Indiana Property Tax Rulings: Charitable Purpose Exemption For Rented Home And Duplex; Taxpayers Prevail With USPAP Appraisal, Lose With “Hodgepodge” Of Questionable Valuation Methods

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Indiana property tax rulings:  charitable purpose exemption for rented home and duplex; taxpayers prevail with USPAP appraisal, lose with “hodgepodge” of questionable valuation methods

The following summaries of final determinations by the Indiana Board of Tax Review from the first half of 2014 were prepared by Noeli E. Serna, a 2014 summer associate at Faegre Baker Daniels who will be entering her second year of law school at Northwestern University School of Law this fall.

Indiana Board applies a charitable purpose exemption to one-half of duplex, even though taxpayer charged rent to occupantsSPA, Inc. v. Elkhart County Assessor, Pet. Nos. 20-012-12-2-8-00001 and 20-012-12-2-8-00002 (March 24, 2014) (March 1, 2012 assessment). SPA offers housing, counseling, and case management to women that have addictions, have been involved in the court system, have been abused, or have been divorced. SPA uses two properties — a free standing house and part of a duplex — as transition housing for the women. The women pay rent for the housing, but SPA does not profit from the rent proceeds. Instead, SPA requires the women to pay rent in order to help them develop budgeting skills.

SPA sought a 100% exemption for the house. It used half of the duplex, so it sought to exempt only that half.  The Assessor argued that because SPA charged the women rent, the properties were used for profit instead of charity. The Board, however, disagreed and determined that SPA used the properties for charitable purposes; teaching the women budgeting skills was part of the charitable organization’s purpose. (Page 9, ¶ 24.)

To be exempt, the property must be predominantly used for that purpose. According to the Board, “the predominate-use analysis . . . [applied] separately to each part of the property.” (Page 10, ¶ 28.) The Board determined that the half of the duplex SPA occupied was in fact occupied more than 50% of the time for charitable purposes. The Board granted SPA 100% exemptions to the house and to one-half of the duplex. Page 13, ¶ 36.)

“Hodgepodge” of questionable valuation methods defeat restaurant operator’s appeal. Full Service Dining, Inc. v. St. Joseph County Assessor, Pet. No. 71-005-09-1-4-01613 (May 30, 2014) (March 1, 2011 assessment). Petitioner argued that the assessment of its restaurant was inaccurate and should be reduced from $1,750,000 to $1,600,000, contending that the assessment was too high in comparison to sales and listings of similar properties.

Petitioner compared its property to six other properties. Its evidentiary support included size adjustments derived from CoStar, property record cards, traffic count data from the Indiana Department of Transportation, depreciation schedules from the Department of Local Government Finance’s 2012 Real Property Assessment Guidelines, and construction base rates from each comparable’s 2013 property record card. Petitioner asserted that his evidence and value conclusion were better than the Assessor’s because the Assessor’s appraisal included sales from all over the state and country. The Petitioner only used local properties.

Assessor argued that Petitioner did not use a licensed appraiser, and the Petitioner did not account for the fact that the comparable properties were vacant. Assessor stated that her use of the sales comparison approach was proper. Her method conformed to USPAP. The Petitioner’s appraisal methods, however, were questionable.

The Indiana Board affirmed the assessment. (Page 7, ¶ 24.)  The Board recognized that Petitioner used a sales comparison approach to calculate the property’s value, and the Petitioner offered evidence showing the comparability of the properties. However, the Board noted that Petitioner did not offer any proof that its appraisal methods and data conformed to generally accepted appraisal practices. (Page 8, ¶ 24(e).) The Board explained:

 [Appraiser’s] hodgepodge of assessment, appraisal, and mathematical methodology does not persuade the Board the evidence is based on generally accepted appraisal or assessment practices. [His] testimony does not sufficiently flush out the details of the adjustments. Furthermore, he does not reference any authorities that might confirm that the methodology and data were applied according to accepted appraisal practices. The Board therefore finds that the Petitioner’s sales comparable analysis is insufficiently reliable to be probative of the property’s market value-in-use.

(Page 8, ¶ 24(e).)  The Board determined that “the Petitioner’s sales comparable analysis [was] insufficiently reliable to be probative of the property’s market value-in-use.” Id. Petitioner failed to make its case.

Procedural Note: Petitioner objected to the admission of the appraisal as evidence. The Petitioner had rightfully requested the appraisal more than ten days before the hearing, but the Assessor never gave the Petitioner a copy of the appraisal before the hearing. The Assessor argued that the appraisal should be admitted as hearsay evidence since this was a small claims appeal. The Indiana Board rejected the Assessor’s argument and declared that “the purpose of this rule [was] to prevent litigation by ambush or gamesmanship.” (Page 3, ¶ 13.) The Board excluded the appraisal as evidence according to 52 IAC 3-1-5(d).)

Where both parties failed to make a case, value reverted to prior year’s assessment. Gus & Terry Tsirtsis v. Lake County Assessor, Pet. No. 45-027-09-1-5-00002 (March 14, 2014) (March 1, 2009 assessment). Petitioners sought to reduce the value of their single-family home in Munster. Petitioners sought a reduction from $227,400 to $190,000.

Assessor argued that her valuation was accurate since she used six sales of comparable properties sold in the same neighborhood. However, most of the comparable properties were smaller homes, and Petitioners’ property was a large, two-bedroom ranch that had the capacity to accommodate another bedroom.

