In re Yellow Equip. & Terminals, Inc.
| Citation | 290 P.3d 686 |
| Decision Date | 14 December 2012 |
| Docket Number | No. 107,653.,107,653. |
| Court | Court of Appeals of Kansas |
| Parties | In the Matter of the Equalization Appeal of YELLOW EQUIPMENT & TERMINALS, INC./ Yellow Transportation, Inc./YRC, Inc. |
In the Matter of the Equalization Appeal of YELLOW EQUIPMENT & TERMINALS, INC./ Yellow Transportation, Inc./YRC, Inc.
No. 107,653.
Court of Appeals of Kansas.
Dec. 14, 2012.
Appeal from Court of Tax Appeals.
Linda Terrill, of Property Tax Law Group, LLC, of Leawood, for appellant YRC. Inc.
Kathryn D. Myers, assistant county counselor, for appellee Board of County Commissioners of Johnson County.
Before PIERRON, P.J., MALONE, J. and BUKATY, SJ.
PER CURIAM.
YRC, Inc., owns property in Johnson County, Kansas, that it uses as its corporate headquarters. YRC appealed the valuation of the property for ad valorem taxation purposes for tax years 2007 and 2008. The Court of Tax Appeals (COTA) held a hearing and found that the County's recommended values were appropriate and that the values were supported by substantial competent evidence. Further, COTA rejected the appraisals submitted by YRC and declined to adopt the valuation methodology advanced by YRC's witnesses. For the reasons set forth herein, we affirm COTA's judgment.
In 2007, YRC's corporate headquarters was located at 10990 Roe Avenue, in Johnson County, Kansas. The property consisted of a 10–story office building of over 300,000 square feet, built in 1972, and a 21.5–acre site. YRC occupied most of the building, but there may have been a couple of other small tenants as well. For tax years 2007 and 2008, which are at issue here, the Johnson County Appraiser's Office (County) valued the property at $26,771,600 and $26,997,000, respectively. YRC appealed both valuations. The appeals were consolidated, and COTA held a hearing over both valuations on February 21–23, 2011. At the beginning of the hearing, YRC stated that the main issue was how to treat an owner-occupied building for valuation purposes, specifically whether an owner-occupied building required a lease-up discount to the valuation. A “lease-up discount” is essentially an amount subtracted from a property's value to compensate for the money and time required for a new buyer to lease the property to a stabilized occupancy rate similar to comparable properties in the market.
The County first presented the testimony of Kyle Blanz, a COTA specialist for the County. After hearing Blanz' qualifications, COTA ruled that Blanz was qualified to testify as a mass appraiser. Blanz had inspected the property in 2011, had reviewed the work of the field appraiser who performed the original valuations, and had performed independent research to review the challenged valuations. In addition, Blanz prepared and brought to the hearing computer-assisted mass appraisal (CAMA) reports with supporting documentation for the tax years in question. COTA admitted these reports into evidence. On cross-examination, Blanz testified that he believed the reports complied with the Uniform Standards of Professional Appraisal Practice (USPAP) Standard 6.
Blanz testified that the 2007 appraisal valued the fee simple interest of the property. There are three valuation methodologies used to calculate a property's value during an appraisal: the sales approach, the cost approach, and the income approach. For both tax years in question, Blanz testified that the County relied upon the income approach to value the property rather than the cost approach or the sales comparison approach. The sales comparison approach was not used because the County's mass appraisal valuation programs “do not include an automated sales comparison system for commercial properties approved by the Division of Property Valuation.” Although both the income approach and the cost approach were performed, the County relied upon the income approach over the cost approach because properties such as the subject property in Johnson County are “normally held and operated as income producing investment properties.” Additionally, because there was no evidence that a use other than the current use would be the highest and best use of the property and because YRC had not asserted a different highest and best use, the County determined that the current use as a single-tenant or owner-occupied office building was the highest and best use.
