In re The Equalization Appeal of HD Dev. of Md. for the Year 2018 in Riley Cnty.

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In the Matter of the Equalization Appeal of HD Development of Maryland For the Year 2018 in Riley County, Kansas.

No. 124,621

Court of Appeals of Kansas

June 7, 2024

NOT DESIGNATED FOR PUBLICATION

Appeal from the Board of Tax Appeals. Submitted without oral argument.

Michael A. Montoya, of Michael A. Montoya, P.A., of Salina for appellant.

R Scott Beeler and Brett C. Randol, of Rouse Frets White Goss Gentile Rhodes, P.C., of Leawood, for appellee.

Before ATCHESON, P.J., ISHERWOOD and HURST, JJ.

MEMORANDUM OPINION

HURST J.

HD Development of Maryland (the Taxpayer) filed an equalization appeal with the Kansas Board of Tax Appeals (BOTA) to dispute Riley County's (the County) appraisal of one its properties for the 2018 tax year. After hearing competing evidence from the parties' respective certified appraisers, BOTA adopted the Taxpayer's appraisal, which was significantly lower than the County's appraisal. The County filed a petition for judicial review in this court, arguing that BOTA's decision is invalid for two reasons: (1) it erroneously applied the law by relying on the exclusionary rule set forth by a panel of this court in In re Prieb Properties, L.L.C., 47 Kan.App.2d 122, Syl. ¶ 8, 275 P.3d 56 (2012), which the Kansas Supreme Court recently overruled; and (2) it was based on factual determinations not supported by substantial evidence in light of the record as a whole. This court agrees with the County that BOTA's decision is invalid because it erroneously relied on Prieb to the exclusion of other available evidence. BOTA's decision is therefore reversed and remanded with instructions to reconsider the value of the subject property without Prieb's limitations. It is therefore unnecessary to address the County's second claim.

FACTUAL AND PROCEDURAL BACKGROUND

The Taxpayer owns a one-story, 97,241-square-foot big-box retail store constructed in 2002 (the Subject Property) that sits on about 12 acres of land in Manhattan, Kansas, and operates as a Home Depot. For the 2018 tax year, the County appraised the fee simple value of the Subject Property at $6,435,400. The Taxpayer disagreed with the County's appraisal and filed an equalization appeal with BOTA, claiming the accurate fee simple value of the subject property to be $4,786,530.

BOTA held two evidentiary hearings on the matter. The County's appraiser- who prepared an appraisal report for the Subject Property that was admitted into evidence- testified that the County initially appraised the Subject Property at $7,814,020 using the cost approach and $6,937,300 using the income approach. The County's appraiser stated that the County chose to rely on its income appraisal and, after adjustments arrived at the contested value of $6,435,400.

The County also retained the services of a certified appraiser, Timothy Keller, who prepared another appraisal report that was also admitted into evidence. Keller testified at the first evidentiary hearing that the Subject Property should be a Class A investment property rather than a less-desirable Class B investment property. Keller agreed with the County that the highest and best use of the Subject Property, both as if vacant and as currently improved, was the existing use.

Keller employed all three appraisal methods-sales approach, income approach, and cost approach-and valued the Subject Property at $7,310,000 under the cost approach; $7,290,000 under the sales approach; and $7,070,000 under the income approach. Keller testified that to reach his cost approach appraisal, he started with land valuation using five recent comparable property sales and made adjustments based on market condition, location, size, and topography. Keller concluded the Subject Property's land value was $3,430,000. Keller then estimated the replacement cost of the Subject Property's improvements using a national subscription service-Marshall Valuation Service-and subtracted the total accrued depreciation which, when added to the land valuation, resulted in a cost approach appraisal of $7,310,000.

Keller testified that he reached his sales approach appraisal by identifying four recent sales of comparable big-box properties: a JC Penney, a grocery store, and a former Sears (all in Lawrence), and a Hobby Lobby in Columbia, Missouri. Keller performed an individual sale comparison for each sale and then adjusted the data based on both transactional and property characteristics such as market conditions, expenditures after sale, conditions of sale, location/access, quality, age, land-to-building ratio, and size. Based on the adjusted data from the comparable sales, Keller valued the Subject Property at $7,290,000 using the sales approach.

