Indianapolis, IN


    IN THE INDIANA TAX COURT _____________________________________________________________________

WILLIAMS REALTY FOUR, LLP,                                                )
    Petitioner,                                                                )
    v.                                                                         )   Cause No. 49T10-0305-TA-23
BARBARA M. HURST, ASSESSOR                                                     )
OF PIKE TOWNSHIP, MARION COUNTY,                                               )
et al.,                                                                        )
    Respondents.                                                               )    


May 18, 2004


    Williams Realty Four, LLP (Williams Realty) appeals the final determination of the Indiana Board of Tax Review (Indiana Board) valuing its real property for the March 1, 2001 assessment date. The sole issue for the Court to decide is whether the Indiana Board erred in denying an obsolescence adjustment to Williams Realty’s improvement.

    Williams Realty owns and operates the Crooked Creek Shopping Center located at the southwest corner of the intersection of 79th Street and Michigan Road in Indianapolis, Indiana. For the 2001 tax year, local assessing officials assigned Williams Realty’s improvement an assessed value (i.e., true tax value) of $1,433,700. See footnote In arriving at that value, no obsolescence depreciation was awarded.
    Williams Realty subsequently filed a Form 130 Petition for Review of Assessment with the Marion County Property Tax Assessment Board of Appeals (PTABOA), alleging that its improvement was entitled to an obsolescence depreciation adjustment. The PTABOA declined to change the value of the property.
    On November 16, 2001, Williams Realty appealed the PTABOA’s determination to the State Board of Tax Commissioners. On February 20, 2002, the Indiana Board See footnote held an administrative hearing on the matter. On May 6, 2002, the Indiana Board issued a final determination in which it rejected Williams Realty’s request for an obsolescence depreciation adjustment.
    Williams Realty timely initiated an original tax appeal. On November 1, 2002, however, this Court remanded the matter to the Indiana Board due to an incomplete administrative record. The Indiana Board conducted a remand hearing and, on March 28, 2003, issued another final determination in which it, again, denied Williams Realty’s request for an obsolescence depreciation adjustment.
    Williams Realty now appeals the Indiana Board’s final determination. The Court heard the parties’ oral arguments on January 30, 2004. Additional facts will be supplied as necessary.

This Court gives great deference to final determinations of the Indiana Board. 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 will 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. Osolo Township Assessor v. Elkhart Maple Lane Assocs., L.P., 789 N.E.2d 109, 111 (Ind. Tax Ct. 2003).     


