Government & Politics

If big-box stores win JoCo appeals, who bears tax burden for schools, services?

Big Box store appraisal worries

Johnson County Commission Chair Ed Eilert discusses concerns about an approach that big box stores like Target are using to challenge their county appraisals. That could dramatically reduce property tax revenues for schools and government services
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Johnson County Commission Chair Ed Eilert discusses concerns about an approach that big box stores like Target are using to challenge their county appraisals. That could dramatically reduce property tax revenues for schools and government services

A battle between Johnson County and big-box retailers heats up over the next two weeks, and the outcome could profoundly affect the county’s schools, libraries and other government services.

The Kansas Board of Tax Appeals began hearing testimony Monday in a case involving nearly a dozen Johnson County Walmart stores that are challenging their county property appraisals from 2016 and 2017. The issue involves a fierce disagreement between the Johnson County appraiser’s office and large retail stores over the proper way to determine the fair market value of commercial property.

If the retailer prevails, it could collectively cut their stores’ property tax bills by several million dollars.

Walmart is not alone. This case follows other appeals involving dozens of Target, CVS, Walgreens, Home Depot, Lowe’s and other Johnson County businesses that are fighting the county’s method for valuing their real estate holdings and trying to lower their property taxes.

If all these commercial property values get reduced, county officials worry it may require budget cuts to schools, libraries and other agencies that rely on property tax dollars, or significant tax increases for residential property owners.

“The numbers are fairly significant and could have a major negative impact on the school districts,” County Commission Chair Ed Eilert told The Star. “I don’t think it’s any question that residential properties would end up paying more.”

County officials are watching closely, especially because Target has already won a partial victory. A 2018 Board of Tax Appeals decision said the county overvalued seven Johnson County Target stores by about 30 percent. That decision is now on appeal in the courts, but Walmart is making similar arguments.

One county analysis last year estimated that if the retailers’ suggested method for commercial property valuations is upheld by the courts, the loss could be nearly $100 million to Johnson County government, its school districts, cities, libraries, fire districts and other government services.

A lawyer representing Walmart, Target and other stores in front of the state Board of Tax Appeals says those fears are exaggerated and insists this is not a challenge to all commercial property appraisals. Linda Terrill said her big-box store clients are just seeking relief after the county’s appraisals on many of these properties jumped significantly from 2015 to 2016 and 2017.

“They literally nearly doubled in one year,” Terrill told The Star.

County Appraiser Paul Welcome acknowledges that the county’s valuations for Target, Walmart and other big stores in Johnson County increased dramatically between 2015 and 2016. But in testimony to the Kansas Legislature last year, he explained that a large commercial building sold in the county in February 2015 for $8.9 million, when the county had valued that building at $5.6 million. He said that sale and other data convinced him the values were low.

“As county appraiser, I decided to commission studies for grocery stores and big-box/ large retail stores where values seemed to be incorrect,” he said. Welcome said the subsequent third-party studies justified the county’s increases.

The appraiser’s office argues the properties should be valued based upon the buildings’ use by their busy retail customers and what the property is worth to the current owner, compared to stores of the same quality and the same current use.

The retailers counter that the properties should be valued on what the property would receive if it were put on the market with a hypothetical buyer and seller, regardless of the existing occupant.

Some critics have called the retailers’ recommended approach the “dark store theory,” treating the stores as if they are vacant.

But Terrill says the “dark store” label is unfair and that it’s proper to evaluate real estate without regard to the success of the existing businesses.

This debate is also raging in other Midwestern states, where big-box retailers are mounting aggressive legal challenges to their property tax bills.

A Jan. 6 New York Times story highlighted Wisconsin municipalities that are fighting commercial appeals in court or have had to raise property taxes on residential owners after settling with major commercial owners.

A 2018 report from S&P Global Ratings said these types of challenges “could pressure U.S. municipal budgets and credit quality.”

“Many of the successful appeals that we have observed have resulted in tax settlements in the millions of dollars,” the report said, cautioning that “the potential for a domino effect of property tax appeals across the commercial and industrial portions of the tax base” could significantly impact some governments.

Terrill says these Johnson County cases should be viewed in their proper context under Kansas law, and she made that argument as Monday’s hearing got underway.

Eleven Walmart stores in Olathe, Gardner, Shawnee, Overland Park, Lenexa and Roeland Park — seven Walmart Supercenters, two Sam’s Clubs and two standard Walmart stores — are contesting the jump in their values from 2015 to 2016. Ten of the stores are also contesting their 2017 valuations. During that time, the county’s values for those properties, collectively, rose from $95 million to $175 million and their tax bills rose from $3 million to $5.56 million.

Walmart’s own independent appraisal for those buildings valued them close to the 2015 values.

Walmart and the other big-box stores have been paying their property taxes since 2016 under protest, and if the county ultimately loses, the money would be refunded to the retailers.

Terrill argued before the Board of Tax Appeals that the Kansas Constitution and prior state Supreme Court rulings are clear. “We don’t look to the economics of the owner. We look to the economics of the property, period,” she said. “It doesn’t say anything about adding value based off of how much money the occupant of that property makes or doesn’t make. We don’t value houses that way. We don’t care how much money you make.”

But Kyle Blanz, a commercial real estate supervisor with the county appraiser’s office, defended the county’s values in Monday’s testimony and said the county follows state law.

“I believe we did our job accurately and fairly,” he told the board, adding that the county appraiser’s office is evaluated every year by the state’s Division of Property Management and it complies fully with state standards for commercial property appraisals.

“We’ve never been out of compliance, so we have an excellent track record,” he said.

Blanz said these Johnson County Walmarts are “all very well located,” in highly desirable areas with lots of rooftops, good visibility, and easy road access, positioned for growth and success. He said these Walmarts were built between 1991 and 2013 but were all in virtually “immaculate condition” and “almost look new.”

Terrill reminded the board that it already found the county overvalued the Target stores and argued the same is true for these Walmarts. Both the county and Terrill will put on dueling experts in a hearing that is expected to conclude Jan. 18. The board will take the arguments under advisement and likely issue its ruling within a few months. But that decision can be appealed to the Kansas Court of Appeals, where the Target case is already pending.

Lynn Horsley reports on Johnson County for the Kansas City Star, focusing on government, politics, business development and battles over growth and change in the county. She previously covered City Hall in Kansas City for 19 years and has a passion for helping readers understand how government affects their lives.