In re Equalization Appeals of Walmart Stores, Inc.
| Decision Date | 08 October 2021 |
| Docket Number | 162,122 |
| Parties | In the Matter of the Equalization Appeals of Walmart Stores, Inc; Walmart Real Estate Business Trust; Sam's Real Estate Business Trust; and TMM Roeland Park Center, LLC, for the Year 2016 in Johnson County; and Walmart Real Estate Business Trust and Sam's Real Estate Business Trust for the Year 2017 in Johnson County. |
| Court | Kansas Court of Appeals |
SYLLABUS BY THE COURT
1. The Kansas Judicial Review Act, K.S.A. 77-601 et seq., governs appellate review of Kansas Board of Tax Appeals (BOTA) rulings. The party challenging BOTA's decision bears the burden of proving the invalidity of the action taken below.
2. The Kansas Constitution grants the power of taxation to the legislative branch. Kansas Const. art. 11, § 1(a).
3. In exercising its constitutional authority, the Kansas Legislature has enacted a statutory system to ensure that non-exempt property is appraised for ad valorem tax purposes in a uniform and equal manner. K.S.A. 79-101 et seq.
4. In determining the validity of the valuation of real property for ad valorem tax purposes, the essential question is whether the standards set forth in Kansas statutes have been appropriately considered and applied.
5. Statutory provisions relating to the imposition of a tax are to be strictly construed in favor of the taxpayer.
6. In determining the fair market value of real property for ad valorem tax purposes, a taxing entity must assume a hypothetical sale of the property as of January 1 of the applicable tax year. K.S.A. 79-1455.
7. Fair market value is the amount that a well-informed buyer is justified in paying and a well-informed seller is justified in accepting for property in an open and competitive market assuming that the parties are acting without undue compulsion. K.S.A. 79-503a. In other words, the hypothetical sale envisioned by K.S.A. 79-1455 is to reflect actual conditions in an open and competitive market.
8. Valuation appeals before BOTA are to be decided upon a determination of the fair market value based on fee simple ownership of the property. K.S.A. 74-2433(g).
9. A fee simple interest means an absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the government and is the equivalent to ownership of the complete bundle of property rights that can be privately owned. Such an interest is to be contrasted from a lease fee interest that includes the right to collect rent under the terms of a lease as well as a reversionary right upon expiration of the lease.
10. For the purposes of ad valorem taxation, Kansas law requires the valuation of the fee simple estate and not the leased fee interest.
11. A commercial build-to-suit lease is not-in and of itself-reflective of actual rental rates in an open and competitive market.
12. Kansas law does not prohibit build-to-suit leases from being taken into consideration in determining the fair market value of real property in an open and competitive market. However if a taxing entity seeks to rely on the rental rates in build-to-suit leases as comparables, it must either show that the lease rates are equal to actual market rates or make any adjustments necessary to isolate above-or-below market rents so that the build-to-suit leases are reflective of the actual market conditions.
13. Under the doctrine of stare decisis, a point of law established by an appellate court will generally be followed by the same court and all courts of a lower rank in later cases or controversies involving the same legal issue. The doctrine of stare decisis promotes stability and continuity in our legal system. As a result, appellate courts endeavor to adhere to the doctrine of stare decisis unless clearly convinced that the rule of law was originally erroneous or is no longer sound based on changing conditions.
14. In deciding tax appeals, BOTA is statutorily bound to follow the published opinions of appellate courts. K.S.A. 74-2433(a).
15. It is the role of the Kansas Legislature-not the courts or BOTA-to implement shifts in state tax policy.
Appeal from Board of Tax Appeal.
Ryan L. Carpenter, assistant county counselor, for appellant Board of Johnson County Commissioners.
Linda A. Terrill, of Property Tax Law Group, LLC, of Overland Park for appellees Walmart Stores, Inc., et al.
Before Powell, P.J., Bruns, J., and Steve Leben, Court of Appeals Judge Retired, assigned.
