Johnson County appraisals draw scrutiny as lawmakers explore ‘dark store’ theory

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Overland Park property tax lawyer Linda Terrill testifies before Senate tax committee on the 'dark store' theory.

Johnson County’s real estate values came under an intense spotlight Wednesday at the Kansas Capitol as a leading hotel owner criticized the appraiser’s office as being “out of touch with economic realities” and called for new leadership in the department.

The harsh testimony came during an hourlong hearing held by the Senate tax committee to explore the “dark store” theory, in which occupied big-box stores are appraised as if they were vacant.

The committee heard from an Overland Park lawyer who represents retailers appealing their property appraisals, including Target stores in Johnson and Sedgwick counties.

“The dark store theory has a lot in common with the tooth fairy,” lawyer Linda Terrill told lawmakers. “The dark store theory is a brand-name PR campaign.  It’s not something taxpayers created.”

The dark store theory is bubbling up in Johnson County and across the country as retailers argue that properties should be appraised based on the value of their physical buildings.

Real estate and property tax attorneys contend that local government wants to appraise commercial properties more based on their tenants than the actual buildings. They say that’s wrong.

They seemed to be supported by a recent state appeals court decision upholding Target’s appeal of property values in Sedgwick County. Johnson County officials believe that another case involving Target stores in their county points in a similar direction.

Local governments say it’s unreasonable to appraise occupied property the same way as a vacant parcel. Vacant property, they say, would naturally be valued less than an occupied property.

Johnson County officials estimate that the dark store theory, if applied to appraisals, could cost more than $100 million in revenue a year. They predicted a large tax increase would be needed to offset the revenue loss, a potentially difficult issue since the Kansas Legislature imposed a property tax lid on local governments several years ago.

Johnson County Commissioner Ed Eilert and Johnson County Appraiser Paul Welcome attended the meeting but were not given time to address the committee.

“Obviously, the information that was shared this morning was only by those who were proponents of the hypothetical valuation theories,” Eilert said. “It was a little frustrating to not be able to respond to those comments, but that’s the way it is.”

Welcome was not prepared to comment Wednesday afternoon. He is preparing a response to comments made at the committee meeting.

During Wednesday’s hearing, Terrill told lawmakers that the retailers are well within the scope of state law.  She said retailers aren’t trying to exploit a loophole in state law to reduce their property values.

Armed with a spiral binder of case law and property value data, Terrill further argued that Johnson County was over-assessing properties, pointing out that she noticed big increases in property values right before the property tax lid went into effect in January 2017. The law imposing the tax lid was passed in 2015.

Terrill presented the committee with data showing that the value of 57 discount and retail stores in Johnson County jumped to $743.2 million in 2016 from $400.3 million in 2015, an increase of 85 percent.

Discount stores alone — Home Depot, Target, Walmart and the like — saw their values jump to $511 million in 2016 from $251.2 million in 2015, a 104 percent increase, she told the committee.

Every big-box store in Johnson County, she said, is appealing its values. “That’s an amazing statistic. I’ve been doing this for 40 years, and I’ve never seen every big-box retailer file an appeal.”

Eilert acknowledged that the values for the big box stores increased, but attributed that to something else. He said back in 2014 and 2015, the county discovered that the rent for the big box stores was lower than market value and had to be adjusted in 2016.

Joining Terrill at the committee meeting was Daniel Kurz, a partner in an investment company that owns the Marriott Hotel in Overland Park. He blamed the appraiser’s office for the hotel’s struggling performance.

Kurz told the committee his investment firm bought the hotel in 2007 after watching the building deteriorate because of a lack of capital investment. The owners renovated the hotel just before the economy fell into a recession in 2009. The economy eventually picked up, and while the hotel is growing, it’s not as profitable as expected, he said.

“Throughout this process, and even today, one of the greatest threats to our solvency has been the Johnson County Appraiser’s Office,” Kurz said.

“The county’s appraisers have routinely over-assessed this hotel, incorporating dramatic valuation increases without sufficient support and valuing our Marriott at significantly higher levels than our competitors,” he said.

He noted that the Marriott’s assessment for 2016 was 40 percent higher than its primary competitor on a square footage basis and 26 percent higher than its primary competitor on a per guestroom basis, despite “remarkable” similarities between the two properties.

He called for a number of improvements to the county appraiser’s office. Among them: installing new leadership.

Eilert said Kurz wanted to compare his hotel to another that is two miles away.

The Marriott’s room rates and occupancy rates are higher than the other hotel, which lead to the higher values, he said.

The chairman pointed out that the Mariott is about half mile from the Overland Park Convention Center and is located in a prime area near Interstate 435 and Metcalf Avenue.

Eilert stood by Welcome. “Paul is probably one of the most qualified appraisers we have in Kansas,” he said. “He follows state law. He doesn’t fudge.”

Sen. Caryn Tyson, a Parker Republican and chairwoman of the committee, asked Terrill if the property value increases were the result of the property tax lid.

Terrill hesitated to come to a conclusion but noted that the increase in property values came just before the lid went into effect.

“I see giant increase in value on big boxes right before the lid,” she said. “It could very well be unrelated. That’s sort of out of my purview.”

The testimony at the hearing was alarming to one senator.

“Obviously, we have a huge appraisal problem,” said Republican state Sen. Julia Lynn of Olathe. “It has been going on for years, and it’s about time we do something significant so that our businesses don’t suffer and residential folks don’t suffer.

“There’s something very, very wrong.”