95. Thus, when the final determination was
issued on Meridians appeals in April 2002, it was issued by the Indiana
Meridian appealed the assessment of two separate parcels; the Indiana Board conducted
a consolidated hearing and issued one final determination.
Footnote: In 1998, Indiana did not assess property on the basis of its
fair market value.
See Town of St. John v. State Bd. of
Tax Commrs, 665 N.E.2d 965, 966-67 (Ind. Tax Ct. 1996), revd on other
grounds, 675 N.E.2d 318 (Ind. 1997). Nonetheless, [the determination of] obsolescence [under
Indianas true tax value system] obviously incorporates market value concepts. Therefore, a
market value estimate is appropriate in the context of obsolescence. There is
really no choice in this matter: the Court (and taxpayers) must accept
quantifications . . . [that] use market concepts. Canal Square Ltd. Pship
v. State Bd. of Tax Commrs, 694 N.E.2d 801, 806 n.8 (Ind. Tax
This Court and the Indiana Court of Appeals have approved the use
of the cost approach and income capitalization approach as methods of determining a
propertys fair market value.
See id. at 805; see also Scott-Reitz Ltd.
v. Rein Warsaw Assocs., 658 N.E.2d 98, 105 (Ind. Ct. App. 1995).
In 1998, [i]n Indiana, real property [wa]s assessed on the basis of
its true tax value. True tax value does not mean fair market
value . . . but rather the value determined under the rules of
the state board of tax commissioners.
Town of St. John, 665 N.E.2d
at 966-67 (internal quotations and citations omitted).
This is because the Indiana property assessment regulations definition of obsolescence is
tied directly to that applied by professional appraisers under the cost approach.
Canal Square, 694 N.E.2d at 806; see also Ind. Admin. Code tit. 50,
r. 2.2-10-7 (1996).
The International Association of Assessing Officers (IAAO) is an educational and research
association of individuals in the assessment/property taxation profession.
Footnote: Furthermore, by relying on evidence outside the record, the Indiana Board denied
Meridian the opportunity to rebut with evidence in support of its calculations.