In re the Equalization Appeal of Johnson County Appraiser/Privitera Realty Holdings
Docket: No. 105,769
Court: Court of Appeals of Kansas; July 27, 2012; Kansas; State Appellate Court
Standridge, J. Privitera Realty Holdings (Privitera) is appealing a decision by the Kansas Court of Tax Appeals (COTA) that reinstated the Johnson County Appraiser's (County) original property value of $1,774,450 for its fast-food restaurant in Overland Park, Kansas, for the 2008 tax year. The restaurant, known as 'KenTacoHut,' uniquely houses three fast-food chains and was built in 1989. After Privitera contested the valuation, a COTA hearing officer reduced the assessment to $1,393,200, which Privitera argued better reflected fair market value. The County subsequently appealed this reduction.
During the evidentiary hearing, Linda Clark, a commercial valuation specialist from the County Appraiser's office, testified about the original assessment process. She detailed her qualifications, including certifications and training from recognized appraisal organizations. Clark explained that the original valuation was computed using a cost approach within a computer-assisted mass appraisal (CAMA) system, specifically employing the Marshall Swift cost valuation system. She inspected the KenTacoHut and discovered that the building's actual square footage was 6,222 square feet, rather than the County's recorded 6,124 square feet, which led to an increased estimated value of $1,778,660 due solely to the corrected square footage. Clark's report, introduced as evidence, indicated a replacement cost of $1,249,880 for the building, including a 10 percent entrepreneurial profit. COTA found substantial evidence supporting Clark's qualifications and the County's assessment methodology.
Clark determined that adding a 10 percent entrepreneurial profit to the replacement cost of the KenTacoHut was appropriate based on her expertise. The replacement cost was adjusted for depreciation, resulting in a value of $774,920 after applying a 38 percent reduction using the Marshall Swift system, considering the building's age, condition, and utility. Clark found no need for market or economic adjustments, asserting that the property had no functional obsolescence and was viable in its current use.
Additionally, she calculated the replacement cost of surrounding asphalt and concrete, amounting to $33,160 after depreciation, which was added to the building's value. For the land, totaling 60,662 square feet, she valued it at $16 per square foot, supported by comparable land sales from 2006-2007 ranging from $13 to $24.02 per square foot, leading to a total property value of $1,778,660.
Clark reviewed 2008 assessed values for similar fast-food restaurants and found the KenTacoHut's valuation to be within the normal range. She performed an income approach, estimating the property's income value at $2,192,000 to further validate the cost approach, though this figure was not used for assessment due to insufficient data at the time. Although she did not conduct a sales-comparison approach, she referenced comparable property sales to support the County's assessment, noting the requirement under K.S.A. 2011 Supp. 79-503a to consider such sales. A list of these comparable sales was included in Exhibit 1 for further validation of the valuation.
Clark evaluated seven sales, four of which were submitted by Privitera, but excluded two sales—Long John Silver's for $380,000 and Taco Bell for $507,000—due to their non-typical nature as 'arm's-length transactions.' She deemed the County’s assessment of the KenTacoHut reasonable, citing the cost approach used by the County, which was standard for appraising fast-food restaurants in 2008. Clark confirmed her awareness of K.S.A. 2011 Supp. 79-503a factors for determining fair market value and asserted that these were adequately considered in valuing the KenTacoHut. She stated that Standard 6 of the Uniform Standards of Professional Appraisal Practice (USPAP) applied to her work, which complied with its requirements. Clark noted that when challenging property assessments, specific property-related information must be provided to evaluate the reasonableness of mass appraisal values. She did not believe Standards 1 and 2 of USPAP applied since her work was not a complete appraisal.
Privitera did not present evidence at the COTA hearing, which ultimately found the County's mass appraisal report and expert testimony to provide substantial competent evidential support for the 2008 valuation of $1,774,450. The court noted that the County’s evidence met minimum reliability standards under Kansas law and found no significant USPAP deviations affecting the County's value opinion. Following a denial of reconsideration, Privitera filed a timely petition for judicial review. The analysis includes a preliminary argument regarding the burden of proof, requiring interpretation of K.S.A. 2011 Supp. 79-1609, with unlimited review of legal conclusions and substantial evidence review for factual findings.
For matters related to the valuation of residential or commercial real property for taxation, the county appraiser is responsible for proving the validity of the assessment by a preponderance of evidence, except for leased commercial properties, where the property owner must provide a complete income and expense statement for the prior three years to shift the burden of proof. If this information is not provided, the owner bears the burden to demonstrate the assessment's inaccuracy before COTA. The statute indicates that even if an owner successfully challenges the assessment at the small claims and expedited hearings division, they must still carry the burden in an appeal to COTA if they did not furnish the required documentation.
In the case of Privitera, the property is classified as leased commercial. Privitera did not submit a formal income and expense statement but provided a lease document indicating rental income and tenant responsibility for expenses. COTA ruled that this lease did not satisfy the statutory requirement for an income and expense statement, maintaining Privitera's burden to prove the tax assessment's invalidity. COTA reviewed the county's evidence and found it substantial enough to uphold the original assessment of $1,774,450. Privitera contested COTA's determination regarding the lease's sufficiency but did not include the lease in the appeal record, leading to a failure to substantiate this claim. As established, the burden lies with the claimant to provide factual support in the record; without it, claims of error cannot succeed.
