In re The Equalization Appeals of NFM of Kan. Inc.
| Decision Date | 19 May 2023 |
| Docket Number | 124,842 |
| Parties | In the Matter of the Equalization Appeals of NFM of Kansas, Inc., for the Years 2018, 2019, and 2020 in Wyandotte County. |
| Court | Kansas Court of Appeals |
NOT DESIGNATED FOR PUBLICATION
Appeal from the Board of Tax Appeals. Affirmed.
Wendy M. Green, senior counsel, of Unified Government of Wyandotte County/Kansas City, for appellant.
Linda Terrill, of Property Tax Law Group, LLC, of Overland Park for appellee NFM of Kansas, Inc.
Before Isherwood, P.J., Malone and Warner, JJ.
Wyandotte County appeals a decision from the Board of Tax Appeals (BOTA) in which it found the County's expert violated the Uniform Standards of Professional Appraisal Practice (USPAP) and failed to put forth a credible report during the contested valuation of Nebraska Furniture Mart (NFM). In addition, the County argues that BOTA erred by excluding some of its evidence. Finding no error in BOTA's decision, we affirm.
This case arises out of a dispute NFM had with the ad valorem tax value assigned to its Kansas City, Kansas, location for tax years 2018, 2019, and 2020. That store was made by and for NFM and consists of a single tenant free-standing, two-story retail building with an attached warehouse. The retail area occupies 443,418 square feet and the warehouse accounts for an additional 545,542 square feet. The building is divided into two separate parcels because two different taxing units-USD 203 and USD 500-are included in the area.
BOTA conducted a hearing to address the County's concerns, and Kevin Bradshaw, an employee with the Wyandotte County Appraiser's Office, testified on the County's behalf. He explained that the County relied on an income approach to assess NFM's total value which was then split 60/40 between the two parcels based on a percentage of the land area in each tax district. Bradshaw acknowledged that adding the split values together did not yield a sum equal to the total appraised value but attributed the discrepancy to a rounding error. He testified that the County believed the property should be appraised at $49,300,000 for tax year 2018 based on the appraisal completed by Robert E. Marx.
The record compiled for us includes Marx's report and we have reviewed the same. It reflects that he arrived at his appraised value by employing a three-part analysis which consisted of a cost approach, an income approach, and a sales comparison approach, with the greatest weight afforded to the income approach. The cost approach in Marx's report is determined by valuing the land, through a sales comparison technique, assessing the replacement cost of improvements using a published cost service, and calculating for physical depreciation, obsolescence, and other loss. Marx describes the cost approach as a "supportive indicator" for a property's value.
The sales comparison approach compares the property in question with sales of relatively similar properties, with adjustments made for measurable differences. Marx likewise designated this approach a "supportive indicator."
The income approach estimates the fee simple market rent for the property by analyzing market rental rates, market vacancy and collection loss to determine an effective gross income. Expenses are then deducted and capitalization rates applied to arrive at an estimated value. Marx describes this theory as "adequate" and detailed enough to produce a "reliable value conclusion."
When appraising NFM in accordance with the cost approach, Marx estimated the value of the land at $4.25 per square foot, for a total of $13,100,000. He compared the property to similar sales, then estimated a replacement cost of the retail portion alone through use of the Marshall Valuation Service and arrived at a total of approximately $103 million. The combined retail and warehouse cost, plus the approximated land value, was around $118 million. After subtracting various forms of obsolescence from that total, the projected value of the property under the cost approach was $49,300,000.
The hybrid nature of the NFM property required Marx to split it into two portions for purposes of the sales comparison approach. A comparison of the retail portion with sales of other similar retail properties reflected a value of roughly $61 per square foot, resulting in a total value of around $27 million. The warehouse segment had an estimated value of $43 per square foot, which yielded a total of about $23.5 million, giving the property as a whole an estimated value of $50,500,000. But Marx considered the cost approach and the sales comparison approach values to simply be supportive indicators of the estimated value obtained through the income approach.