Petitioners argued that an adjustment of $30,000 for a potential third bedroom was excessive. They also argued that the Assessor compared their property with three-bedroom homes, not a two-bedroom home like the subject. Finally, the Petitioners conducted a comparative market analysis, and the realtor estimated that the market value of the home was about $190,000.

The Board concluded that the Assessor failed to prove that the assessed value was correct. (Page 4, ¶ 15.)  The Assessor ineffectively used the sales comparison approach. (Page 4, ¶ 15(c).) She failed to show how “the properties compared to the subject property and offered no explanation as to how any differences may have affected the properties’ values.” (Page 5, ¶ 15(e).) Finally, the Board rejected the Assessor’s unsubstantiated conclusions that the disputed assessment “was within an acceptable range for mass appraisals. (Page 5, ¶ 15(f).)

The Board also rejected the Petitioners’ claim for an even lower assessed value for 2009. (Page 6, ¶ 15(h).) The Petitioners ineffectively tried to prove the lower assessed value with an undated comparative market analysis, and the real estate broker that prepared the analysis “did not make any adjustments to the sold properties to account for differences between them and the subject property.” Id.

The Board determined that both the Respondent and the Petitioners failed to prove their cases. (Page 6, ¶ 16.) Because the Assessor had the burden of proof, the Board ultimately changed the assessment to the prior year’s assessment of $215,000. Id.

Failure to consider non-easement resulted in unreliable valuation.  Yum Brands, a/k/a Taco Bell of America, Inc. v. Allen County Assessor, Pet. No. 02-076-12-1-4-00002 (April 8, 2014) (March 1, 2012 assessment). Yum Brands owned a Taco Bell and an adjacent commercial lot. Taco Bell used the lot as a parking area for its customers and employees. The commercial lot was burdened by a non-exclusive perpetual easement for the benefit of the Taco Bell parcel. The easement prohibited the construction of buildings on the land.

The Assessor relied upon her Deputy’s valuation opinion, leading to a significant increase in the lot’s assessed value. Yum Brands argued that the Deputy’s sales comparison analyses were inadequate methods to calculate the lot’s market value-in-use. The owners of the Deputy’s comparable properties had all constructed buildings and businesses on the lots. The Deputy had overlooked this key factor, which likely affected the subject property’s market value-in-use.

The Indiana Board determined that the Deputy’s valuation opinion was unreliable. The Assessor’s reliance on the Deputy’s evidence was improper. When the Board asked the Deputy if he had complied with USPAP, he “replied only that he followed USPAP’s ethics rule and code of conduct but not the provisions that apply to appraisers.” (Page 13, ¶ 34(i).) Because the Assessor had the burden of proof in this appeal, the assessment was reduced to its 2011 level.

Procedural Note: Taco Bell of America, Inc. raised an objection under Rule 1002 of the Indiana Rules of Evidence, or the “best evidence” rule. Ind. Evid. R. 102. Indiana’s “best evidence rule” provides that “[a]n original writing, recording, or photograph is required in order to prove its content unless [the Indianan Rules of Evidence] or a statute proves otherwise.” Id. (emphasis added). The Assessor presented evidence of the sales prices for three properties in the form of copies of property record cards and Gateway printouts. The Board of Tax Review determined that the copies were admissible evidence since the original forms were destroyed, and the Assessor did not act in bad faith.

Petitioners’ use of a USPAP-compliant appraisal gives Homeowners the upper hand. John & Martha Rose v. Kosciusko County Assessor, Pet. No. 43-035-12-1-5-0001 (February 18, 2014) (March 1, 2012 assessment).  Petitioners appealed the property tax assessment of a single-family residential rental property. They purchased the property in 2006 at an auction for $37,000 and argued that property values had declined since that time.

In order to prove the need for a reduced assessment, the Petitioners presented an appraisal completed by a licensed appraiser. The Appraiser certified that he had prepared the appraisal in conformance with USPAP. The Assessor argued that the Appraiser had used sales of foreclosed homes in his sales comparison analysis.  The Board explained that “an appraisal performed in conformance with generally recognized appraisal principles is often enough to establish a prima facie case that a property’s assessment is overvalued.” (Page 5, ¶ 14(d).)  Since the Petitioners established a prima facie case, the burden shifted to the Assessor to counter the Petitioners’ evidence. Id.

The Assessor had not adequately proven that the appraisal was flawed. (Page 5, ¶ 14(f).) “Conclusory statements that the appraiser used invalid sales [were] not sufficient to rebut the Petitioners’ case here.” Id. The Assessor offered a competing sales-comparison analysis, but she only used conclusory statements (without evidence) to explain how the characteristics of the subject property and allegedly comparable properties were similar. (Page 6, ¶14(g).)

Because there was also no evidence that the Assessor was an appraiser and she did not certify that her analysis complied with USPAP, the Board determined that “the Respondent’s sales-comparable analysis [was] insufficiently reliable to be probative of the property’s market value-in-use.” (Page 6, ¶ 14(h).) The Board approved a reduced assessed value of $25,000. (Page 6, ¶15.)

Topics:  Charitable Deductions, Charitable Donations, Charitable Organizations, Property Valuation, Tax Exemptions, USPAP

Published In: Civil Procedure Updates, Nonprofits Updates, Commercial Real Estate Updates, Residential Real Estate Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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