In re Equalization Appeal of Kansas Star Casino, L.L.C., 060818 KSCA, 116, 421

CourtCourt of Appeals of Kansas
JudgeBefore Powell, P.J., McAnany, J., and Hebert, S.J.
Writing for the CourtPOWELL, J.
Date08 June 2018
PartiesIn the Matter of the Equalization Appeal of Kansas Star Casino, L.L.C. for the Year 2014 in Sumner County, Kansas.
Docket Number116,421

In the Matter of the Equalization Appeal of Kansas Star Casino, L.L.C. for the Year 2014 in Sumner County, Kansas.

No. 116, 421

Court of Appeals of Kansas

June 8, 2018


Appeal from the Board of Tax Appeals.

Jarrod C. Kieffer, Lynn D. Preheim, and Frank W. Basgall, of Stinson Leonard Street LLP, of Wichita, for appellant/cross-appellee Kansas Star Casino, L.L.C.

David R. Cooper and Andrew D. Holder, of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka, for appellee/cross-appellant Sumner County.

Before Powell, P.J., McAnany, J., and Hebert, S.J.



Kansas Star Casino, L.L.C. (Kansas Star) appeals from the ruling by the Board of Tax Appeals (BOTA) which established a 2014 valuation for ad valorem tax purposes of $97.6 million for its real property located in Sumner County, Kansas. This is the companion case to the 2013 tax year property valuation appeal, In re Equalization Appeal of Kansas Star Casino, No. 115, 587, issued this same day. (At the time Kansas Star appealed the County's tax valuation, the agency was known as the Court of Tax Appeals. The agency name was changed to the Board of Tax Appeals [BOTA] during the 2014 legislative session. L. 2014, ch. 141. For purposes of consistency, this opinion refers only to BOTA.)

On appeal, Kansas Star complains that BOTA erred (1) by classifying all 195.5 acres as commercial property; (2) by rejecting Kansas Star's expert's cost approach appraisal; and (3) by rejecting both its expert's and Sumner County's expert's income approach appraisals for the property and, instead, applying its own income approach by using average input values for its allocation percentage and EBITDA (earnings before interest, tax, depreciation, and amortization) multiplier. The County cross-appeals, arguing that BOTA's decision to reject the County's expert's opinion on functional obsolescence, particularly as it relates to superadequacy, is not supported by the record and is unreasonable, arbitrary, and capricious. The County also argues that BOTA's income allocation approach analysis, which in effect split the difference between both parties' figures by attempting to use a median number, is not supported by the record and is unreasonable, arbitrary, and capricious.

For reasons more fully explained below, we agree with the parties that BOTA improperly adopted its own income allocation approach to valuing the property by utilizing supposed median figures to establish a 21% profit margin, an EBITDA multiplier of 7.64, and a 30% real estate allocation percentage because such alleged median figures are unsupported by the record. The case is remanded to BOTA for reconsideration of the appropriate figures for profit margin, EBITDA multiplier, and real estate allocation. We affirm BOTA in all other respects.

Factual and Procedural Background

As this court explained in detail in In re Equalization Appeal of Kansas Star Casino, 52 Kan.App.2d 50, 52-55, 362 P.3d 1109 (2015), rev. denied 307 Kan.___(December 20, 2017), Kansas Star is one of four state-sponsored gaming enterprises in Kansas and is located in the south central gaming zone. In April 2007 the Kansas Legislature enacted K.S.A. 74-8733 et seq., the Kansas Expanded Lottery Act (KELA) to authorize a limited number of casinos to be operated in Kansas. KELA divided the state into four gaming zones: northeast, south central, southwest, and southeast, with a single gaming facility allowed in each gaming zone. K.S.A. 2017 Supp. 74-8734(a), (d), and (h)(19). Sedgwick County and Sumner County comprise the south central gaming zone. K.S.A. 2017 Supp. 74-8702(f). Additional background is also included in the companion case 115, 587.

A. The Subject Property

The property upon which the casino sits is located on two formerly separate tracts of land, referred to as the Wyant and Gerlach tracts, and is located in the northeast part of Sumner County, nearly adjacent to Sedgwick County and just west of the Kansas Turnpike/Interstate Highway 35. Peninsula Gaming, Kansas Star's former parent company, acquired both tracts in July 2010 for a total purchase price of nearly $17 million and combined them into a single parcel of land. The property's improvements consist of a casino and an arena building which are located entirely on the Gerlach tract. Because the property sits on low ground, Kansas Star set aside a little over 41 acres for drainage.