Blanz also reduced the rental rate on the below-grade office space; increased the rental rate for the above-grade office space; increased the allowance for expenses per square foot; increased the net leasable area on an architect's calculations; and lowered the investment class, which is “the perceived worth of the subject property to an investor” and determines the capitalization rate used in the income approach to valuation. Neither the original valuations nor Blanz' adjusted valuations applied a lease-up discount; instead of valuing the property as vacant and discounting the value to offset the cost of leasing, Blanz valued the property at 90% occupied. Ultimately, due to the changes noted above, Blanz recommended adjusting the valuations downward to $24,129,000 for tax year 2007 and $24,203,000 for tax year 2008. Blanz testified that, in his opinion, the County used accepted appraisal practice as adapted to mass appraisal and complied with all requirements under Kansas law for property valuation.
Bernie Shaner also testified for the County. YRC stipulated to Shaner's qualifications to testify as an appraisal expert and to the foundation of his report, with no conditions. The County appraiser hired Shaner to appraise the fee simple interest of the YRC property for tax year 2007. Shaner personally inspected the property in 2007, performed independent research, and compiled information from databases in order to complete his appraisal. Like the County, Shaner concluded that the highest and best use of the property was the existing use—a single-tenant office building. Shaner testified that in his opinion, his report complied with USPAP standards.
Shaner did not rely upon the cost approach to valuation; instead, he relied upon the income and sales comparison approaches. Although Shaner completed a cursory cost approach analysis, he testified that he only used the resulting figure for comparison purposes. Shaner gave detailed explanations of his analysis under the income and sales comparison approaches. Under the income approach, Shaner valued the property at $24,210,000; under the sales comparison approach, he valued the property at $26,700,000. Because he did not have “perfect data” for the property and because he recognized the strengths and weaknesses of each valuation method, Shaner settled on a value “pretty much in the middle”: $25,500,000.
Shaner also testified that he did not think it would be appropriate to appraise the fee simple value of the property by acting as if the property were vacant. Specifically, Shaner stated that he felt it would be inappropriate to apply a lease-up discount to an appraisal of a building that is occupied on the date of the appraisal where there is no indication that the occupation is not going to continue into the nature; here there was no indication that YRC's property would not remain owner-occupied. After Shaner's testimony, the County rested its case.
YRC first called Chris Williams, an appraiser and managing director for C.B. Richard Ellis, a company hired in 2008 by JP Morgan Chase Bank (Chase) to compile a portfolio of YRC's properties. The parties stipulated that Williams was qualified to testify as an expert on appraisal of the property in question and that his report would be admitted into evidence. Williams testified that Chase had directed him to appraise the property as though it were vacant; Chase asked what the value of the property would be if YRC were to move out and put the property up for sale. Williams also inspected the property; he considered all three valuation methodologies, but he relied most heavily upon the income approach.
Because he was valuing the property as if it were vacant, Williams factored in a lease-up discount, which, as stated above, considers the cost to a buyer to bring the vacant property to a stabilized occupancy. Williams determined that a buyer of the empty property would need approximately 24 months to find tenants to fill the space and would need to spend approximately $5 million in improvements and $1.6 million in leasing commissions in order to do so. The overall lease-up discount for this property as calculated by Williams was $15,480,000, which was subtracted from the valuation he arrived at through all three approaches. The final value under all three approaches, and therefore the value of the property according to Williams, was $16,200,000.
YRC also called David Lennhoff, president and owner of PGH Consulting, whom YRC hired to review Blanz' and Shaner's appraisals. After extensive testimony as to his qualifications, COTA ruled that Lennhoff was qualified to provide testimony reviewing the County's appraisals and principles underlying mass appraisal methodology. In addition, COTA ruled that Lennhoff was qualified to testify as to where he believed the County deviated from the USPAP. COTA also admitted into evidence Lennhoff's 2010 report in which he reviewed the County's appraisals.
In preparing his report, Lennhoff did not inspect the property; his review consisted only of reading the appraisal reports. Lennhoff testified that he reviewed the appraisals based on his knowledge of USPAP and without conducting any research on Kansas law regarding ad valorem taxation appraisals. The report stated, and Lennhoff testified, that the County's appraisals were inadequate for numerous reasons and did not meet the USPAP's minimum standards. Moreover, Lennhoff believed that Blanz' and Shaner's reports were too incomplete and insufficient to be considered credible. Lennhoff further contended that, because this was an individual appraisal as opposed to a mass appraisal, USPAP Standards 1 and 2 applied, rather than Standard 6. Finally, Lennhoff testified that in order to value a property in fee...
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