IN THE DISTRICT COURT OF MORRIS COUNTY, KANSAS

IN THE MATTER OF THE PROTEST ) APPLICATIONS

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CASE NO’s 2015CV19 and

OF THE CITY OF COUNCIL GROVE ) FOR THE TAX YEAR 2012 and 2013

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IN MORRIS COUNTY, KANSAS

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2015CV18 (Consolidated)

MEMORANDUM DECISION

On May 24, 2016, the captioned matter was set for oral argument based upon the Petition of the Plaintiff (Morris County) for Judicial Review of the decision of the Kansas Board of Tax Appeals (BOTA) on the appraisal value of real property at the Council Grove City Lake for tax year 2012. Petitioner was represented by counsel, Michael Montoya. Defendant was represented by Linda Terrill. Having reviewed the record on appeal and considered the parties’ arguments, the Court affirms the decision of BOTA for the reasons set forth herein. FINDINGS OF FACT AND PROCEDURAL HISTORY 1. The appeal concerns the valuation of property for tax purposes. The property in question constitutes four parcels amounting to 228.3 acres of unplatted improved land surrounding Council Grove City Lake. (Council Grove Lake). 2. The City of Council Grove owns the City Lake and the surrounding land. The Council has divided the parcels into 352 lots for recreational and/or residential use. Each lot is subject to a ground lease.

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3. The tenants (Lessees) of the ground lease are members of the Council Grove Lake Association (the Taxpayer). 4. The City of Council Grove Council (the Council) renegotiated the ground lease in 2011 with the Lake Association. The lease is effective from January 1, 2012 through December 31, 2041 with automatic renewal thereafter. Under the lease each lessee pays $1,000.00 a year in 2012. 5. The lots contain improvements. The improvements consist of various structures, some simple, some elaborate and include docks, decks, and residences ranging from mobile homes to permanent high end residences. 6. All improvements are created by and at the expense of the lessees. The main conditions set by the 2012 lease with reference to the improvements are; that residential buildings may be constructed and used; they must be in compliance with building regulations; properly maintained; replaced or rehabilitated if damaged or destroyed. 7. No valid market comparators were put forward by the Parties. 8. The County employed Marion Johnson to value the Council Grove City Lake property for taxation purposes. Mr. Johnson gave the value of the land as $28,187,810.00 for the 2012 tax year and $29,871,240 for tax year 2013. 9. Mr. Johnson’s appraisal contained significant violations of Uniform Standards of Professional Appraisal Practice. 10. The City Grove Council empowered the Lake Association to appeal the 2012 and 2013 valuation to BOTA, authorizing the City Clerk to sign a Declaration of Representative to allow the Lake Association to do so.

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11. BOTA determined that the requirement of K.S.A.79-503a were not met by Mr. Johnson’s methodology. BOTA held that that the effects of restrictions imposed by governmental entities must be considered in valuing the subject property 12. Such was the basis for BOTA’s decision and order that the appraised value for 2012 be set at $2,366,442 and $2,386,800 for 2013. BOTA’s ruling that Johnson’s income analysis represented the only valuation methodology in the record that was both competent and in compliance with that law. JURISDICTION In accordance with K.S.A. 74-2426(c)(4)(A), any final order of the Kansas Board of Tax Appeals issued after June 30, 2014, may be appealed by any aggrieved person by filing a petition with the District Court. The order in question was a final order. STANDARD AND SCOPE OF REVIEW The review of the order of the Kansas Board of Tax Appeals is in accordance with K.S.A. 742426(c)(4)(A). The review is de novo. Except in respect of the de novo standard, the review is governed by the Kansas Judicial Review Act The de novo standard as applied to administrative action, is strictly construed. Nurge v. State Univ. of Kan. Med. Ctr., 234 Kan. 309, 316, 674 P.2d 459 (1983). In reviewing an Agency action, the de novo standard has been interpreted as requiring the Court to go beyond a review of whether substantial evidence supports an administrative Board’s actions. De novo standard requires an independent examination of the record, but stopping short, failing explicit indication, of allowing additional evidence. Frick v. City of Salina, 289 Kan. 1, 21, 208 P.3d 739 (2009). The parties have agreed that there should be no evidentiary hearing. There is no explicit requirement under K.S.A. 74-2426(c)(4)(A) for an evidentiary hearing for an appeal for judicial

