In re Protest of Arciterra BP Olathe KS, L.L.C.

Decision Date02 April 2021
Docket Number121,438
CourtKansas Court of Appeals
PartiesIn the Matter of the Protest of ARCITERRA BP OLATHE KS, L.L.C. for the Tax Years 2016 and 2017 in Johnson County, Kansas.

NOT DESIGNATED FOR PUBLICATION

Appeal from Board of Tax Appeals.

Ryan L. Carpenter, assistant county counselor, of Olathe, for appellant Board of Johnson County Commissioners.

Linda Terrill, of Property Tax Law Group, LLC, of Overland Park for appellee Arciterra BP Olathe KS, L.L.C.

Before Gardner, P.J., Schroeder, J., and Walker, S.J.

MEMORANDUM OPINION

PER CURIAM

Johnson County (County) appeals the tax appraisal of real estate owned by Arciterra BP Olathe KS, L.L.C. (Arciterra). In 2016 Johnson County valued Arciterra's property at $17, 538 740. As a result, Arciterra's property tax increased from $295, 800 in 2015 to $553, 115 in 2016. The County valued the property and imposed property tax similarly in 2017. Arciterra appealed to the Board of Tax Appeals (BOTA) to determine the value of the property for ad valorem taxes for the 2016 and 2017 tax years. After an evidentiary hearing BOTA substantially lowered the ad valorem taxes for both years.

The County appeals BOTA's decision, but we may not overturn an administrative-agency decision when it is supported by substantial evidence, even though there may be evidence to the contrary. Arciterra presented appraisal evidence supporting its valuation, and BOTA found that evidence to be the best indicator of the property's value. We find that BOTA's decision was supported by substantial evidence and the County's other claims of error are unpersuasive or unpreserved.

Factual and Procedural Background

In 2005, Bass Pro Shops (Bass Pro) negotiated a 20-year, build-to-suit lease agreement with the then owners of the subject property. Under the lease, the landlord was responsible for property taxes, some insurance, parking lot maintenance, and administrative and management costs. The lease required Bass Pro to pay an annual rent of $600, 000-or $4.58 per square foot-and any operating expenses. The lease also gave Bass Pro the option of buying the property for $10 at the termination of the lease period. In 2008, Arciterra bought the property for $1, 900, 000 subject to the 2005 lease from the previous owners.

Bass Pro built a retail structure on the subject property financed by sales tax and revenue (STAR) bonds from the City of Olathe in 2006. The building is 130, 988 square feet of net rentable area, and the improvements to the property sit on approximately 16.44 acres. Bass Pro has occupied the building since its construction.

The lease produced a positive cash flow for Arciterra from 2008 to 2016. But in 2016, the County substantially raised Arciterra's property tax obligations when it doubled its valuation of the subject property. In 2016, the County valued the property at $17, 538, 740, so the property tax increased from $295, 800 in 2015 to $553, 115 in 2016. The County valued the property and imposed property tax similarly in 2017.

Arciterra appealed to the Board of Tax Appeals to determine the value of the subject property to impose ad valorem taxes for the 2016 and 2017 tax years.

Evidentiary Hearing

BOTA conducted an evidentiary hearing in December 2018. Testimony was presented from each party's corporate representatives and appraisers. Both parties agreed that the highest and best use of the subject property-if vacant-was use as another build-to-suit improvement, and-as improved-was as a build-to-suit, single tenant retail building. The County recommended the subject property be valued based on the highest appraisal-one by Timothy Keller, MIA. Keller valued the subject property at $14, 475, 260 for 2016 and $14, 470 320 for 2017. Arciterra presented testimony from Gerald Maier, MIA, who valued the property as both a "hypothetical leased fee" estate and a "fee simple" estate. Arciterra asked BOTA to adopt the lowest appraisal-Maier's fee simple valuation of $7, 500, 000 for 2016 and $7, 850, 000 for 2017. BOTA accepted neither request, adopting Maier's "hypothetical leased fee" value instead.

