In re Equalization Appeal of Kan. Star Casino, L.L.C.

• Citation: 362 P.3d 1109,52 Kan.App.2d 50
• Decision Date: 20 November 2015
• Docket Number: No. 111,650.,111,650.
• Parties: In the Matter of the EQUALIZATION APPEAL OF KANSAS STAR CASINO, L.L.C. for the Year 2012 in Sumner County, Kansas.
• Court: Court of Appeals of Kansas

52 Kan.App.2d 50

362 P.3d 1109

In the Matter of the EQUALIZATION APPEAL OF KANSAS STAR CASINO, L.L.C. for the Year 2012 in Sumner County, Kansas.

No. 111,650.

Court of Appeals of Kansas.

Nov. 20, 2015.

Lynn D. Preheim and Jarrod C. Kieffer, of Stinson Leonard Street LLP, of Wichita, for appellant.

David R. Cooper and Andrew D. Holder, of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka, for appellee.

Before MALONE, C.J., GREEN and POWELL, JJ.

POWELL, J.

Kansas Star Casino, L.L.C. (Kansas Star) appeals from the ruling by the Kansas Court of Tax Appeals (COTA) that the appraised value of its property, a 195.5 acre tract of land located in the northeast corner of Sumner County and used for casino operations, was $80,510,000 for the tax year 2012. In reaching its conclusion, COTA determined that the value for Kansas Star's land was $16,931,250. This amount was based on the actual price Kansas Star's parent company paid for the land. On appeal, Kansas Star argues that COTA erroneously inflated the value of its land and that the land should have been valued based on sales of agricultural property in the surrounding area. The County cross-appeals, arguing COTA erred in declining to include various additional costs as part of its valuation. After a careful review of the record, we agree with COTA's ruling in all respects and therefore affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. An Overview of the Kansas Expanded Lottery Act and the Single Management Contract

The Kansas Legislature enacted the Kansas Expanded Lottery Act (KELA), K.S.A. 74–8733 et seq., in 2007. KELA divided the state into four gaming zones: northeast, south central, southwest, and southeast, each of which would be allowed to have only a single gaming facility management contract. K.S.A. 2014 Supp. 74–8734(a), (d). Sedgwick County and Sumner County comprise the south central gaming zone. K.S.A. 2014 Supp. 74–8702(f).

KELA established a process under which the State owns the casino's gaming operations but hires a gaming facility manager via a management contract to construct and own the casino improvements and infrastructure as well as to manage the gaming operations. Specifically, KELA provides that the management contract shall "allow the lottery gaming facility manager to manage the lottery gaming facility in a manner consistent with this act and applicable law, but shall place full, complete and ultimate ownership and operational control of the gaming operation of the lottery gaming facility with the Kansas lottery." K.S.A. 2014 Supp. 74–8734(h)(17).

Further, "[a] lottery gaming facility manager, on behalf of the state, shall purchase or lease for the Kansas lottery all lottery facility games. All lottery facility games shall be subject to the ultimate control of the Kansas lottery in accordance with this act." K.S.A. 2014 Supp. 74–8734(n)(2). KELA also created a Lottery Gaming Facility Review Board (Review Board) that was charged with evaluating lottery gaming facility management contracts. K.S.A. 2014 Supp. 74–8735(a), (h).

Potential gaming facility managers' casino proposals had minimum infrastructure requirements, including a $225 million minimum investment amount for the south central gaming zone. K.S.A. 2014 Supp. 74–8734(g)(2). Management contracts were to be for an initial maximum term of 15 years, and the winner of the management contract in the south central gaming zone was required to pay a privilege fee of $25 million in order to be selected as the lottery gaming facility manager for that zone. K.S.A. 2014 Supp. 74–8734(h)(1), (6). KELA mandated that the approved management contract contain provisions for payment of 22% of gaming revenues to the State, 2% to the problem gambling and addictions grant fund, 2% to the county in which the casino was located, and 1% to the other county in the zone. K.S.A. 74–8734(h)(12), (13), (16). KELA also specified that the "management contract shall not constitute property, nor shall it be subject to attachment, garnishment or execution, nor shall it be alienable or transferable, except upon approval of the executive director, nor shall it be subject to being encumbered or hypothecated." K.S.A. 2014 Supp. 74–8734(m).

Under KELA, once a management contract is approved by the Review Board, the contract has to be submitted to the Kansas Racing and Gaming Commission (KRGC) for a background check and final approval. K.S.A.2014 Supp. 74–8736(e). Facility managers and their employees must also be licensed and certified. K.S.A.2014 Supp. 74–8751.