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review of this BOTA decision. (As distinct from appeals filed after July 1, 2016, which fall under revised law effective from July 1, 2016 under K.S.A. 74-246(c)(4)(B) 2016 Session Law chapter 112 “the trial de novo shall include an evidentiary hearing at which issues of law and fact shall be determined anew.”) The Kansas Judicial Review Act lays down specific factors that must be examined to determine the validity of the action of the Board. K.S.A. 77-621. In making their determination, the court shall take due account of the rule of harmless error. K.S.A. 77-621(e). Application of this statute requires an appellate court to grant relief if: (i)

the agency has erroneously interpreted or applied the law, K.S.A. 77-621(c)(4);

(ii)

the agency has engaged in an unlawful procedure or has failed to follow prescribed procedure, K.S.A. 77-621(c)(5);

(iii)

the agency action is based on a determination of fact, made or implied by the agency, that is not supported by evidence that is substantial when viewed in light of the record as a whole, K.S.A. 77-621(c)(7); or

(iv)

the agency action is otherwise unreasonable, arbitrary, or capricious. K.S.A. 77621(c)(8)

Helmerich & Payne, Inc. v. Bd. of Seward Cnty Comm'rs, 34 Kan. App. 2d 53, 57, 115 P.3d 149 (2005). BURDEN OF PROOF In accordance with K.S.A. 77-621(a)(1), the burden of proving the invalidity of the Board’s action is on Morris County, as the party asserting the invalidity of an agency action. The burden of proof at the agency level is also on the County. Under K.S.A. 79-1609, when determining the

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valuation of residential property “it shall be the duty of the county appraiser to… demonstrate, by a preponderance of the evidence, the validity and correctness of such determination.” DISCUSSION This action involves a challenging appraisal situation given the unusual, if not unique, situation at Council Grove Lake. Four parcels of land are owned by the City of Council Grove, are not platted and are divided into 352 lots with ground leases. This Court is tasked with determining whether the record supports a valuation of the Lake property which is valid under Kansas law for ad valorem tax purposes. Kansas law does not provide fine detail on what interests are taxable under our ad valorem scheme but does contemplate that “there are only two components of realty ownership subject to taxation in Kansas: the land and the improvements”. In re Equalization Appeal of Lipson, 44 Kan. App. 2d 515, 519 and 521, 238 P.3d 757 (2010); referencing Board of Johnson County Comm’rs v. Greenhaw, 241 Kan. 119, 123, 734 P.2d 1125 (1987).] K.S.A 79-501 concludes that each parcel of real property shall be appraised at its fair market value. Appraisers are tasked with arriving at a fair market value as defined in K.S.A. 79503(a); the amount “that a well-informed buyer is justified in paying and a well-informed seller is justified in accepting for property in an open and competitive market.” Our Supreme Court has directed that in determining the validity of a tax assessment of real property, the essential question is whether the K.S.A. 79-503a factors have been considered and applied. Hixon v. Lario Enters., 257 Kan. 377, 382, 892 P.2d 507 (1995). The statute also directs that the appraisal process shall conform to generally accepted appraisal procedures. These include consideration and application of the three approaches to value in order to determine the fair market value of property when data to perform each approach is readily available. See In re Equalization Appeal of Johnson Cty. Appraiser/Privitera Realty Holdings, 47 Kan. App. 2d 1074, 1087, 283 P.3d 823 5

(2012); Bd. of Sedgwick Cty Comm’rs v. Kiser Living Tr., 250 Kan. 84, 92, 825 P.2d 130 (1992) (case about a condemnation award); Hixon v. Lario Enters., 257 Kan. 377, 383, 892 P.2d 507 (1995) (the principles behind establishing a valuation are the same for taxation and for condemnation). For Council Grove Lake, the record shows no valid comparators. Mr. Johnson, while providing the County with an appraisal, used a complex hybrid approach to determine the value. In doing so, he did not conform to the Uniform Standards of Professional Appraisal Practice (USPAP). Mr. Johnson’s approach failed to take into consideration the overall situation at Council Grove Lake, where a local governing body has set a rental price and manages an estate with a quantifiable income stream encumbered by up to 352 30 year renewable leases. The K.S.A. 79503a framework is applicable to this set of facts. The appraiser is allowed to take into consideration the productivity as indicated by lease price restrictions imposed by local governing bodies on rents and on the use of real estate and to consider the productivity of such real estate, given these restrictions. K.S.A. 79-503a(f)-(h) and (j). See Bd. of Sedgwick Cty Comm’rs v. Kiser Living Tr., 250 Kan. 84, 92, 825 P.2d 130 (1992) (where property so unique that no ascertainable market exists, it is reasonable to rely on one of the other approaches); In re Porterhouse Apartments, LLC, 314 P.3d 900 (Kansas Court of appeals unpublished-- cost approach inadequate method to establish valuation where government requirements led to a rent which could not support a cost based approach to valuation.)

