Johnson County overvalued a Bass Pro Shop in Olathe by about $5 million, a state appeals court ruled, raising more questions about whether property should be appraised as if it’s vacant, or “dark.”
The Kansas Court of Appeals last week upheld a decision by the state’s tax appeals board that found the county incorrectly valued the Bass Pro store, which was built in 2006 with the help of state tax incentives near Interstate 35 in Olathe.
The case adds more fuel to the so-called “dark store” debate because the court said that real property must be valued as vacant, separate from the business on the property.
The court upheld the $9.1 million value for the property in 2016 and $9.4 million value for 2017. The county had recommended a value of about $14.5 million for each year.
The appeals court ruling is the latest development in how big-box stores should be appraised in Kansas, a legal battle that potentially could cost local governments millions of dollars in property tax revenue.
In 2019, the Board of Tax Appeals cut the combined value of 11 big-box stores’ properties by $60 million after their lawyer argued that the county tried to account for the values of the businesses and the property.
Johnson County is appealing that decision to the Kansas Court of Appeals.
“The court is not willing to legislate in these opinions to benefit the counties,” said Linda Terrill, the lawyer who represented the property owner in the Bass Pro case.
“The decision was not unexpected,” she said.
“This is the court applying long established law,” she said. “These cases only come up when the county tries to use a methodology that is not in compliance with the law.”
Johnson County spokeswoman Jody Hanson offered this response:
“Johnson County government is disappointed with the court’s decision and is reviewing its impact,” Hanson said in an email. “We will have more information soon.”
The issue potentially presents a public policy decision for the Kansas Legislature to decide how the big box stores should be appraised.
In the latest case, the appeals court found that “real property must be valued as vacant to separate the value of the property from the value of the business being conducted on the property.”
Citing a previous ruling, the court said it is “permissible to ‘determine the difference between the value of the property under a hypothetical vacant condition and its value as occupied in order to isolate the value of the taxable real estate separate and apart from the business being conducted on it.'”
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 any leases that might be in place.
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.
The county’s expert appraiser said he used the “fee simple” standard but testified that he didn’t think the property had to be valued as if it were vacant on the date of a hypothetical sale.
In this case, the county’s expert appraiser considered build-to-suit leases in determining the market rent to come up with the value for the Bass Pro property, which is owned by Arciterra BP Olathe.
A build-to-suit lease is a type of commercial lease arrangement in which a developer or landowner agrees to construct a property to meet the needs of the tenant.
The Board of Tax Appeals — and affirmed by the Court of Appeals — rejected the county expert’s use of build-to-suit leases to determine market rent for the property.
The board found that a previous Court of Appeals decision ruled that build-to-suit leases do not reflect market rent without some adjustments that were not shown to have been made in this case.