Seven Target stores in Johnson County could soon be paying lower taxes after arguing their county property appraisals were too high by at least 30 percent.
And other appeals involving Walmart, Home Depot, CVS, Walgreens and dozens of other Johnson County businesses are waiting in the wings.
A Feb. 21 summary decision from the Kansas Board of Tax Appeals said Johnson County’s 2016 values for the Target stores, which nearly doubled from 2015, were excessive.
If all commercial property values in the county were reduced by 30 percent, the potential revenue loss would be nearly $100 million.
That could lead to a devastating drop in property tax money for schools, cities, libraries, fire districts and other government jurisdictions, county officials say. And homeowners in the county ultimately may be affected.
“Every taxing jurisdiction in the county would be negatively impacted. And it’s a big, big number,” says Johnson County Commission Chairman Ed Eilert. “And if it’s not collected from that class of property, who pays? All of us that are left, and that means primarily residential property.”
The summary decision isn’t final, and a complete ruling with the board’s legal reasoning is expected within three months. But it’s a signal that Johnson County’s commercial appraisal approach is in doubt.
The issue involves a disagreement between the Johnson County appraiser’s office and large retail stores over the proper way to value commercial properties.
The appraiser’s office maintains these properties should be valued based upon the buildings’ use by their busy retail companies, and what the property is worth to the current user.
The big box stores counter that the buildings’ market value is actually 30 to 50 percent lower, based on what the structure would receive if it were put on the market for lease, without the existing occupant.
Supporters of the county call the companies’ approach the “dark store theory,” treating the stores as if they are vacant. But advocates for the companies say the “dark store” label is unfair, and that it’s proper to evaluate real estate without regard to the success of the existing business.
The Target decision stems from the corporation’s challenge to its 2016 appraised values for three stores in Overland Park, two in Olathe, one in Shawnee and one in Mission. The county valued those properties at $105 million as of Jan. 1, 2016. Target countered with its own values totaling $60.8 million.
The tax appeals board found the seven properties together should be appraised at $74.4 million — 30 percent lower than the county’s number. It said Target’s “hypothetical leased fee” value “is a better indication of a property’s fair market value.” It ordered the county to re-compute the taxes owed by Target and issue a refund for any overpayment.
Linda Terrill, the attorney representing the Target stores, has asked the tax board for a complete opinion, which is due within 90 days. That ruling can then be appealed to the Kansas Court of Appeals, so a final decision could be many months away.
County officials strenuously defend their appraisal approach and are urging school districts, the library board and other community groups to support them in their battle against the commercial appeals.
“The issue that has been before the board of tax appeals is a valuation process for big box stores. However, the result of their decision will not be limited to big box stores,” Eilert told the Shawnee Mission School Board on Monday.
If commercial values plummet 30 percent, Eilert said, Blue Valley schools could lose about $12.5 million annually, while Shawnee Mission could lose $10.7 million and Olathe $9.9 million. Big cities in Johnson County would also lose millions, as would the library and park districts.
The dispute involves a major philosophical difference, with dueling opinions from appraisal experts.
Terrill declined to comment while the case is pending. But in a brief filed with the Kansas Board of Tax Appeals, she argued the county improperly valued the properties based on their big box occupants — adding millions of dollars to those values — rather than applying a fair market value that the buildings alone would bring if resold.
“We all understand the county wants to add value...on top of the value of the underlying real estate to increase tax receipts from retail commercial property owners,” she wrote. “Valuing property based on the owner or occupant is not the law in Kansas.”
David Lennhoff, an international expert on appraisal methodology, testified on behalf of Target in the case.
Johnson County has “been valuing these the wrong way, and the result is a much inflated assessed value,” Lennhoff said in an interview. “You have to value just the real estate regardless of who’s in it and how they are doing.”
County officials say they are following state law, and disagree with the idea of valuing just the real estate when these buildings are filled with thriving retail stores.
“I’m supposed to value what is there,” County Appraiser Paul Welcome told The Star, citing the example of Town Center Plaza, which has major brand stores on 119th Street. “You want me to value that as if it doesn’t have any occupants? Do you want me to value that as if those tenants are the lowest quality tenants that are in the county?”
The county’s appraisals for these Target and other big box stores nearly doubled between 2015 and 2016.
For example, the county valued the Target at 12220 Blue Valley Parkway in Overland Park at $9.7 million in 2015 and at $18.2 million in 2016. Its property tax bill went from $299,033 to $552,749. A similar increase occurred for the Target at 15435 W. 119th in Olathe. All seven Targets paid a total of $3.23 million in property taxes in 2016, up from $1.75 million in 2015.
Welcome said those increases were justified by a 2015 study from a highly experienced appraisal firm, Valbridge Property Advisors. The firm looked at recent activity and estimated the rents for these types of properties. That study increased the rents his office applied for 2016 and led to the increased appraisals.
“Before I did anything, I went out and secured a study and implemented the study,” Welcome said. “It showed rents had gone up from where we were.”
The Kansas Chamber of Commerce says the county’s commercial appraisal increases were outrageous.
“We’re trying to protect the business community,” said Eric Stafford, vice president of government affairs with the Kansas Chamber of Commerce. “They want to assess the value significantly higher, which is entirely unfair.”
Big box store appraisal challenges have become increasingly common in recent years in Midwestern states including Indiana, Wisconsin and Michigan, with mixed success. And Johnson County is not the only Kansas county affected by this debate.
In fact Sedgwick County has already lost a court of appeals case concerning Target stores in Wichita and Derby. The county valued the four stores at $35 million, but the appeals court ruled in January that Sedgwick County overestimated that value by $5.4 million. The county is preparing to refund Target nearly $177,000 it paid in property taxes in 2015.
Johnson County officials say the Sedgwick County ruling was case-specific and not precedent-setting. But Terrill, who handled the Wichita case as well, disagrees and believes it indicates the big box store approach to commercial appraisals is proper under Kansas law.
School districts and other Johnson County government groups are watching these arguments closely.
“This is a state-wide issue that affects schools, cities, counties, and eventually our residents,” said Kenny Southwick, interim Shawnee Mission School District superintendent. “Anytime we face the erosion of our tax base, it is important for all of us to work together so as to maintain necessary services and lessen the potential negative impact on our students.”