Johnson County residents have been following an important public discussion in recent weeks about property taxes — and how the county’s tax base might be affected by the way big-box stores are assessed. It’s an important conversation, but everyone needs to be working with the same set of facts.
On March 31, Alan Cobb, president and CEO of the Kansas Chamber of Commerce, wrote a guest commentary in The Star that attempted to refute claims about valuation of large retail properties from Steve Rose’s own column of March 3.
Unfortunately, Cobb made some statements that are false and misleading.
Before I go any further, let me state that I have not reviewed the values placed on retail properties by Johnson County Appraiser Paul Welcome or any of his staff, so I am not commenting on their accuracy. Like Rose, I will only comment on the methodology to be used and the possible impact on property tax bills.
One of the guiding principles of appraising any type of property is a finding of what is referred to in the appraisal industry as its current “highest and best use.” The Appraisal Institute, the international association of professional real estate appraisers, defines that term as:
The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value.
This is done before looking at comparable properties in order to insure those comparables have the same highest and best use as the building being valued.
Many times, when a piece of retail real estate is sold, the owner attaches restrictions on its use that prohibit competition. So for example, if I sell my big-box hardware store, I might place deed restrictions on it that forbid the buyer from opening another hardware store in that building. That’s why you often see those former big-box buildings reused for other purposes. The big-box retail use of the building is no longer legal, and therefore it no longer qualifies as the highest and best use of the property.
Cobb was correct when he wrote that a house would not be valued according to the income of its owner. However, it would be valued according to the quality of its construction, its current use as a residence and its location.
Likewise, fully-operating retail stores should be compared to stores of the same quality and the same current use.
With regard to the impact on taxes of reductions in value, Cobb is correct that property tax bills are based on valuation and mill levy. He is also correct that the only way a shift occurs is if one of the taxing bodies raises its mill levy. That formula is: Assessed value multiplied by mill levy equals tax revenue.
If assessed value drops, the mill levy will have to increase to raise the same amount of tax revenue as was previously raised. If the county, cities and school districts want to continue to provide taxpayers the same level of service, that means their mill levies will have to increase. A tax shift occurs because property owners whose values did not decrease will pay higher tax rates.
It is hard to imagine a scenario in which there will not be a shift, considering the amount of assessed value being appealed by retail stores in the county.
Larry Clark is director of strategic initiatives at the International Association of Assessing Officers, based in Kansas City.