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In re Equalization Appeal of Tallgrass Prairie Holdings, LLC

Court of Appeals of Kansas

August 15, 2014

In the Matter of the Equalization Appeal of TALLGRASS PRAIRIE HOLDINGS, LLC, for the Year 2011 in SHAWNEE COUNTY, KANSAS

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Appeal from Kansas Court of Tax Appeals.

Affirmed in part, reversed in part, and remanded with directions.

SYLLABUS

BY THE COURT

1. K.S.A. 2013 Supp. 79-1460(a)(2) provides the county appraiser shall notify each taxpayer annually of the classification and appraised fair market value of the taxpayer's property. A Kansas Court of Tax Appeals (COTA) ruling that reduces the fair market value for a property pursuant to a final determination of the valuation appeals process causes the next year's fair market value to be lowered equal to the COTA-determined fair market value unless there are substantial and compelling reasons to increase the fair market value in that next year.

2. Pursuant to K.S.A. 2013 Supp. 79-1460(a)(2), when multiple-year tax appeals are pending and the taxpayer obtains a reduced fair market valuation from COTA, the taxpayer cannot rollover the reduced fair market value to any tax year other than the next tax year. The next tax year means only the tax year immediately following the COTA-determined reduced fair market valuation.

3. A reduction in fair market value made pursuant to K.S.A. 2013 Supp. 79-1460(a)(2) for the tax year following a successful taxpayer appeal is not a reduction due to a final determination made pursuant to the valuation appeals process for that tax year.

4. Judicial review is governed by the Kansas Judicial Review Act, K.S.A. 77-601 et seq., and the scope of review is controlled by K.S.A. 2013 Supp. 77-621.

5. In Kansas, the Uniform Standards of Professional Appraisal Practice (USPAP) (1992) Standard 6 governs mass appraisals.

Carol B. Bonebrake, of Cosgrove, Webb & Oman, of Topeka, for appellant Tallgrass Prairie Holdings, LLC.

Ashley R. Heidrick, assistant county counselor, and Richard V. Eckert, county counselor, for appellees Board of Shawnee County Commissioners and Shawnee County Appraiser.

Before HILL, P. J., SCHROEDER, J., and HEBERT, S.J.

OPINION

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[50 Kan.App.2d 636] Schroeder, J.:

Tallgrass Prairie Holdings, LLC (Tallgrass) appeals the Kansas Court of Tax Appeals' (COTA) 2011 valuation of Tallgrass' multitenant office complex (the Property) built in 2002. The Property has a prime location, and the building is also equipped with a large surgical suite leased by one of the tenants. Tallgrass seeks a fair and reasonable valuation for the property based on current market values in compliance with K.S.A. 2013 Supp. 79-1460. Originally, Tallgrass' appeal to COTA challenged the fair market valuation of its Property for tax years 2010 and 2011. While both appeals were pending before COTA, the parties mutually agreed to dismiss the 2010 tax appeal after the decision of the 2009 tax year appeal was rendered by COTA. As more fully set out in this opinion, COTA's decision establishing the fair market value of the Property for tax year 2011 is affirmed in part, reversed in part, and remanded with directions.

Facts

The record is extensive; to put some order to it all, we will set out each step of the property valuation process resulting in this appeal.

Property

The Property is a large three-story building in northwest Topeka. A related, but separate, Tallgrass L.L.C. operates the surgical suite on the first floor. Another related Tallgrass L.L.C. operates medical offices on the first and second floors, with other tenants renting space on the first and third floors.

Property Tax History

Tallgrass has challenged Shawnee County's tax valuation of the property every year since 2005. For 2010 and 2011, the County used the same mass appraisal methodology for both years and appraised [50 Kan.App.2d 637] the Property at $10,870,383. As a result of Tallgrass' appeal to COTA for the 2009 tax year, COTA determined a 2009 market value of $8 million. With receipt of COTA's decision for 2009, the parties agreed the 2009 valuation should control the market value of the Property for tax year 2010 pursuant to the provision of K.S.A. 2013 Supp. 79-1460(a)(2), and the parties jointly dismissed the 2010 tax year appeal.

2011 Tax Assessment and Informal Meeting

After the County provided its original 2011 appraisal, the County adjusted its income approach and lowered its appraisal from $10,870,383 to $10,711,100 at the informal meeting. Tallgrass appealed the 2011 valuation notification of informal meeting results to COTA.

The County filed a motion for leave to issue discovery out of time and to order the taxpayer to allow an inspection of the Property. Over Tallgrass' objection, COTA granted the motion in part, allowing a new county appraiser to inspect the property. However, COTA limited the appraiser to a rebuttal witness and the appraisal as a rebuttal exhibit only. Additionally, COTA denied the County the right to change the value or classification for the Property based on the second appraisal. Both parties petitioned COTA to reconsider, but COTA denied their motions.

COTA Hearing

The parties presented their respective analyses, appraisals, and arguments to COTA. COTA was presented with three different appraisals to consider. David Meyer initially valued the Property for the County. John Dillon appraised the Property for Tallgrass. The County presented Timothy Keller's appraisal of the Property through his rebuttal testimony. We will discuss each in turn.

