In re Walmart Stores, Inc.
| Decision Date | 08 October 2021 |
| Docket Number | No. 122,162,122,162 |
| Citation | 500 P.3d 553 |
| 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 |
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 leased properties. According to Maier, he excluded these sales in order to focus on comparables that involved fee simple sales. Maier also testified that he adjusted the sale prices for time and market conditions, location, quality and utility, and investment quality to derive a square foot unit value that he then applied to each of the subject properties.
Maier's income approach for each property consisted of both a direct capitalization analysis and a discounted cash flow analysis. For his direct capitalization analysis, Maier rendered the opinion that sales in which the property is sold vacant and available to be leased at market rates were the most probative for determining actual market value of the fee simple estates of the subject properties. Maier also testified that he adjusted each of the comparables for time and market conditions, lease terms, suite size, age and condition, location, quality of construction, and utility. In addition, Maier testified about his opinions regarding the appropriate capitalization rates to be applied to each of the subject properties.
On June 26, 2019, BOTA issued a summary decision in which it found that the "income approach direct capitalization methodology based on projected net operating income"—which was presented by Maier on behalf of Walmart—was the best indicator of the actual market value of the real property for ad valorem purposes. Nevertheless, BOTA adjusted the capitalization rates used by Maier on all but two of the properties because it found that the evidence supported an 8.5% capitalization rate rather than a 10% capitalization rate on nine of the properties. For the other two properties, BOTA found the appropriate capitalization rate to be 9%. Accordingly, BOTA remanded the matter to Johnson County to recalculate the taxes owed based on its valuations of the subject properties and to refund any overpayment made by Walmart.
As allowed by K.S.A. 74-2426(a), both Johnson County and Walmart made timely requests to BOTA for a full and complete opinion. On September 25, 2019, BOTA issued a unanimous 14-page full and complete opinion. In the opinion, BOTA made both findings of fact and conclusions of law. In particular, BOTA cited several Kansas tax statutes as well as several cases interpreting tax law as authority in support of its legal conclusions.
After considering the evidence presented by the parties, BOTA found:
BOTA then recognized that it is statutorily bound under K.S.A. 74-2433(a) to follow the published opinions of Kansas appellate courts. Furthermore, BOTA noted that in the case of In re Equalization Appeal of Prieb Properties , 47 Kan. App. 2d 122, 275 P.3d 56 (2012), this court found that the rental rates in build-to-suit leases are not to be relied on in appraising real property for ad valorem tax purposes without first making the appropriate adjustments to reflect market conditions. BOTA also noted that this court subsequently held in the case of In re Equalization Appeal of Target Corporation , 55 Kan. App. 2d 234, 410 P.3d 939 (2017), that appraisals based upon the valuation of real property as " ‘vacant and available to be leased at market rent’ " complied with the standards set forth in the Uniform...
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In re Walmart Stores, Inc.
...build-to-suit leases. The County appealed, but a divided Court of Appeals panel agreed with BOTA. In re Equalization Appeals of Walmart Stores, Inc. , 61 Kan. App. 2d 154, 500 P.3d 553 (2021). On review, we reverse the panel and return the case to BOTA to reconsider the County's evidence.Th......