A recent Kansas Board of Tax Appeals decision could lead to a sizable dent in Riley County’s budget, and that has county administrators concerned.
In that decision, the board sided with Bass Pro Shops in Olathe after the company appealed its assessed property tax valuation, Greg McHenry, county appraiser, told the county commission Monday. The company argued that the store was really worth about 40% less than what the Johnson County had appraised it at, and the board agreed, stating in its decision that hypothetical leased fee value is the best indicator of a property’s value.
The decision sets a precedent and could have ripples on county governments across the state, McHenry said.
“We hadn’t really seen that before,” McHenry said. “It hadn’t gone that far, and that’s a problem from an appraiser’s standpoint. First of all, there is no such thing as a hypothetical leased fee approach. That’s a phrase that they have come up with, and some folks in national media have used. But in terms of appraisal theory, there is no hypothetical leased fee value theory. And a big reason why is because it does not address fee simple market value. In Kansas, we’re mandated to assess value at the fee simple market value.”
Under hypothetical leased fee value and the “dark store theory,” big box retailers across the country have started to appeal their assessed property tax values, arguing that their properties should be assessed based on what similar, but empty, properties have sold for in the region.
McHenry said the county has three “dark store theory” cases before the board later this year. Home Depot is appealing its 2018 assessed valuation of $6.4 million and arguing for a $2.9 million reduction in value, or about 40%, according to McHenry. Since property tax dollars go to the city and school district as well, that would mean those entities would have to refund Home Depot $106,000 in property taxes. That case will be heard June 24.
Manhattan Marketplace, which includes Sport Clips and Noodles and Company, is looking for a 45% reduction, or about $4.2 million decrease in property value, for two tax years. For the 2018 year, that would mean a property tax refund of $158,000, and for 2019, a refund of $173,000. McHenry said the cases would likely be heard in the fall.
Combined, there are $438,000 in tax dollars at stake between the three cases, and McHenry said he wouldn’t be surprised if the county sees more cases, like Hy-Vee and Target, before the end of the year.
“The real story is the $438,000 in valuation that the large companies are now not paying in taxes. The common resident is,” Rich Vargo, county clerk, said. “That’s a shift in taxation from large businesses to the constituents. Previous commissioners used to be always concerned with single-parent families and the elderly. That’s where the mill levy is going to now. We have to get people who are going to vote to realize this is money coming out of their pockets.”
Kansas law says that any appeals that county governments file in such cases have to go straight to the board, which creates a tactical incentive for the companies, because those cases typically take some time to get through, and if the board rules against the county, the county has to pay interest on refunded tax dollars.
County governments have had to evaluate their chances of winning before their cases before the board and decide whether to proceed or cut their losses.
“It used to be one arm tied behind our backs, but now it’s like going with both arms tied,” McHenry said. “It’s definitely not a fair process at all. We feel like we’re creating a constitutionality issue with these decisions, where BOTA is. We’re really creating a separate class of a few properties that are not held to the market value standard. … Is that constitutional or not? I don’t believe so, and I’m not an attorney, but that’s where we’re at.”
One way to fight the companies is for county governments to take the cases to the Kansas Supreme Court and declare hypothetical leased fee value unconstitutional.
Clancy Holeman, county attorney, said the state Legislature could also fix the problem by changing state appraisal law to say that a property’s market value shall not include the property’s hypothetical leased fee.