Hixon v. Lario Enterprises, Inc.

• Decision Date: 22 March 1995
• Docket Number: No. 70346,70346
• Citation: 892 P.2d 507,257 Kan. 377
• Parties: J. Mark HIXON, Shawnee County Appraiser, Appellant, v. LARIO ENTERPRISES, INC., Appellee.
• Court: Kansas Supreme Court

Page 507

892 P.2d 507

257 Kan. 377

J. Mark HIXON, Shawnee County Appraiser, Appellant, v. LARIO ENTERPRISES, INC., Appellee.

No. 70346.

Supreme Court of Kansas.

March 22, 1995.

Syllabus by the Court

1. The Board of Tax Appeals is a specialized agency that exists to decide issues concerning taxation and valuation; its decisions should be given great credence and deference when it is acting in its area of expertise. However, if the reviewing court finds that the administrative body's interpretation is erroneous as a matter of law, the court should take corrective steps. The party challenging the validity of the agency's action bears the burden of proving the invalidity of the action. K.S.A. 77-621(a)(1).

2. K.S.A.1994 Supp. 79-501, K.S.A.1994 Supp. 79-503a, and K.S.A.1994 Supp. 79-1439(a) are construed and applied.

3. K.S.A.1994 Supp. 79-501 requires that appraisal of real property for ad valorem tax purposes be based on the fair market value of the property owned, not on the status of the owner of the property and the number of lots owned.

4. Under the facts of this case, the developer's discount method of valuation used to determine the fair market value of subdivision property held by the developer violated the statutory scheme for determination of the fair market value of the property for ad valorem tax purposes.

Sandra L. Jacquot, Asst. County Counselor, argued the cause, and Linda P. Jeffrey, County Counselor, was with her on the briefs, for appellant.

Robert J. O'Connor, of Morrison & Hecker, Wichita, argued the cause, and Pamela Clancy, of the same firm, was with him on the briefs, for appellee.

DAVIS, Justice:

Lario Enterprises, Inc., (Lario) a Shawnee County developer, seeks review of a Court of Appeals decision holding that the developer's discount method of valuing subdivision property for ad valorem tax purposes is unconstitutional and violative of the Kansas statutory scheme of valuation. We granted review because the issue is one of first impression in Kansas and because the issue involves significant tax valuation questions affecting Kansas developers and home buyers.

The Court of Appeals' opinion provides an excellent description of the developer's discount method of valuation for ad valorem tax purposes:

"The developer's discount method of valuation, which is also known as the subdivision approach or the development approach, consists of a discounted cash flow analysis which considers a projected absorption rate and the corresponding drop in income from the sale of lots. Inherent in this approach is the notion that, if the owner of multiple lots places them all on the market at once, there would not be enough buyers in the marketplace who would be willing to pay full market price for each lot. Such approach assumes that the seller would have to discount the price of the property to lure additional buyers into the market. The discount is calculated by utilizing an absorption factor, which based upon the number of willing buyers in any given year. In the alternative, the developer's discount method could be defined as the price that the owner of multiple lots would accept for all of its lots when sold to one buyer; that buyer would presumably pay a discounted price for each individual lot because the buyer would take the absorption factor into account in determining how quickly, and for what price, he or she could in turn sell the lots to other buyers." Hixon v. Lario Enterprises Inc., 19 Kan.App.2d 643, 647, 875 P.2d 297 (1994).

Before consideration of the undisputed facts in this case, the Board of Tax Appeals (BOTA) approved Lario's use of the developer's discount method of valuation, and the BOTA order was affirmed by the Shawnee County District Court. The Court of Appeals, however, reversed on constitutional and statutory grounds. We do not decide the constitutional question posed because the developer's discount method, as described in this opinion, violates the Kansas statutory scheme for valuing real property for ad valorem tax purposes. For the reasons stated in this opinion, we therefore affirm the decision of the Court of Appeals, as modified.