    In 2001, commercial improvements in Indiana were assessed pursuant to the statutory standard of “true tax value.” See Ind. Code Ann. § 6-1.1-31-5 (West 2001) (amended 2002). True tax value did not mean fair market value, but rather the value that was determined by an application of Indiana’s assessment regulations. Ind. Code Ann. § 6-1.1-31-6(c) (West 2001) (amended 2002). More specifically, true tax value was determined by calculating an improvement’s reproduction cost and then subtracting any physical and obsolescence depreciation. See Ind. Admin. Code tit. 50, r. 2.2-10-5(d)(13)-(17) (1996). In turn, “[o]bsolescence . . . is defined as a loss of value and classified as either functional or economic.” See footnote Freudenberg-NOK Gen. P’ship v. State Bd. of Tax Comm’rs, 715 N.E.2d 1026, 1029 (Ind. Tax Ct. 1999), review denied (footnote added). In the commercial context, this loss of value usually represents a decrease in the improvement’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).
    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, 1239 (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. Only after this showing does the taxpayer proceed to the second prong: quantifying the amount of obsolescence to be applied. See footnote See id. (footnote added).
    During the administrative hearing, Williams Realty asserted that its improvement suffered from both functional and economic forms of obsolescence. More specifically, Williams Realty complained that its improvement was constructed with an odd, V-shaped layout that did not accommodate an anchor store. (Cert. Admin. R. at 140; see also Pet’r Br. at 8-9.) Because “[p]otential tenants will not consider leasing in a center without an anchor draw[,] . . . [the center] is difficult to lease[.]” (Pet’r Br. at 1-2.) Furthermore, Williams Realty explained that potential tenants preferred to locate in the booming and more affluent area along and north of 86th Street. (Cert. Admin. R. at 152.) Williams Realty also complained that its improvement lacked poor visibility from the street, resulting in poor customer draw, which in turn affected its tenant draw. (See Cert. Admin. R. at 153.) Finally, Williams Realty also implied that the commercial retail market in its immediate neighborhood was “saturated,” as across the street there was a newer, more modern shopping center, and a second center was under construction as of the March 1, 2001 assessment date. (See Cert. Admin. R. at 135, 176.)
    In turn, Williams Realty offered evidence indicating that, in order to keep the improvement leased and occupied given these functional and economic deficiencies, it was required to lease its space for less than what was charged by its competitors. See footnote (Cert. Admin. R. at 155.) Indeed, Williams Realty submitted evidence indicating that while the properties across the street were asking rents of approximately $13.75 per square foot, it was only able to collect an average rent of $10.80 per square foot. (Cert. Admin. R. at 154.)
Having established that its improvement has suffered an actual loss in value due to obsolescence, Williams Realty was required to quantify the amount of obsolescence to which it believes it is entitled. See Clark, 694 N.E.2d at 1241. As the Court has previously held, a permissible means of quantifying the obsolescence present in an improvement is to use generally accepted appraisal methods and their associated economic analyses. See Loveless Const. Co. v. State Bd. of Tax Comm’rs, 695 N.E.2d 1045, 1050 (Ind. Tax Ct. 1998), review denied.
    At the Indiana Board hearing, Williams Realty attempted to quantify the obsolescence of its property by translating the rent differential (i.e., the loss in the property’s value) into an obsolescence adjustment. More specifically, Williams Realty determined that, due to obsolescence, its annual rent loss was $147,500. See footnote It then divided that annual rent loss by an 11% capitalization rate to arrive at a total loss in value of $1,340,909. This, Williams Realty asserts, is equivalent to a 93.5% obsolescence adjustment.See footnote
    Williams Realty’s attempt to quantify the obsolescence of its property in this manner is flawed. The obsolescence of a particular improvement is tied to the loss of the improvement’s income generating ability. “The income generated by an improvement is measured in real dollars, not [t]rue [t]ax [v]alue dollars.” Id. Therefore, subtracting a real world dollar value from a true tax value dollar value is essentially meaningless. See id. Accordingly, Williams Realty did not meet its burden in quantifying its request for obsolescence. See footnote

For the aforementioned reasons, the Indiana Board’s final determination is AFFIRMED.

Footnote: For the March 1, 2001 assessment date, a property’s assessed value was the same as its true tax value. Ind. Code Ann. § 6-1.1-1-3 (West 2001) (amended 2002). Prior to that, however, assessed value was 33 1/3% of true tax value. See id.

Footnote: 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 Ann. §§ 6-1.5-1-3; 6-1.5-4-1 (West Supp. 2003); 2001 Ind. Acts 198 § 95. Thus, the Indiana Board conducted the hearing on Williams Realty’s appeal and issued the final determination thereon.

Footnote: Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property itself. Ind. Admin. Code tit. 50, r. 2.2-10-7(e) (1996). For instance, functional obsolescence may be caused by limited use of an improvement due to an irregular or inefficient floor plan. 50 IAC 2.2-10-7(e)(1)(A). Economic obsolescence is caused by factors external to the property. 50 IAC 2.2-10-7(e). Economic obsolescence may be caused by the decreased market acceptability for which the improvement was constructed or currently used. 50 IAC 2.2-10-7(e)(2)(D).

Footnote:      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 these factors are causing an actual loss of value to its property. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 954 (Ind. Tax Ct. 2001). Furthermore, when a taxpayer quantifies the amount of obsolescence to which it believes it is entitled, it is required to convert the actual loss of value (shown in the first prong) into a percentage reduction and apply it against the improvement’s overall value. See Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1238 (Ind. Tax Ct. 1998).

Footnote: At the time of the assessment, Crooked Creek Shopping Center was 98% occupied. As this Court has previously noted, a high occupancy rate does not necessarily mean that obsolescence does not exist in an improvement, as “a taxpayer may have had to reduce the rent to maintain the high occupancy rate.” Clark, 694 N.E.2d at 1239.

Footnote: Williams Realty took the rent differential of $2.95 per square foot ($13.75 minus $10.80) and multiplied that by the total square feet (50,000) in its shopping center.

$1,340,909 is 93.5% of the improvement’s true tax value of $1,433,700.

Footnote: Instead, Williams Realty could have “converted” its improvement’s true tax value to a real world dollar value (i.e., fair market value), and then compared the capitalized rental income lost to that value. See, e.g., Canal Square Ltd. P’ship v. State Bd. of Tax Comm’rs, 694 N.E.2d 801, 805-07 (Ind. Tax Ct. 1998).