Clark's testimony indicated that Privitera did not provide a complete income and expense statement for the KenTacoHut, leading COTA to determine that the burden of proof rested with Privitera during the hearing. Subsequently, Privitera argued that COTA's valuation of $1,774,450 for ad valorem tax purposes lacked substantial evidence. He raised several points against Clark's report and testimony, including non-compliance with USPAP standards, absence of a 'highest and best use analysis,' lack of disclosure regarding assistance from counsel, insufficient explanation for a 10 percent upward adjustment in replacement cost, and her claimed lack of competence regarding the cost approach to value. Additionally, Privitera contended that the property’s specific characteristics indicated functional obsolescence that should have been considered, questioned the reliability of Clark's comparable sales analysis, and criticized the validity of the income approach in her report for relying on copied information.
The Kansas Judicial Review Act (KJRA) outlines the standards for judicial review of COTA decisions, specifying that a party may seek relief by proving COTA’s error in law, unlawful procedure, lack of substantial evidence for factual determinations, or that COTA's decision was unreasonable or arbitrary. Substantial evidence is defined as relevant and substantive evidence providing a reasonable basis for resolving issues. The assessment of factual findings is to be considered in light of the entire record, including evidence that supports or detracts from the findings, along with credibility determinations made by the presiding officer.
The court will not reweigh evidence or conduct a de novo review according to K.S.A. 2011 Supp. 77-621(d). If the Commission on Tax Appeals (COTA) lacks substantial evidence for its decision, it can be deemed arbitrary or capricious, as established in In re Equalization Proceeding of Amoco Production Co. The court exercises unlimited review for statutory interpretation appeals, as noted in In re Tax Appeal of Graceland College Center, reflecting a change in Kansas appellate courts that no longer defer to agency interpretations of statutes, as clarified in Saylor v. Westar Energy, Inc.
Several Kansas statutes guide property tax calculation processes. K.S.A. 79-501 mandates that real property be appraised for fair market value assessment. K.S.A. 2011 Supp. 79-503a defines 'fair market value' as the price a well-informed buyer would pay and a seller would accept in a competitive market, free from undue compulsion. It emphasizes that sales alone do not determine fair market value, which must also consider factors such as land classification, size, location effects, depreciation, reproduction costs, productivity, rental values, sale values accounting for inflation, governmental use restrictions, and comparisons with similar properties. The appraisal process must adhere to generally accepted appraisal procedures that align with fair market value definitions unless otherwise specified by law, and assessment-sales ratio studies are not valid for appraisal purposes under K.S.A. 2011 Supp. 79-503a.
K.S.A. 2011 Supp. 79-503a outlines three methods for establishing property value: the sales approach, the cost approach, and the income approach. Appraisers must utilize these methods to determine fair market value when sufficient data is available. K.S.A. 79-505(a) mandates that appraisals for ad valorem taxation must be documented in writing, with K.S.A. 79-504(b) recognizing appraisals from the CAMA system as compliant. Additionally, K.S.A. 79-505 and K.S.A. 79-506 require adherence to the Uniform Standards of Professional Appraisal Practice (USPAP), which serves as a legal standard for appraisal procedures. Specifically, USPAP Standards 1 and 2 govern individual appraisals, while Standard 6 pertains to mass appraisals. The PVD's Directive No. 92-006 emphasizes compliance with these standards. There are provisions within USPAP allowing for limited exceptions and jurisdictional rules that negate conflicting standards in specific jurisdictions. In the context of Privitera’s claims, there is a contention that Clark’s appraisal report was invalid due to non-compliance with USPAP Standards 1 and 2, which dictate the development and reporting of individual appraisals.
USPAP Standard 6 governs mass appraisals, which county appraisers must follow for ad valorem tax assessments. In contrast, USPAP Standard 2 pertains to single property appraisals, including special purpose properties unsuitable for mass appraisal techniques. Standard 6 also applies to properties initially valued through mass appraisal but later reassessed during hearings and appeals. The Division does not require county appraisers to adhere to both standards for every appraisal; only one applies based on the appraisal type.
In the case presented, Privitera acknowledges that the County's initial valuation was a mass appraisal. However, he contends that Clark's subsequent examination and adjustment of the property value shifted the appraisal to an individual property assessment. Privitera cites an advisory opinion illustrating that if an individual appraisal is conducted during an assessment appeal, Standard 1 applies. The argument is dismissed because Clark did not use any unique site-specific data beyond what was considered in the initial mass appraisal.
Clark's evaluation of the KenTacoHut's value at $1,778,660 involved reviewing prior assessments, personally inspecting the property, correcting a square footage error, and verifying the basis for the $16 per-square-foot land value. She also referenced data from the CAMA system and assessed values of similar fast-food restaurants, reinforcing the mass appraisal methodology. Although Clark utilized an income approach for valuation, she relied on mass appraisal data from the County. The lack of evidence for a complete or partial individual appraisal means the mass appraisal remains intact.