STANDARD OF REVIEW

The question presented is one of law. BOTA is a specialized agency that exists to decide issues concerning taxation and valuation; its decisions should be given great credence and deference when it is acting in its area of expertise. In re Tax Appeal of Director of Property Valuation, 14 Kan.App.2d 348, 353, 791 P.2d 1338 (1989), rev. denied 246 Kan. 767 (1990). The ruling of an administrative agency on questions of law, while not as conclusive as its findings of facts, is nonetheless persuasive and may carry with it a strong presumption of correctness. Boatright v. Kansas Racing Comm'n, 251 Kan. 240, 246, 834 P.2d 368 (1992). However, if the reviewing court finds that the administrative body's interpretation of a question of law is erroneous as a matter of law, the court should take corrective steps. 251 Kan. at 246, 834 P.2d 368. The party challenging the validity of the agency's action bears the burden of proving the invalidity of the action. K.S.A. 77-621(a)(1).

FACTS

This case concerns the 1989 property tax appraisal of the Montara and Montara North subdivisions. Montara and Montara North (collectively Montara) were constructed between 1958 and 1960. The units were originally occupied by members of the Air Force stationed at Forbes Field. After the air base closed in 1973, the property was purchased by the City of Topeka and used as low-income rental housing. Lario purchased the property in 1979.

As a subdivision, Montara consists of between 650 and 700 individual parcels of property. These parcels can generally be divided into five groups: Category 1 contains 117 vacant lots; category 2 is comprised of 386 single family rental units; category 3 is made up of 158 vacant single family residences which are in need of renovation and not habitable; category 4 consists of three model homes and offices used by the Montara staff; and category 5 is comprised of three vacant lots and an RV storage area.

Shawnee County (County) appraised all the properties at $18,099,240. Lario appealed to BOTA, claiming that the fair market value based on the developer's discount method of valuation was $9,600,000. BOTA, accepting the developer's discount method advanced by Lario, modified the appraised value to the amount of $12,028,600. BOTA accepted the County's appraisal in category 4, and Lario has not appealed that determination. This appeal by the County involves categories 1, 2, 3, and 5 only.

In support of its contention before BOTA, Lario relied on the testimony of David Craig, an appraiser. He testified that he valued the 117 lots in category 1 as one parcel of land, using the developer's discount approach. He testified that he valued the property in category 2 as a single unit, using the direct capitalization approach, because the property's best use was characterized as rental property. Craig also testified that he used the developer's discount method to value the 158 vacant residences in Category 3. He valued the property in Category 5 as a single unit with no discount. According to Craig, buyers in the marketplace purchasing multiple lots will pay less per lot than if they were buying only one lot, and the developer's discount method takes this element into consideration. Craig concluded that the value of the entire property was $9,600,000, approximately one-half the County's valuation.

Lario called Dr. Mark Dotzour, a professor at Wichita State University, who testified that the developer's discount approach should be used in valuing Lario's subdivision property. According to Dr. Dotzour, a discount rate is essential in any valuation of a subdivision because a single owner could not sell all of the houses in a subdivision in a given year. Instead, the value of the property is discounted to reflect an absorption rate, viz., the rate at which the parcels could be sold and the cost of holding the parcels until they are sold.

Rick Stewart, Deputy Appraiser for Shawnee County, testified on behalf of the County. Stewart did not originally use the developer's discount method but later used the discount method to value the vacant lots in category 1 after considering a memorandum from the Property Valuation Division of the Kansas Department of Revenue. Stewart, nevertheless, opined that the developer's discount method was not a proper method for valuing Montara. According to Stewart, the ad valorem tax statute is concerned with valuing each parcel of property on an annual date and, therefore, it is inappropriate to consider an absorption period to take into account the sale of properties years later.

BOTA approved Lario's use of the developer's discount method of appraisal and fixed the value of the property at $12,028,600. On appeal to the district court, the court concluded that the sole issue for review was whether the developer's discount method was a lawful technique for valuing unsold subdivision properties. The court stated that such a method was legitimate and had been approved by this court in State Highway Commission v. Lee, 207 Kan. 284, 485 P.2d 310 (1971). The court further found that the valuing of several parcels of property as one unit did not violate the uniformity requirement found in the Kansas Constitution. BOTA's order was upheld.

The Court of Appeals reversed, concluding that the developer's discount method violated the "uniform and equal basis of valuation" requirement in the Kansas Constitution. It reasoned that the developer's discount method focused strongly on the identity of the owner of the lot treating investors with multiple lots differently than owners with one lot and treating an investor with multiple lots in one subdivision differently than an investor with multiple lots spread throughout the city. The Court of Appeals noted that K.S.A.1994 Supp. 79-501 states that each...