Opinion ID: 2622017
Heading Depth: 1
Heading Rank: 5

Heading: Nevada's property tax assessment scheme recognizes the method used to assess Olen Residential's property

Text: As an initial matter, Olen Residential asserts that the State Board's decision is unjust and inequitable because it relies on an improper assessment. In particular, Olen Residential apparently contends, contradictorily, both that the Assessor did not first determine altogether the taxable values of its properties by appraising the lands and then appraising the improvements on them, as required by NRS 361.227(1), and that in making this appraisal, the Assessor failed to subtract[ ] from the cost of replacement of the improvements all applicable . . . obsolescence. But the record demonstrates that the Assessor appraised each parcel of land and its improvements, as required by NRS 361.227(1). Although the Assessor acknowledged that he did not subtract any obsolescence from the value derived under NRS 361.227(1), he testified that he did not do so because it was not clear that any such reduction was necessary, given that no obsolescence was demonstrated or readily observable. In light of this testimony, an assessment was made under NRS 361.227(1), even though the Assessor did not reduce that amount for obsolescence. This conclusion leads to Olen Residential's next argument that, at least once the district court entered a judgment in Olen Residential's constructional defect action, the judgment represented amounts that should have been subtracted under NRS 361.227(1) as obsolescence. Olen Residential argues that constructional defects are necessarily obsolescence that must be accounted for by reducing the apartments' full cash value by simply subtracting the applicable obsolescence. We disagree. Obsolescence can be either functional or economical. Obsolescence is economic if it results from external economic factors, such as decreased demand or changed governmental regulations, while obsolescence is functional if it results either from inherent deficiencies in the property, such as inadequate equipment or design, or from improvements in the property since its use began. [12] With respect to commercial property that generates income, the Indiana Tax Court has recognized that a loss of value usually means a decrease in the property's income-generating ability. [13] Thus, functional obsolescence must result in detriment to the property's income-producing capabilities. [14] If the taxpayer properly demonstrates that the alleged obsolescence decreased the income that the property generates, the assessor must then convert the actual loss of value . . . into a percentage reduction and apply it against the improvement's overall true tax value. [15] Thus, in commercial properties, even obsolescence depreciation can be seen as correlating to the property's income-producing capabilities. Indeed, Nevada tax law appears to recognize, as the Indiana Tax Court has, that with respect to income-producing property, a defective condition on any improvement must affect the property's income-generating ability before it constitutes deductible obsolescence. [16] Specifically, NRS 361.227(5) provides that an assessor may use the income capitalization approach to determine whether obsolescence is a factor in valuation. If a property's full cash value using the capitalized income method is substantially less than the taxable value assessed without depreciation under NRS 361.227(1), this indicates that a reduction for obsolescence is warranted. [17] In this way, the income that a property generates is used to determine whether the condition of any improvement on the property is decreasing the income that the property would otherwise generate. Thus, constructional defects could impair a property's function so as to constitute obsolescence, if a connection between the purported obsolescence and an actual loss in property value is shown. Here, however, Olen Residential failed to make any specific connection between its properties' constructional defects and the income that its properties generate, or are likely to generate in the future. It instead argues that its properties' constructional defect judgments should merely be deducted from the cost to replace the improvements, without considering whether the constructional defects in any way impact the amount of income its properties generate. Olen Residential's proposed method ignores that its properties generate income, which necessarily affects the properties' value. As set forth in NRS 361.227(5), the Assessor was permitted to determine whether obsolescence is a factor in his valuation under the income capitalization method. Thus, as the Assessor applied the capitalization method to properties with constructional defects, the Assessor properly followed the statutory steps in appraising the properties' values under NRS 361.227(1).