In re Walmart Stores, Inc.

• Decision Date: 01 July 2022
• Docket Number: 122,162
• 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 Supreme Court

513 P.3d 457

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.

No. 122,162

Supreme Court of Kansas.

Opinion filed July 1, 2022.

Ryan L. Carpenter, assistant county counselor, argued the cause and was on the briefs for appellant Board of County Commissioners of Johnson County.

Barbara A. Smith, of Bryan Cave Leighton Paisner LLP, of St. Louis, Missouri, argued the cause, and Samuel E. Hofmeier, of the same firm, of Kansas City, Missouri, and Linda Terrill, of Property Tax Law Group, LLC, of Overland Park, were with her on the briefs for appellees Walmart Stores, Inc., et al.

David R. Cooper and Andrew D. Holder, of Fisher, Patterson, Sayler & Smith, LLP, of Topeka, were on the brief for amicus curiae Kansas Association of Counties.

Johnathan Goodyear, general counsel, and Gerald N. Capps, of Wichita, were on the brief for amicus curiae League of Kansas Municipalities.

R. Scott Beeler and Carrie E. Josserand, of Lathrop GPM LLP, of Overland Park, were on the brief for amicus curiae The Kansas Chamber of Commerce.

Jarrod C. Kieffer, of Stinson LLP, of Wichita, was on the brief for amicus curiae Institute for Professionals in Taxation.

Stephen R. McAllister and Betsey L. Lasister, of Dentons US LLP, of Kansas City, Missouri, were on the brief for amicus curiae Chamber of Commerce of the United States of America.

S. Lucky DeFries, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Topeka, was on the brief for amicus curiae Council on State Taxation.

The opinion of the court was delivered by Biles, J.:

This is an ad valorem property tax appeal for the 2016 and 2017 tax years involving 11 Walmart and Sam's Club "big box" stores in Johnson County that saw their valuations nearly double from 2015. The Board of Tax Appeals concluded the County's valuations were too high because they improperly relied on unadjusted sales and rental income data from other properties subject to 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.

This highly contested issue boils down to deciding whether appraisal opinions founded on unadjusted build-to-suit lease data are inadmissible as a matter of law to support valuations used in the process of ad valorem taxation. The alternative is to treat these opinions like other evidence. Here, BOTA dutifully followed a 2012 Court of Appeals decision that crafted this choice as a rule of law to exclude opinions based on this unadjusted data. See In re Prieb Properties, L.L.C. , 47 Kan. App. 2d 122, 135-36, 275 P.3d 56 (2012) (holding rental rates from commercial build-to-suit leases "are not reflective of market conditions and may not be utilized for purposes of the income approach or the sales comparison approaches to value for ad valorem tax purposes in Kansas without a disentanglement by adjustments"). Other Court of Appeals panels have taken a similar approach since Prieb , although at times they inject some ambiguity into what evidence is admissible. See, e.g., In re Tax Protest of Arciterra BP , No. 121,438, 484 P.3d 261, 2021 WL 1228104, at *10 (Kan. App.) (unpublished opinion) ("If, for example, an appraiser can show that a build-to-suit lease was motivated by market terms and can isolate above- or below-market rents to make the necessary adjustments, BOTA could find that a market rent determination is properly supported and based on appropriate, comparable leases."). This court has never considered the question.

We hold Prieb ’s rationale invades BOTA's longstanding province as the fact-finder in the statutory process for appraising real property at its fair market value for ad valorem tax purposes. See, e.g., Northern Natural Gas Co. v. Dwyer , 208 Kan. 337, Syl. ¶ 2, 492 P.2d 147 (1971) ("The State Board of Tax Appeals is the highest administrative tribunal established by law to determine controversies relating to assessments of property for ad valorem tax purposes."). A property's fair market value is generally a question of fact with the fact-finder free to decide whether one appraisal or methodology is more credible than another. City of Mission Hills v. Sexton , 284 Kan. 414, Syl. ¶ 8, 160 P.3d 812 (2007). Prieb ’s rule of law effectively prohibits BOTA from considering expert opinions based on unadjusted data, even when the experts argue their methodologies arrive at a fair market value appraisal in conformity with generally accepted procedures and standards as required by state law. See K.S.A. 79-503a. It does this by declaring "build-to-suit lease rental rates are not probative of market conditions." Prieb , 47 Kan. App. 2d at 124, 275 P.3d 56.