Keller's valuation approach

The County originally commissioned Valbridge Property Advisors (Valbridge) to study big box retail stores to help it determine market value. But after Arciterra appealed to BOTA, the County commissioned Keller to perform an appraisal. As for market rent, Keller testified that he looked for "larger retail tenants" similar in size to Bass Pro and who had recently signed leases in the same market. Keller also considered the results of the Valbridge study. He acknowledged that several leases considered in the Valbridge study were build-to-suit leases. Likewise, Keller testified that at least two of the four leases he considered were build-to-suit leases. Keller considered these four properties: Price Chopper, Dick's-Field & Stream, Best Buy, and Oak Barry Shopping Center. Price Chopper and Oak Barry Shopping Center had build-to-suit leases; Best Buy originally had a build-to-suit lease but the lease was later renegotiated.

Both experts considered this court's decision in In re Equalization Appeal of Prieb Properties, 47 Kan.App.2d 122, 275 P.3d 56 (2012). Prieb determined that because build-to-suit leases are essentially financing agreements, they should not be used in determining market rent absent certain adjustments. 47 Kan.App.2d at 135-36.

"A commercial build-to-suit lease is essentially a financing agreement between a lessor and lessee, and the rental rates therein are based in large part upon the revenue needed to amortize the investment required for the contemplated construction-plus a measure of profit-over the lease term or extensions thereof. Accordingly, when one takes a snapshot view of rental rates at any time during such a lease, these rates are not reflective of market rent but rather just reflective of the rate required in that specific situation to continue an agreed revenue stream to amortize the lessor's investment, subject to a host of financial risks. In other words, contract rents in a build-to-suit lease are not designed to capture market value for each period within the lease term, but rather are designed to amortize an investment made at the outset and may vary dependent on factors that are unrelated to the real estate market thereafter." 47 Kan.App.2d 122, Syl. ¶ 7.

Keller testified that it was okay to consider build-to-suit leases to determine market rent if the necessary adjustments were made. But Keller did not explain what adjustments he made to the build-to-suit leases or how those adjustments complied with Prieb. When asked what adjustments were necessary to allow use of a build-to-suit lease, Keller testified that the necessary adjustments could include adjustments to "the contributory value of that particular case" and other adjustments that appraisers typically make in the normal course of their appraising duties. And although Keller's appraisal report showed that he made adjustments for the properties' market condition, location, design, size, and age, Keller refused to explain how he made those adjustments at the hearing and instead directed opposing counsel to review his appraisal report.

Keller valued Arciterra's property using a $10 per square foot, triple net lease market rental rate, 7.25% capitalization rate, and 7.5% vacancy rate. Keller concluded that the property's fair market value was $14, 475, 260 for 2016 and $14, 470, 320 for 2017. Keller testified that his valuation was based on the fee simple estate as required under Kansas law. He also maintained that he tried not to attribute any value to Arciterra's lease with Bass Pro. Keller's report stated that he valued the subject property's fee simple interest. Still, Keller testified that he did not believe that the fee simple standard announced in Prieb and other rulings from this court meant that the property had to be valued as if vacant on the date of the hypothetical sale. Consistent with that belief, Keller valued the property "as improved" instead of "as vacant" based on his determination that the property's highest and best use was the continued use of the property as a "Class A big box retailer."

Keller explained that he chose the highest and best use of the property "as improved" instead of "as vacant" because the property was unique and when valued was being used at its maximum capabilities:

"The existing improvements produce a significant positive cash flow, before debt, and this can reasonably be expected to continue.
"There are no alternative uses that could reasonably be expected to provide a higher present value than the current use. The value of the subject under the existing use exceeds the potential value associated with the alternatives. Furthermore, the value produced by the existing improvements exceeds the value of the site, as if vacant. For these reasons, the existing use as a Class A big box retailer is concluded to be maximally productive, and the highest and best use of the site as improved.
"The duration of occupancy for these types of facilities confirms their market acceptance. The subject's two-story design, while found in other properties in Johnson County, is not typical in this market."

Maier's valuation approach

Maier conducted cost, income, and sales comparison approaches, but he relied most significantly on the income approach. Besides valuing the property as a "fee simple" estate Maier provided BOTA with a valuation of the property as a "hypothetical leased fee" estate. Under his hypothetical leased fee method, Maier assumed that the property would be encumbered by a short-term lease agreement with a moderate credit tenant. Maier explained that he started providing his clients with the hypothetical leased...

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