The 195.5 acres held by Kansas Star is more land than is necessary for the casino itself, and Kansas Star planned to use the undeveloped land for other projects, such as an RV park. However, the plans for future development have not come to fruition. The original plan for an arena and equine event center proved to be unprofitable and unnecessary, so Kansas Star negotiated with the Kansas Lottery to amend its management contract to allow for some funds to be shifted away from arena development and towards conference space.

On December 20, 2013, Kansas Star entered into a lease agreement with Mark Hardison to farm 63.5 acres of the property that had originally been planned for future development, in exchange for mowing the drainage areas and $1 in consideration. After the January 1, 2014 valuation date, Hardison raised soy beans on the property. None of the 63.5 acres was used to operate the casino business. The County classified the entire 195.5-acre parcel as commercial and industrial for tax year 2014.

B. The Arena

The arena building was originally constructed as a temporary casino. From December 26, 2011, through December 21, 2012, Kansas Star operated a temporary casino in its arena while the permanent casino was being constructed. The permanent casino opened in December 2012, after which time Kansas Star began the process of converting the temporary casino back into an arena. The permanent casino is 164, 790 square feet for a total building area of 327, 412 square feet. The casino floor in the permanent casino is 78, 000 square feet, which is more than double the gaming floor space in the temporary casino.

The arena is 162, 622 square feet with a maximum seating capacity in concert mode of 6, 200. Kansas Star held its first concert at the arena on June 29, 2013. However, in the first 9 months of operation, the arena hosted just 16 events. One major event had to be cancelled because of low ticket sales, forcing Kansas Star to make a $200, 000 buyout. Kansas Star found that during the events, gaming revenue went down in the casino due to full parking lots, long lines, and crowds. Kansas Star also found the equine events did not produce the expected revenue, so it minimized the focus of the arena as an equestrian center. Dan Ihm, the vice president general manager of the Kansas Star Casino, testified that the arena had a $500, 000 operating loss in 2013. This loss represented the total lost on the individual events that were held but did not include fixed overhead expenses such general advertising, maintenance, and utilities.

Materials submitted by Kansas Star during the bidding process for the gaming license projected that the arena would sustain operating losses ranging from $790, 170 in 2013 to $534, 046 in 2016. Kansas Star cites evidence in the record disputing this expectation and in support of its expectation that the arena would increase revenue. Despite the expectations, the arena does not operate a profit on its own nor does it generate additional gaming revenue. The arena is competing in a saturated market, and all of the other arenas are closer to Wichita. The completion of the arena reduced the casino's profitability in 2013. Wendy Runde, the former assistant manager of the Kansas Star Casino, testified that Kansas Star would be more profitable if the arena had never been built. Ihm testified that Kansas Star was better off operating out of the temporary arena than operating the permanent casino and arena. Ihm said that he would not have built the arena in order to maximize profits.

Kansas Star collected $192.4 million in total revenue in 2013, which exceeded preopening projections for 2014 by more than 15%. However, the EBITDA decreased. Ihm believed the dip in profits was attributable, at least in part, to the addition of nongaming amenities such as restaurants, which carry overhead expenses and are not big revenue drivers. Kansas Star's financial data showed that operating expenses jumped from approximately $115 million to $157 million. One significant expense increase was an "affiliate management fee" paid by Kansas Star to its parent company, Boyd Gaming, which alone decreased Kansas Star's overall EBITDA.

C. The Appraisals

The County valued the property at $153.5 million based on an appraisal performed by Richard Jortberg, MAI. Kansas Star appealed this value to BOTA, where the County had the evidentiary burden to show the validity and correctness of its valuation of the property. See K.S.A. 2013 Supp. 79-1609. Kansas Star asserted a value of $75 million.

1. The County's appraisal expert

Jortberg appraised the subject property for tax year 2014. Jortberg has numerous years of experience appraising casinos for the taxing authorities in Colorado. Jortberg considered all three approaches to value: the sales comparison approach, the cost approach, and the income approach.

To calculate land value, Jortberg performed a highest and best use analysis and concluded that it would be physically possible, legally permissible, financially feasible, and maximally productive to use the subject property for gaming/casino purposes, as it was the property's highest and best use, both as vacant and improved. Jortberg decided not to rely on a sales comparison approach because of a lack of comparable sales that would provide a...

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