By following Prieb , BOTA imposed an exclusionary rule on the County's evidence—rather than simply considering its weight and credibility. BOTA held the Taxpayers’ expert valuation "better adhered to the Prieb mandate regarding built-to-suit rental rates than the County appraisals." We remand this case to BOTA to reconsider the County's evidence without Prieb ’s constraints. Though BOTA may reach the same result on remand, that decision must be based on its own determinations of the facts and witness credibility.

FACTUAL AND PROCEDURAL BACKGROUND

Johnson County appraised these 11 Walmart and Sam's Club stores for tax years 2016 and 2017 at nearly double their 2015 tax values. The taxpayers are the Walmart Real Estate Business Trust, Sam's Real Estate Business Trust, and TMM Roeland Park Center, LLC. All stores are owner-occupied except one, which is leased to Walmart by TMM Roeland Park. Taxpayers unsuccessfully sought review at the county level, then appealed to BOTA, which held a 10-day evidentiary hearing. Valuation experts on both sides testified about their preferred methods for valuing these properties.

In finding the properties’ values, BOTA adopted "the income approach," in which: (1) market rent is estimated; (2) market vacancy and collection rates are estimated; (3) appropriate, market expenses are deducted to determine the property's net income; and (4) the net income as determined in the previous steps is divided by a capitalization rate to arrive at that income's present worth. The dispute here mostly concerns the information from which the County's experts constructed their valuation estimates. In particular, the parties argue over the relevance of unadjusted sales and rental rates from other "big box" retail properties subject to build-to-suit leases.

To appreciate the legal issue presented and the conflicting valuation approaches, it is necessary first to detail each side's primary valuation evidence. Then, we will discuss the rulings by BOTA and the Court of Appeals panel before deciding the merits.

The County's case

Kyle Blanz, the County's BOTA specialist, explained how the County used the Valbridge Property Advisors Big Box Retail Market Study to estimate each store's market rental rate and expenses on a square-footage basis. The rental rates varied from $7.20 to $10 per square foot based on the County's view of each property's investment class; a 4% vacancy and collection loss rate; operating expenses ranging from $.50 to $.70 per square foot depending on investment class; and capitalization rates from 7.5% to 7.75%, also depending on investment class.

Bernie Shaner, an appraiser who co-authored the Valbridge study, explained how he had trouble finding rental data for big box retail stores because they are seldom leased on the open market in the traditional sense of an existing building offered for rent. Instead, these properties are typically leased under build-to-suit arrangements in which the end user finds a location, develops plans, and hires a contractor in exchange for a lease. This meant the data for his Valbridge study was limited to what could be learned from second-generation leases of big-box properties and build-to-suit rents because big-box stores characteristically do not "changeover" often. But, he added, the rental rates for the first- and second-generation properties compared "[r]ather consistently" and that he expected rent for an older second-generation property to be less than for a new property, which is typically subject to a build-to-suit lease. He said that the fact the stores operating under build-to-suit leases are not "turning over" shows those locations remain viable. He also believed build-to-suit tenants have "done their homework" and analyzed each site to confirm the property's highest and best use as a big box retail store. For these reasons, Shaner typically looked for other build-to-suit leases because they dominate this particular lease market. In his opinion, these leases are very relevant for valuation purposes and represent the typical transaction for this property segment.

A second County expert, Peter Korpacz, appraised the six largest properties and presented his work as evidence supporting the County's valuations. He testified he selected his rental and sales comparables by size and trade area data, and adjusted them for size, year built or renovated, tenant quality, and net operating income per square foot. He testified that when valuing big box retail stores, he looked at rentals of other big box retail stores and for sales of properties occupied by the big box retailers. Like Shaner, Korpacz noted retailers "don't sell these first-generation stores ... until they no longer have value to them ...." Accordingly, he said, "we look for sales of properties that have similarities. They are occupied by retailers, and they are always going to be under a lease because those are the ones that...