Indiana Senate Bill 436
Proposes Significant Methodology Change
To Industrial and Commercial Real Property Tax Assessments
If passed, Indiana State Senate Bill 436 will have a dramatic impact on many Indiana business property tax assessments due to increased real property tax assessments on properties that are newer than 20 years in construction age and may be applied retroactively. The Bill represents a significant assessment methodology change where “special purpose property” would be valued according to the taxpayer’s federal tax records.
The Bill defines “special purpose property” as buildings of 50,000 square feet or more (i.e. big box stores), fast-food restaurant chain properties, manufacturing plants, movie theaters, industrial properties, chain stores and similar properties that have one or more of the following characteristics:
- Built with a unique physical design that enhances the utility to the person for whom the structure was built
- Made using special construction materials that enhance the utility to the person for whom the structure was built
- Designed with a layout that enhances the utility to the person for whom the structure was built
The current language of SB 436 mandates that only the cost approach should be used for appraisal purposes and improvement costs should be dictated by the federal tax depreciation records of the owner. Essentially, the Bill eliminates the application of economic or functional obsolescence or alternative methods of market valuation (i.e., sales or income approaches).
We believe that the methodology in the current Bill language provides several problems to Indiana business owners of larger, newer commercial and industrial properties and hinders Indiana’s efforts to stimulate future growth for the following reasons:
1) The initial cost of a building or other improvement to land may be inflated when compared to market value especially when premiums are paid for accelerated construction or when amenities are constructed which would generally not contribute to market value (i.e., “overbuilt” or “super-adequate properties”). The Bill would allow Indiana assessors to include the inflated costs as part of their real property tax assessments.
2) Many businesses take the total cost of all improvements, (including process related mechanicals, foundation, and electrical which would generally be assessed by Indiana as personal property), into their building improvement account which may further inflate their reported cost above market.
3) Applying the federal depreciation method for building improvements sets a recovery period at 39 years which, if applied to actual building improvement cost per books, may not correctly capture all forms of market depreciation especially during downward market changes. Business owners with newer properties would generally pay above market assessment rates during their initial depreciation recovery period term for around the first 20 years of construction age.
4) Abandonment of market principals pursuant to SB 436 could have a detrimental effect on business investment in Indiana. Businesses that have selected Indiana as an expansion site within the past 10 – 15 years and see the significant increase in the assessed value would be loath to contemplate additional expansion. When the impact of SB 436 is fully publicized, Indiana could also fail to attract expanding employers as a result of not providing a competitive state tax climate with neighboring states who integrate market value concepts as a basis for their tax assessment systems.
Indiana State Senate Bill 436 passed the Senate 49-1 on February 24 and was sent to the House for consideration. The Bill is currently in the House Ways and Means Committee and is receiving increased levels of opposition as it is being debated. A strong effort is in place to eliminate the retroactive component, which would make the bill’s effective date March 1, 2015, and there is also a push to ensure the bill is aligned with general appraisal principles. The result of these efforts has yet to be determined. We anticipate that the bill will not be acted upon until later this month.
The Senate sponsor for the bill is Brandt Hershman, the committee chair of the Tax and Fiscal Policy Committee, and it was introduced in response to the Indiana Board of Tax Review’s decision in Meijer Stores LP v Marion County Assessor.
We will continue to publish Bill updates as they become available. Due to the significant potential financial impact on Indiana businesses, please feel free to contact us with any questions.