The income approach "measures value in terms of future financial benefits flowing from a property in terms of periodic net incomes and future reversions." As Marx explains it in his report, the "basic formula is: Income [divided by] Rate [equals] Value." In his report, Marx acknowledged there was a lack of directly comparable properties and that he had to expand his search to "relatively similar properties and tenants within the Kansas City Metropolitan and Regional areas for both the industrial and retail markets." One particular consideration was again, the hybrid nature of NFM. The fact not all retail is created equally raised another concern. That is, a "Warehouse Discount Store" will have a different value per square foot than a traditional "Retail Store." In his report, Marx used the inside of a Lowe's to describe a warehouse discount store and the inside of a Kohl's to describe a traditional retail store, and ultimately concluded that the retail portion of NFM was more akin to the latter.
For the warehouse portion of NFM, when considering size, age, and ceiling height, Marx located 11 comparable properties, 9 of which were in Kansas, which had more than 250,000 square feet, ceiling heights of at least 25 feet, and were built after 2000. The average and median rental rate was $3.84 per square foot. As Marx saw it, the rental rate was similar between first generation leases and subsequent generation leases. Because of the similarity, Marx found that "the functional nature of a structure and location are considered the primary determinant of market rental rates." Ultimately, Marx concluded that the warehouse portion of NFM had a fee simple rental rate of $3.75 per square foot.
For the retail portion of NFM, Marx compared the property with 45 others in the regional market that contained at least 80,000 square feet and determined that the average rental rate was $7.27 per square foot and the median rental rate was $7.56 per square foot. Of those 45 properties, 11 had comparable leases of at least 125,000 square feet. The average rental rate of those specific properties was $6.64 per square foot with a median rental rate of $6.74 per square foot. Returning to the 45 properties as a whole, 15 presented with comparable leases and were built within two years of NFM's 2003 construction date (for the retail portion). The average rental rate of that subset of properties was $8.28 per square foot with a median rental rate of $8.00 per square foot.
Using the income approach, Marx estimated the first floor level of NFM to have a rental rate of $6.50 per square foot. He noted that in the Kansas City Metropolitan Area, second floor retail spaces rented at rates between 68.8% and 74.6% lower than first floor spaces. Thus, he estimated a 70% lower rate for NFM's second floor and assigned a $4.55 per square foot rental value. Multiplying those amounts with their respective square footage and adding the warehouse and retail portions together resulted in a combined value of $4,493,584.
Marx then turned to other sources of income, such as "potential tenant reimbursements" which he estimated were valued at $2,671,130. He also considered vacancy and collection loss and used a stabilized vacancy and collection loss of 5%. Marx added the $2,671,130 to the $4,493,584 and then subtracted $358,236 to account for the 5% vacancy and collection loss to arrive at an effective gross income of $6,806,479.
Marx also calculated for expenses but noted that accounting practices can lead to highly variable results. He estimated annual expenses at $136,130 for management, $235,000 on insurance, $235,000 for repairs and maintenance, $1,150,000 on common area maintenance, $1,150,000 for utilities, and $100,000 on general and administrative costs. The gross income, minus the expenses, resulted in a net operating income (before real estate taxes) of $3,800,349.
Once the income of a property is determined, several methods can be used to convert that income into a property value. Marx found the Direct Capitalization method was the most appropriate. He prefaced the analysis in his report with the statement that "capitalization rates of leased fee estates can be equal to the capitalization rates of the fee simple estate." Given an adequate sample size, and proper consideration of average and median figures, the "indicated average and median capitalization figures for the leased fee estates are considered to be representative of income components that are in-line with the fee simple estate." According to Marx's report, a single-tenant retail survey suggested that capitalization rates ranged from 5% to 8.8% for more than 40 relatively similar properties. A large industrial survey showed capitalization rates ranged from 6% to 8% for over 20 relatively similar properties.
Marx also considered the PricewaterhouseCoopers (PwC) Real Estate Investor Survey when establishing his capitalization rate. While the PwC considers several different categories, NFM did...
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