The Board of Johnson County Commissioners (Johnson County) seeks judicial review of the unanimous decision of the Board of Tax Appeals (BOTA) establishing the valuations of 11 pieces of real property for ad valorem tax purposes. Currently, nine Walmart stores and two Sam's Club stores are operated on the subject properties. With the exception of one property that is leased, Walmart Inc.-or one of its wholly owned subsidiaries-owns each of the pieces of real property. After receiving Johnson County's appraised values of the 11 properties, Walmart appealed to BOTA. After an evidentiary hearing, BOTA lowered the valuations on each of the properties and ordered that Johnson County refund Walmart for any overpayment made for the 2016 and 2017 tax years.
In this judicial review action, Johnson County contends that BOTA erroneously interpreted and applied the law, that its decision is not supported by substantial competent evidence and that its decision was unreasonable, arbitrary, or capricious. For the reasons set forth in this opinion, we conclude that BOTA appropriately followed Kansas law, that its decision was supported by substantial competent evidence when the record is reviewed as a whole, and that its decision was not unreasonable, arbitrary, or capricious. Thus, we affirm.
This judicial review action represents a continuation of an ongoing dispute in the appraisal industry over the appropriate methodology to use in valuing real property associated with the operation of what are known as big-box retail stores. These stores- which are usually a single story-occupy large amounts of space and offer a large inventory of merchandise to consumers. The term "big-box" is derived from the physical appearance of such stores.
Although the parties differ on the weight to be given to the evidence most of the facts that are material to the issues presented in this action are not in dispute. The 11 tracts of real property that are the subject of this action are currently used for the operation of either a Walmart or a Sam's Club store. The buildings located on the subject property range in size from approximately 108, 000 square feet to approximately 227, 000 square feet. The oldest building was constructed in 1991 and the newest building was constructed in 2013.
Although Walmart appealed the valuations of each of the subject properties separately, all of the appeals were consolidated by BOTA into one action based on the agreement of the parties. Likewise, the parties stipulated that the highest and best use of each of the subject properties is as a single tenant retail store. For 10 of the pieces of real property, Walmart challenged Johnson County's appraisal for the 2016 and the 2017 tax years. However, for one piece of property that is leased from a third-party limited liability company, this action only involves Johnson County's appraisal for the 2016 tax year.
In appealing to BOTA, Walmart pointed out that the 2016 appraisals of the subject properties were nearly double the appraised values for the same properties for the 2015 tax year. According to Walmart, this substantial increase was a result of Johnson County using an appraisal methodology that improperly added value based on the type of businesses currently operating on the properties. In response, Johnson County argued that it used a generally accepted appraisal method in valuing the subject properties and suggested that the rental rates in build-to-suit leases are indicative of actual market conditions.
BOTA conducted an evidentiary hearing from January 7, 2019, to January 18, 2019. Prior to the hearing, the parties submitted the pre-filed testimony of several witnesses as well as transcripts of testimony presented in another case that were incorporated into the record in this matter by agreement. At the evidentiary hearing, Johnson County presented the testimony of six expert witnesses, including Bernie Shaner, MAI, and introduced numerous exhibits in support of its valuations of the subject properties. Similarly, Walmart presented the testimony of eight expert witnesses, including Gerald Maier, MAI, and introduced numerous exhibits in support of their valuations of the subject properties.
At the hearing, Johnson County primarily relied on the income approach to support its valuations of the subject properties. The County's income approach utilized data derived from a market study co-authored by Shaner. According to Shaner, the market study used rental rates from build-to-suit comparables because the authors believed they were illustrative of market conditions. However, Shaner acknowledged that the study contained no analysis to show how the rental rates set out in the build-to-suit leases reflected actual market conditions nor did the study make any attempt to separate out any non-realty components that might be included in the build-to-suit lease comparables.
In presenting its case, Walmart primarily relied on the valuation opinions expressed by Maier. In rendering his opinions regarding the valuation of the subject properties Maier testified that he examined comparable sales of real property on which big-box retail stores were operated but excluded those that involved build-to-suit leases, those that involved leaseback sales, and those that involved the sale of second generation...
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