For the income approach, Keller looked at the lease rates of comparable properties to determine the Subject Property's potential gross income if not owner-occupied. Keller used five comparable commercial leases of properties in Manhattan, Overland Park, Garden City, Kansas City, and central Nebraska with adjustments for characteristics such as location/access, quality, age, and size. Keller then estimated a market vacancy rate to calculate an effective tax rate and, after adding it to the estimated direct capitalization rate, appraised the Subject Property at $7,070,000.

Keller testified that he included built-to-suit leases. The County's attorney asked Keller, "what steps did you take with regard to the built-to-suit leases to ensure that there was no consideration for other business value or business interest as Prieb describes?" Keller responded, "Yes, so these were lease operating memorandums that we received from the actual sale of the property. And I did the actual lease for the sale -- Lease 1, but the other leases, where I could, we actually had done an appraisal of it or I had information about the lease, and there was no reason to suspect that any of these leases had any additional consideration other than the real property." The County's attorney had the following exchange with Keller about the Prieb decision related to the value:

"[County's Attorney:] And did you feel that your analysis complied with what Prieb -- and you're familiar with Prieb, correct?

"[Keller:] Yes.

"[County's Attorney:] And did you feel your analysis complied with the requirements of that case?

"[Keller:] Yes.

"[County's Attorney:] And it is a fair statement, isn't it, that even big-box stores or properties are part of the 'market'?

"[Keller:] Yes.

"[County's Attorney:] And as long as you are able to utilize information to take out whatever business interests or other intangibles will be attributed to that lease, if you can do that, there's no reason you can't consider those part of your market rent, is there?

"[Keller:] No."

Keller testified that he believed the cost approach and income approach appraisals were the most reliable and therefore relied on those appraisals to reach a final value. Keller's report explained that the cost approach appraisal was "a good approach to value" because "[l]and value was estimated based on sales in the local market," "[c]onstruction costs were estimated based on Marshall," and "[g]iven the age of the subject and its design, depreciation was not significant and was extracted from other big box sales in the state." Keller's report explained that the income approach appraisal was "a good approach to value" because "[s]ufficient rental data was available to estimate market rent for the subject including a lease in close proximity" and "[s]ufficient sales with capitalization rates were available for analysis and our estimate of the overall rate is well supported." Finally, Keller explained that the sales approach appraisal was "considered the weakest approach to value" because "[f]ee simple sales of newly constructed big box stores rarely occur" and "[t]he sales that are available are typically older and or located in second-tier locations." Keller arrived at a final fee simple value for the Subject Property of $7,200,000, which is about the average of his cost and income approach appraisals.

The Taxpayer also retained the services of a certified appraiser, Thomas Slack, who prepared an appraisal report that was admitted into evidence at the second evidentiary hearing. Slack determined that the Subject Property's highest and best use as if vacant was "to hold for future retail or industrial development or sale to an owner-user" and that the Subject Property's highest and best use as improved was "for continued use as a big box retail store or several stores." Slack performed all three appraisal methods used by Keller but relied "almost exclusively" on the sales approach appraisal to reach a final fee simple value. Slack's report explained that "[t]he Sales Comparison Approach is the best method to use in appraising the fee simple interest in real property when there are several recent fee simple big box sales to compare." Slack explained that "[t]he Cost Approach is not normally a reliable indicator of value for a property that is sixteen years old" and the income approach appraisal "is not as reliable in a fee simple analysis because market rental rates vary depending on the lease duration, the quality of the tenant, tenant improvements and other concessions, and because capitalization rates in the market vary based on the lease duration, credit worthiness of tenants, periodic rent increases or fixed rate leases, responsibility for operating expenses, etc."

For the sales approach, Slack's report explained that he "researched fee simple sales of large, single tenant or single-user big box retail buildings in Manhattan, Kansas but found none." Therefore, Slack "expanded the research to included [sic] additional properties within the region that includes seven sales in...