When challenging a mass appraisal, the County must provide property-specific information to evaluate the assigned value's reasonableness, which does not convert a mass appraisal into an individual appraisal. Privitera also argues that Clark's report was insufficient due to the absence of a 'highest and best use analysis' to assess the market for a multi-restaurant building.
Privitera contends that Standard 6 of the USPAP mandates a highest and best use analysis in mass appraisals. Specifically, Standard 6-2(h) outlines that appraisers must consider several factors, including existing land-use regulations and economic conditions, when determining the value of real property. The accompanying comment emphasizes the need for appraisers to develop the highest and best use concept adequately for a proper appraisal solution. Standard 6-7(i) requires written reports of mass appraisals to discuss how the highest and best use was determined, suggesting that these reports should reference relevant case law or public policy.
In her report, Clark noted that the highest and best use of a property may evolve with neighborhood changes but determined that, in the absence of evidence indicating such changes, the current use remains valid. She cited the case of Board of Douglas County Comm'rs v. Cashatt, which supports considering surrounding property changes in value assessments. Clark invoked USPAP’s departure rule for Standard 6-2(h) and the jurisdictional exception rule for Standard 6-7, referencing K.S.A. 79-504, which clarifies that appraisals produced under the CAMA system are considered written appraisals.
During the hearing, Clark acknowledged she did not perform a highest and best use analysis due to cost concerns in mass appraisals and stated that unless there are claims suggesting a potential change in property use, the current use is assumed to be the highest and best. Her testimony regarding the KenTacoHut's use mirrored that of an appraiser in the case In re Tax Appeal of Yellow Freight System, where it was noted that the highest and best use typically remains the current use unless contrary evidence is presented. The panel ultimately found that the appraiser’s testimony aligned with USPAP Standard 6-2(h) and provided substantial evidence for determining highest and best use.
Clark's report and testimony adequately addressed the highest and best use of the property, with Privitera failing to present contrary evidence before COTA. The validity of Clark’s report was questioned on two grounds: first, whether her acknowledgment of receiving assistance from counsel required the inclusion of counsel's name in the report. Privitera cited USPAP Standard 6-8, which mandates that any significant professional assistance must be disclosed. However, it was determined that Clark was not obligated to include counsel's name, as she invoked the jurisdictional exception rule of USPAP, citing relevant Kansas statutes.
The second point of contention was whether the report was invalid due to a lack of explanation for a 10 percent upward adjustment to the KenTacoHut's replacement cost. Privitera argued this violated USPAP Standard 6-7, which requires detailed justification for such adjustments. Although Clark admitted her report did not explain the justification for the 10 percent increase, she clarified that this adjustment, termed "entrepreneurial profit," was standard practice based on her training. She acknowledged the report lacked necessary justifications but noted that the underlying calculations were generated by a CAMA system recognized by the PVD, which was aware of the report's deficiencies. Clark also invoked the jurisdictional exception rule related to Standard 6-7, referencing the same Kansas statutes.
Clark's testimony confirmed that the County's CAMA system, approved by the PVD, provided a legally sufficient appraisal report for the KenTacoHut under Kansas law, as per K.S.A. 79-504[b]. Any confusion regarding a 10% increase in value was clarified by her trial testimony. Privitera challenged Clark's competence, claiming she was unable to testify about the economic life of the KenTacoHut or its site improvements, suggesting this indicated incompetence. However, Clark did not conduct a single-property appraisal but verified the accuracy of the tax assessment based on the County’s CAMA system using the Marshall & Swift cost system, which estimates depreciation based on property characteristics. Privitera failed to provide evidence disputing the accuracy of the depreciation applied to the KenTacoHut. Thus, the argument regarding Clark's competence was deemed unsubstantiated.
Regarding functional obsolescence, Privitera argued that the KenTacoHut's unique characteristics and size warranted a downward adjustment in value, but provided no evidence to support the claim that it suffered from functional obsolescence. Clark's conclusion—that there was no justification for changing the property's use—was the sole evidence presented to the COTA and was not contested by Privitera.
Clark testified that the KenTacoHut property, consisting of three fast-food restaurants, was viable in its operational format and could not justify any value adjustment based on size due to a lack of objective data. Privitera's claim regarding functional obsolescence was deemed unsupported. Regarding comparable sales, Clark did not conduct a sales-comparison approach but did evaluate comparable property sales to assess the County's valuation, which she deemed reasonable. She reviewed seven sales, including four provided by Privitera, but dismissed two as unsuitable comparisons due to their non-arm's-length nature. Privitera failed to demonstrate that Clark's selected sales were inappropriate or biased.
Additionally, Privitera challenged the validity of Clark's income approach, arguing it relied on general 2008 data from the County’s CAMA system. However, this method aligns with the definition of mass appraisal, which uses standard methodologies and common data for valuing properties. Privitera did not provide evidence to contradict the appropriateness of Clark's data usage or the accuracy of her valuation estimate. Consequently, substantial evidence supported the decision to uphold the County's original 2008 assessment of $1,774,450 for the KenTacoHut, leading to an affirmation of that assessment.