B. Selection of the South Central Zone Gaming Facility Manager

The selection of the south central zone gaming facility manager was a lengthy process that encompassed three rounds of proposals. Potential gaming facility manager proposals included a proposed site for the casino. However, none of the proposed casino sites were purchased by the prospective applicants prior to the award of the management contract. Instead, various entities entered into option agreements to purchase the tracts at prices substantially above market value if, and only if, the site were part of the proposal selected for the management contract. All the proposed casino sites presented throughout the bidding process were agricultural-use properties. The entities that submitted proposals to the Kansas Lottery also applied for zoning at the proposed sites, and such zoning was granted to the proposed tracts.

The first round of bids occurred in 2008. The approved proposal's site for the casino was located on the combined Wyant and Brewer tracts in Sumner County. However, the first approved proposal was withdrawn due to the economic downturn during the 2008 recession.

Beginning in 2009, Scott Cooper, who served as an analyst for the Review Board, assisted in evaluating proposals during the second round of bidding. In the second round, the Kansas Lottery approved the bid of a gaming facility manager group with a prospective location immediately south of the Wyant and Brewer tracts—the Gerlach tract located in Sumner County. However, due to infighting within the management group, no management contract was awarded.

In 2010, Peninsula Gaming (Kansas Star's parent company) hired Cooper to develop and expand its gaming operations in the United States. Cooper helped Peninsula assemble a proposal for the third round of bidding. Peninsula submitted its bid alongside two other prospective gaming facility managers.

For its bid, Peninsula chose to acquire purchase options for two abutting tracts: the Wyant tract (selected for the management contract in round one) and the Gerlach tract (selected for the management contract in round two). The owners of the Gerlach tract initially entered into a purchase option agreement with Paul Treadwell and Mark Linder just after the legislature passed KELA, wherein they agreed to sell the tract for $25,000 per acre, or approximately $3,631,250. Treadwell and Linder assigned the option to Foxwoods Development Company, L.L.C. (Foxwoods) in 2007.

Foxwoods sold the Gerlach tract option to Peninsula on July 15, 2010, for $5,300,000. Six days later, on July 16, 2010, Peninsula and Double Down Development entered into an option agreement with the owners of the Wyant tract for a purchase price of $8,000,000.

Peninsula Gaming was awarded the management contract on October 19, 2010. It exercised its option for the Wyant tract on March 2, 2011, and its option for the Gerlach tract the next day. The Wyant and Gerlach tracts together comprise the Subject Property.

C. Land value appraisal and appeal

Kansas Star, a wholly-owned subsidiary of Peninsula and the gaming facility manager for the south central zone, was transferred ownership of the Subject Property and began operating the Kansas Star Casino there beginning December 26, 2011; as of January 1, 2012, the Subject Property consisted of an operating temporary casino and a partially constructed permanent casino. The Kansas Star Casino is situated on the southern Gerlach tract, while the northern Wyant tract is undeveloped aside from ingress and egress roads.

The County appraised the Subject Property at $91,000,000. Kansas Star appealed this appraisal to COTA. Following Kansas Star's appeal, the County hired Richard Jortberg as its litigation appraiser, who valued the Subject Property at $95,800,000. Kansas Star hired its own appraiser, Laird Goldsborough, who valued the Subject Property at $64,300,000. In deciding the appeal, COTA partially relied on Jortberg's appraisal and appraised the Subject Property at $80,510,000, including $16,931,250 in land value. Kansas Star now appeals COTA's land valuation of $16,931,250. The County cross-appeals, arguing COTA erred in declining to include various additional costs as part of its valuation of the Subject Property.

DID COTA OVERVALUE THE SUBJECT PROPERTY?

Kansas Star argues COTA improperly valued the Subject Property because the land would never be worth $86,605 per acre without KELA and the management contract. Kansas Star essentially asserts that it paid an inflated price for the Subject Property due to the unique circumstances of the management contract and that without the management contract the Subject Property's value would be substantially less. Thus, according to Kansas Star, the value attributable to the management contract should be subtracted from the property value of the Subject Property for the purposes of ad valorem taxation.

This court reviews a decision from COTA in the manner prescribed by the Kansas Judicial Review Act, K.S.A. 77–601 et seq. This court may grant relief pursuant to K.S.A.2014 Supp. 77–621, the pertinent portions of which provide:

"(c) The court shall grant relief only if it determines any one or more of the following:

....

"(4) the agency has erroneously interpreted or applied the law;

"(5) the agency has engaged in an unlawful procedure or has failed to follow prescribed procedure;

....

"(7) the agency action is based on a determination of fact, made or implied by the agency,

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