Twelve Days of Property Tax Protections for Indiana Taxpayers – Day No. 3:  Assessors have the Burden to Prove that Changes to “Underlying Parcel Characteristics” are Justified

Twelve Days of Property Tax Protections for Indiana Taxpayers – Day No. 3: Assessors have the Burden to Prove that Changes to “Underlying Parcel Characteristics” are Justified

In conducting mass valuations, Indiana assessing officials generally apply the cost approach.  The 2021 Real Property Assessment Manual states, “The Guidelines adopted by the Department of Local Government Finance provide procedures and schedules that are acceptable in determining true tax value under the cost approach.”  According to the DLGF, assessors “need to understand the following concepts” to appropriately value commercial and industrial structures under the Guidelines:

  • measuring and calculating areas
  • using the general commercial models
  • using schedules
  • understanding base rates for floor levels
  • determining a structure’s finish type
  • determining a structure’s use type
  • determining a structure’s wall type
  • using a structure’s floor height
  • understanding the perimeter-to-area ratio for a structure
  • determining a structure’s construction type
  • understanding vertical and horizontal costs
  • determining the number of property record cards to use for a parcel

These concepts represent some of the “building blocks” of the cost approach, which are expanded on by the Guidelines.

The General Assembly recognizes the importance of keeping the foundational components of Indiana’s cost approach in place year-over-year, and it assigns the burden of proving changes of an improvement’s “underlying parcel characteristics” to the assessor making the changes.

What does it say? Indiana Code § 6-1.1-4-4.4 states:

(b) If the assessor changes the underlying parcel characteristics, including age, grade, or condition, of a property, from the previous year’s assessment date, the assessor shall document:

(1) each change; and

(2) the reason that each change was made.

In any appeal of the assessment, the assessor has the burden of proving that each change was valid.

Why is it important?  Small changes to “underlying parcel characteristics” can create large upward swings in assessed value (and the taxpayer’s corresponding property tax bill).  Section 4.4 reasonably and fairly requires the assessor to “document” – i.e. keep a written record – of the changes and the reasons the changes were made.  In other words, assessors must be able to “show their work.”  Changes and the reasons for the changes must be transparent.

For example, the statute specifically identifies “grade” as an “underlying parcel characteristic.”  Grade refers to the qualify of construction materials and design. The 2021 Real Property Assessment Guidelines, Appendix E, at 4, explains: “Construction quality is a central concept in the approaches used to value commercial and industrial improvements. The quality of the material and workmanship used in constructing an improvement, together with its design elements, will influence its cost new.”  The Guidelines provide for the assignment of grades to reflect a commercial or industrial property’s quality of materials and design, with base models being assigned a “C” or “average” grade.  Table E-1 includes the Quality Grade Factors chart:

Quality Grade

Quality Grade Factor

A

160%

B

120%

C

100%

D

80%

E

40%

And the Guidelines provide for intermittent quality grades.  The factors are applied to the base cost to reflect the improvement’s overall quality.

For simplicity, assume a commercial improvement has a base cost, as adjusted, of $50 PSF.  If the average “C” grade (“average quality”) of 100% is applied, there is no change – the unit value remains at $50 PSF.  If that same improvement is assigned an “A” grade (“high quality”), the unit value increases to $80 PSF.  This broad span of value hinges on the assessor’s assignment of grade.  The property’s grade factor typically should not change year-over-year, so it is logical that an assessor should have the burden to prove their change of grade (or any “underlying characteristic”) is reasonably explained and supported by substantial evidence.

In Chauncey Hill North, LLC v. Tippecanoe County Assessor (August 29, 2016), the taxpayer challenged the 2012 assessment of its two-unit rental house.  After the county board “adjusted the grade from D to C and changed the condition from fair to average, the value increased from $137,900 to $228,400 for 2012.”  Because the assessment both increased by more than 5% and because the grade and condition ratings had been adjusted, the IBTR found that the Assessor had the burden of proof under both Ind. Code § 6-1.1-15-17.2 and Section 4.4.  The Assessor conceded that he had the burden of proof.  The IBTR ruled: “With regard to the changes in grade and condition, [Assessor] contends that the C grade and average condition were appropriate for a neighborhood of two and three unit properties. [Assessor] presented no evidence to support his contention. Statements that are unsupported by probative evidence are conclusory and of little value to the Board in making its determination.”  The Assessor failed to meet his burden, and the property’s value reverted to its lower 2011 value (the remedy under Section 17.2).  This ruling illustrates how Section 4.4 can protect taxpayers from increased assessments due to unsupported changes of a parcel’s “underlying characteristics.”

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