IN THE MATTER OF THE EQUALIZATION APPEAL OF PRIEB PROPERTIES, L.L.C. FOR THE YEAR 2004 FROM SHAWNEE COUNTY, KANSAS
Now the above-captioned matter comes on for consideration and decision by the Board of Tax Appeals of the State of Kansas.
The tax year in issue is 2004, and the effective appraisal date for this appeal is January 1, 2004. The taxpayer, Prieb Properties, L.L.C, appeared by and through its attorney of record, Linda A. Terrill. Shawnee County appeared by and through its attorney of record, Shawn S. Leisinger. The Board conducted a hearing of this matter on February 15, 2006. The taxpayer and county filed post-hearing briefs on June 22, 2006 and June 23, 2006, respectively.
Having exercised jurisdiction pursuant to K.S.A. 79-1609, and after fully considering all of the evidence presented, the Board finds and concludes as follows.
The subject matter of this tax equalization appeal is described as follows:
Real estate and improvements commonly known as 1600 SW Wanamaker Road in Topeka, Shawnee County, Kansas, also known as Parcel ID# 089-142-04-0-20-06-005.00-0.
The subject property is a single-tenant discount store situated on approximately 4.02 acres. The store was built in 1989 with 30, 378 square feet, and an addition comprising 15, 436 square feet was built in 1996. The total square footage of the facility as of the appraisal date was 45, 814. The structure's exterior walls are masonry over metal framing with windows of double-paned glass. The property currently is leased and operated by Best Buy in an area called the West Market Area of Topeka, Kansas, as designated by the Office of the Shawnee County Appraiser. The subject property is zoned to allow for a wide variety of commercial uses.
County Valuation Evidence
In making its determination of value, the county collected data within the local market concerning actual sales, sales offerings, and rates of return on investments and real estate. The county developed values based on this data for both the land and improvements. The county valued the land as vacant and available for development at its highest and best use. Using a paired sales analysis, the county arrived at a base value for the land at $3.75 per square foot and then applied an influence factor of 175 percent based on the desirability of the subject property's location. The county arrived at a land value estimate of $1, 149, 170, or $6.56 per square foot.
The county appraised the subject property with the aid of the Computer Assisted Mass. Appraisal (CAMA) system, utilizing both the income and cost approaches to value. The county's expert witness, David Meyer, testified that the county failed to complete a formal sales comparison approach because there was a scarcity of sales of comparable properties in the relevant valuation area and investment class. The county did however review relevant sales to determine whether they fell within the range for the subject's designated investment class (class A).
The county prepared, but did not rely upon, a cost approach to value. The cost approach provides an estimate of value based on the current replacement cost of the improvements as new. The county estimated the improvement's replacement cost using a cost system developed by a national mass appraisal vendor and made modifications for local market factors. This replacement cost estimate was then adjusted to reflect depreciation resulting from physical deterioration as well as functional and economic obsolescence. The county added the depreciated replacement cost new to the estimated land value to arrive at a final cost approach value determination of $3, 347, 860.
The county relied most heavily on the income approach to value. Under the income approach, the county initially arrived at a valuation of $5, 032, 200 for the subject property. Prior to the final hearing, however, the county reduced its valuation recommendation after re-evaluating the rental income information. Under the income approach, the county estimated the fair market value of the subject property by capitalizing anticipated net operating income into its present market worth. Through this methodology the county estimated the property's economic potential gross income at $435, 233 using a gross rental rate of $9.50 per square foot. Allowing for a vacancy and collection loss of 5 percent, the county arrived at an effective gross income of $413, 471.
The county estimated normal management and operating expenses at 5.54 percent ($0.50 per square foot) and deducted total expenses from the estimated effective gross income calculation to arrive at a net operating income of $390, 564. The net operating income calculation was capitalized into a value indication using a capitalization rate of 9.1 percent. The county's final value recommendation for tax year 2004, based on the income approach, is $4, 291, 916.
The county's income approach utilized income, vacancy and expense rates from the 2004 Benchmark Study performed by Daniel W. Craig for Shawnee County. For single-tenant retail properties of 20, 000 square feet or greater, the study indicates a rental rate for class A properties to be between $7.50 and $10.00 per square foot, a vacancy rate range of between 5 and 10 percent, and an expense range of $.41 to $1.05 per square foot. The county's capitalization rate was derived from the 2003 Capitalization Rate Study performed by Daniel W. Craig for Shawnee County. The capitalization rate study shows a prevailing rate of 9.4 percent for class A properties. Meyer testified that he considered the subject property to be a class A property and thus determined that the subject property's rental rate should be at the high end of the range and that its vacancy and expense rates should be at the low end of the range for investment class A properties. Meyer also determined that a capitalization rate of 9.1 percent was appropriate for the property because of its class A designation, instead of the 9.4 percent capitalization rate for typical class A properties. The data contained in the two Craig studies were derived from various types of leases, including leases of facilities that were built to suit the existing tenant's operational purposes.
The county noted that the subject property was sold in December 1996 for $4, 441, 086 and then again in September 2001 to its current owner for $5, 049, 000. Both sales occurred with the existing Best Buy lease in place. Meyer testified that the county's recommended value is below the 1996 and 2001 sale prices ...