Blair and Olsen: On economic downturns, construction problems and taxation


By Benjamin Blair and Matthew Olsen

Most of us can relate to the feeling of starting a home project, only to complete half of it (likely not very well) and leave the project as-is for months on end. We certainly can, as much as we might not like to admit it.

While our spouses might disagree, partially completed home projects are not really a big deal in the grand scheme of things. But what about partially completed commercial buildings? That’s a different story.

For the last couple of years of this market recovery and expansion, financial news has featured headlines predicting a potential downturn in the stock or real estate markets. These stories often cite a top, unnamed financial analyst who predicted the 2008 Great Recession and who is convinced the market will soon be taking a turn for the worse. Regardless of the accuracy of the timing of those predictions, it is safe to assume the market will eventually take a tailspin. As we learned last decade, if a contraction happens, construction projects will inevitably slow or come to a complete halt — just like many of our home improvement projects (albeit for different reasons).


Lots of things happen when a commercial construction project comes to a halt. The project owner’s bank may come calling. Contractors may walk off the job. Liens may be filed and enforced. Contract claims may be made. And many of those persons who either provided work or were promised work on the job may seek legal redress in court. These are significant risks for an owner, who may be left with a partially completed building, legal and financial problems, and no ability to finish their project. But importantly, it postpones the property tax revenue for the county or district where the building is located. Or does it?

In Indiana, commercial properties are taxed based upon their “market value-in-use.” Although the meaning of that term has come under recent scrutiny by some tax assessors, it is well-established law that an assessor must value a property “for its current use, as reflected by the utility received by the owner or a similar user, from the property.” Kooshtard Property VIII, LLC v. Shelby Cnty. Assessor, 987 N.E.2d 1178, 1180 (Ind. Tax Ct. 2013). For most property types, market value-in-use is the same as market value — that is, the price that a property would exchange for in the open market between unrelated, self-interested parties.

Indiana law also requires assessors to assess all real property that exists in the jurisdiction on the assessment date. Although not explicit in Indiana code, long-settled case law clarifies that even buildings that are partially complete on an assessment date must be assessed for tax purposes. So, if a building was partially complete on Jan. 1, 2019, it should be assigned a value and taxed accordingly for that date. In practice, very few properties are actually assessed as partially complete, instead remaining assessed as vacant land until the structure is completed.

To assign a value as “partially complete” to a property, the assessor uses the same computerized, cost-based system that applies to properties more broadly. If the system shows the property’s improvements will have a cost of $1 million upon completion, and if the assessor concludes the property was 50% complete on the assessment date, the improvements would be assessed at $500,000 (plus the value of the land, which is never “partially complete”).

Putting aside the difficulty of determining what percent of a property is complete on a certain date, assessing properties as partially complete in this manner assumes costs equal market value. This assumption is not borne out in the market. Suppose you are the developer of a $20 million apartment building, and about halfway through construction, market forces cause you to halt construction. As you consider selling, would you really be able to recover every dollar you had put into the project at that point? And from the potential buyer’s perspective, would you be willing to pay $10 million simply because that’s how much had been spent to date? The answer to both questions is, in most cases, not a chance.

There is no question that partially complete buildings have to be assessed, but there is not yet an accepted standard for determining the assessed value. Because market value-in-use must reflect supply and demand in the market, the touchstone, then, should be what the property in its partially complete state would garner in the open market. Most of the time, that price will be less than what the developer had spent on that project, even assuming the developer was cost-conscious and paid construction costs at market rates.

As market prognosticators anticipate the coming decline, property developers will begin to sweat the details on construction timelines. But just as sure as there will, eventually, be another recession, there will, eventually, be buildings left incomplete as sunk costs are eclipsed by the costs necessary to complete the structure. When that day comes, we can rest assured that a taxing authority will find a way to place a value on those buildings and add them to the tax rolls. The open question for when that day arrives is, “At what cost?”•


Benjamin Blair is a partner and Matthew Olsen is an associate with Faegre Baker Daniels LLP in Indianapolis. Blair focuses his practice on state and local tax litigation, while Olsen focuses his practice on construction and real estate litigation. Opinions expressed are those of the authors.

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