Meyer Analysis

The County relied on the testimony of David Meyer, a commercial real property

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specialist from the Shawnee County Appraiser's Office. Meyer was designated a registered mass appraiser by the State of Kansas Property Valuation Division (PVD), had been employed by the County Appraiser's Office for 10 years, and [50 Kan.App.2d 638] appraised 600 offices and 100 medical properties on an annual basis. However, Meyer was not a licensed general appraiser and had never done an appraisal that complied with the Uniform Standards of Professional Appraisal Practice (USPAP) (1992) Standards 1 and 2. Meyer did claim his appraisal was in compliance with USPAP Standard 6 and was a mass appraisal rather than a single appraisal.

Meyer testified the Property was in a very good location in Topeka and considered the Property in a prime, investment Class A location.

Meyer's initial valuation of the Property for tax year 2011 was $10,711,100. Before COTA, he lowered the value of the Property to $9,768,500. Meyer claimed the difference in recommended value stemmed from a reduced rental rate for the medical office and surgical center space in the Property.

Meyer used the usable square footage of the Property for the income approach calculation in his appraisal. Meyer defined usable square footage as the floor space of the Property, minus vertical penetrations such as stairwells, elevators, and common areas. For the sales approach, he used the net rentable square footage, which did include the common areas. To determine fair market value, Meyer considered what the Property was worth on the open market. Meyer considered the Property's current use to be its highest and best use.

Dillon Analysis

Tallgrass' expert appraiser was John Dillon, a licensed general real estate appraiser who had been doing appraisals in the Kansas City area since the early 1980's. Dillon appraised all types of property but mainly worked with commercial property. Dillon first appraised the Property for Tallgrass in 2006 and had prepared other appraisals on the Property. Dillon was tasked with estimating the market value of the Property for presentation before COTA. Dillon claimed he quantified the physical factors and market data for the Property and believed the market for the Property did not extend beyond the immediate Topeka market. Dillon considered the Property a second tier property, not a Class A or Class A location.

[50 Kan.App.2d 639] Dillon's analysis was aimed at finding market value, as defined by the Federal Register and USPAP. However, Dillon admitted that this definition contained some minor differences from the Kansas definition of fair market value. Dillon based his analysis on the rentable area of the Property, or the total square footage of the Property, minus vertical penetrations such as stairwells or elevators, but including common areas. Dillon believed this calculation to be a market-wide method of establishing how rental rates per square foot for office and medical office space are established. Ultimately, Dillon determined the valuation for the Property was $7.6 million.

Keller Analysis

The County presented Timothy Keller, a state licensed certified general real estate appraiser with around 20 years of appraisal experience, as a rebuttal witness. Keller appraised all types of commercial and residential properties, including offices and medical offices, mainly in the Topeka, Lawrence, and Kansas City areas.

Keller testified the County asked him to perform an appraisal of the Property to determine the market value of the Property. Keller's appraisal was admitted, and he defined market value in accordance with Kansas statutes. Keller labeled the Property as a Class A property, located in a competitive neighborhood and market location. Keller claimed the highest and best use for the Property would be its current use.

Like the other appraisers, Keller used cost, sales, and income approaches to establish the value of the Property. Keller appraised the Property at $10,250,000.

COTA Ruling

COTA stated the County determined the Property contained 12,139 square feet of office space, 50,031 square feet of medical office

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space, and 12,533 feet of surgical space, for a total usable square footage of 74,730.

COTA first addressed Tallgrass' claim that the County failed to comply with K.S.A. 2013 Supp. 79-1460(a)(2). Tallgrass argued the Property's 2010 tax valuation was reduced pursuant to the valuation [50 Kan.App.2d 640] appeals process; therefore, under the statute, the County was required to present substantial and compelling reason for the Property's increased 2011 tax valuation. Tallgrass claimed the County failed to meet that burden and that the increased valuation was therefore inappropriate.

COTA agreed that under K.S.A. 2013 Supp. 79-1460(a)(2) the County would have been prevented from increasing the Property's tax valuation following the 2010 reduction if the 2010 reduction had been " due to a final determination made pursuant to the valuation appeals process." However, the County reduced the Property's 2010 appraised value based on the results of the 2009 tax appeal, and the 2010 appeal was never submitted to COTA. Thus, COTA ruled the Property's 2010 tax valuation was not " 'reduced due to a final determination pursuant to the valuation appeals process'" and therefore the requirements of K.S.A. 2013 Supp. 79-1460(a)(2) were inapplicable to the Property's 2011 tax valuation.

COTA next discussed the law governing ad valorem taxes in Kansas. Under the Kansas Constitution, Article 11, ยง 1(a) and K.S.A. 79-101, all real and personal property in Kansas is subject to taxation on a uniform and equal basis unless specifically exempted. COTA classified the Property as commercial use property; and pursuant to K.S.A. 2013 Supp. 79-1609, COTA determined the County had the " duty to initiate the production of evidence to demonstrate, by a preponderance of the evidence, the validity and correctness" of a fair market value determination. Under the same ...


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