Johnson County overvalued 11 big-box retail stores by about $60 million, a state appeals court has ruled, potentially firing up the ongoing debate over whether property should be appraised as if it’s vacant, or “dark.”
The Kansas Court of Appeals on Friday upheld a decision by the state’s tax appeals board that found the county incorrectly valued a group of Walmarts and Sam’s Clubs by about $60 million in 2017 and $63 million in 2016.
A Johnson County spokeswoman said the county was reviewing the decision and would provide more information after its review was complete.
The latest case adds more fuel to the so-called “dark store” theory, a criticism leveled at retailers who believe their property should be appraised as if their property is vacant, separate from the business activity it generates such as leases.
The retailers essentially argue that the property should be valued as if it were vacant when it’s hypothetically transferred to a new owner.
They say there’s no such thing as a “dark store theory,” comparing the issue more like to appraising a home regardless of how much the property owner earns.
Local government officials in Johnson County and across the state have been sounding the alarms about the potential for these kinds of court decisions, warning that it could potentially blow holes in their budgets.
It is believed that court decisions like the one handed down Friday could cost local governments hundreds of millions of dollars and shift the tax burden onto homeowners as the number of cases snowball.
Friday’s decision reflects yet another case that has gone in favor of the retailers, suggesting that any changes need to start with the Kansas Legislature, not the courts.
The three-judge panel ruled 2-1 against Johnson County on Friday.
The majority found that a series of Kansas appeals court cases had established that properties should be appraised without considering anything else, including any lucrative leases that might be in place that generate income.
“We conclude that Johnson County has failed to satisfy its burden of showing the invalidity of (the Board of Tax Appeals’) decision regarding the valuation of the Walmart properties,” Judge David Bruns wrote for the majority.
“We also conclude that the county has not shown that BOTA erroneously interpreted or applied Kansas law,” Bruns wrote.
“Furthermore, we conclude that the county has not shown that BOTA’s decision was not supported by substantial evidence in light of the record as a whole,” he wrote.
At issue is how the phrase “fee simple estate” is applied in the arcane vocabulary of property appraisals.
Lawyers for the big-box retailers believe the phrase means the properties should be appraised without considering anything else, including the lease.
They say the law is on their side, pointing out that their definition of “fee simple” was already upheld by the Kansas Court of Appeals in a 2012 appraisal case in Topeka involving a Best Buy that’s known in legal shorthand as “Prieb.”
“Johnson County seeks to redefine the term ‘fee simple’ or ‘fee simple interest’ to mean “fee simple subject to a lease,” the court wrote.
The court said adopting the county’s definition to include leases would lead to a seismic shift in Kansas tax policy that could affect property values across the state.
“The county has simply found a definition that it prefers and invites us to replace it with the definition relied upon by Kansas courts and BOTA since 2012,” the judges wrote.
“Although we understand the county’s incentive to do so in order to increase its revenue at the expense of Kansas taxpayers, we respectfully decline the invitation to implement such a major shift in tax policy.”
Sitting in with the court, retired Appeals Court Justice Steve Leben sharply criticized the 2012 appeals court opinion in the Prieb case, which heavily influenced Friday’s ruling.
Leben argued that the 2012 appeals court overstepped its authority when it issued an opinion that he said went beyond state statutes and the judiciary’s proper role in interpreting the law.
The court in the Prieb case couched the primary legal issue as whether the state tax appeals panel had adhered to state law and “generally accepted appraisal practice,” Leben wrote.
“Yet the court cited no Kansas statute that gave the court the authority to determine what was generally accepted appraisal practice,” Leben wrote.
“In deciding what Kansas law meant in the appraisal of big-box stores, the Prieb court went far beyond any statute adopted by the Kansas Legislature,” he wrote.
The court instead “enshrined into Kansas caselaw the theory of a single expert as “generally accepted appraisal practice.”
Leben faulted the 2012 opinion for agreeing with a “noted commentator,” appraiser David Lennhoff, who published an article saying that an appraiser “‘theoretically should approach the valuation as if the property were vacant.'”
Leben noted that Lennhoff – “whose view expressed in an article became the law” – was an expert for the taxpayer in the case before the court.
“He agreed that his 2009 article on big-box-store appraisals, cited in Prieb, generated
controversy and multiple letters to the editor of the journal that printed it,” Leben wrote.
“What’s clear from Lennhoff’s testimony and that of other experts in our case is that all of this is hotly contested territory in the world of real-estate appraisal.”
Leben also pointed out that the Prieb decision “cited an article by someone named Shapiro with the title, ‘Big-Box Retailers Beware How Assessors Overvalue Your Property.'”
He added that the piece written by Michael B. Shapiro for National Real Estate Investor is not a “scholarly article and cites no legal authority – though it does analogize the valuation of big-box stores to made-to-order men’s suits.”
The majority in the Walmart case defended the Prieb decision, which also had been criticized by Johnson County as poorly researched and lacking specificity.
“Although we appreciate the county’s zealous advocacy, we find such attacks on Prieb to be – at best – misguided,” Bruns wrote for the majority in the Walmart case.
“Moreover, we note that the county’s argument overlooks the fact that the legal principles set forth in Prieb have subsequently been followed and explained by other panels of our court,” he wrote.
Bruns noted that the courts, the Board of Tax Appeals, attorneys, appraisers and litigants have relied on the Prieb case for more than a decade.
Likewise, the Kansas Legislature has not amended the tax statutes to express displeasure with the decision in the Prieb case, Bruns noted.
“The Kansas Legislature’s continued acquiescence to Prieb and its progeny is a strong indication that it accurately reflects legislative intent regarding the valuation of
real property for ad valorem tax purposes,” Bruns wrote.
“Moreover, we are not clearly convinced that Prieb or its progeny were wrongly decided nor do we find that the legal principles set forth in those opinions are no longer sound because of changing conditions.”