The Kansas Court of Appeals has determined that BOTA is not required to reject in its entirety an appraisal that in part fails to comply with USPAP. In re Equalization Appeal of

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Kansas Star Casino, L.L.C., 52 Kan. App. 2d 50, 65, 362 P.3d 1109 (2015). An erroneous determination that an appraisal adhered to USPAP would be considered an error of law. Id., citing In re Protests of City of Hutchinson/Dillon Store for Taxes Paid in 2001 and 2002, 42 Kan. App. 2d 881, 891-92, 221 P.3d 598 (2009). In Kansas Star, COTA (now BODA) ignored some parts of an appraisal, rejected others as non-compliant with USPAP but upheld a particular conclusion which was correct and adequately explained and was not a violation of USPAP. 52 Kan. App. 2d at 66. The taxpayer contends that because of the noncompliance with USPAP, the appraisal was invalid in its entirety and should be set aside even though the errors did not affect COTA’s final decision. Id. The Court held that COTA is not required to wholly reject an appraisal that contains non-USPAP compliant errors that are not materially detrimental. Id., citing In Re Equalization Proceeding of Amoco Production Co., 33 Kan. App. 2d 329 at 337 102 P.3d 1176 (2004). Kansas Star Court held that even if the County’s appraisal contained errors sufficient to invalidate it, the court did not need to set the appraisal aside and remand, because COTA’s error was harmless given that COTA had rejected or ignored the deficiencies that could have harmed the taxpayer. Id. The County suggests that the case of In re Tax Complaint of Douglas A. Wine, 46 Kan. App. 2d 134, 260 P.3d 1234 (2011) which actually dealt with the same properties, somehow gives guidance as to how the ground leases should be valued. Wine was a case that dealt solely with valuation of improvements on the leased ground at the Council Grove City Lake – it did not deal with the value of the leases themselves. While the tenant’s leasehold estate was mentioned in Wine, the method of valuation of said leaseholds was not. Therefore, Wine offers no help on the issues raised herein.

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Kansas courts give some leeway in situations where the approach is correct, but mathematical precision is lacking. Indeed, they require that in order to show that substantial evidence to support a BOTA action is lacking, “the decision must be so wide of the mark as to be outside the realm of fair debate.” In re Protests of City of Hutchinson/Dillon Stores, 42 Kan. App. 2d 881, 889, 221 P.3d 598 (2009). Johnson capitalized the income stream represented by the rents, assigning expenses as a percentage of Potential Gross Income. At Council Gove Lake, where the landowner has leased out most of its bundle of sticks (property rights) on a semipermanent basis, the income approach sufficiently captures the value of land. BOTA found that the capitalized income approach was authorized under the USPAP and proper and therefore used that valuation by Johnson. The County relies on In re Equalization Appeal of Prieb Props., L.L.C., 47 Kan. App. 2d 122, 275 P.3d 56 (2012); Walgreen Co. v. City of Madison, 311 Wis. 2d 158, 752 N.W.2d 687 (2008); Privitera, 47 Kan. App. 2d 1074. Kansas law does not support reliance on the leased fee interest to assign a valuation to a property, absent consideration of market rent and other factors and the application to the property of three accepted approaches to establish value (sales, cost and income). This interpretation ignores the necessity of taking into account the effect on the productivity of the property of the way the Council has shaped the rental estate. This assertion does not hold true at Council Grove Lake because at Council Grove, a local government body mandated the rent level, creating its own separate market for the up to 350 tenants and making it impractical to use any approach except income, because the information needed to undertake the other approaches is not readily available. That reality dictates how the K.S.A. 79-503a should be applied. The Council Grove situation is differentiated from Prieb and Privitera because of the restrictions that a local government body placed on the rental market at Council Grove Lake.

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DID THE CITY ALLOW THE APPEAL OF THE 2013 APPRAISAL? The City Council authorized the Clerk (Matthews) to sign the Declaration of Representative for 2012. This declaration is necessary when someone other than the landowner makes an appeal against a valuation to BOTA. The grant signed in 2012 stated that they would consider extending the grant for subsequent years. The City Clerk signed the 2013 and 2014 declarations. He did this after receiving a phone call from Morris County Courthouse saying that the day was the deadline to “sign this declaration again…” The City Clerk signed the Declaration for 2013 after consulting with the City Attorney who said “we should probably go ahead and do that again.” Matthews testified that he later realized that he thought he was signing something else (authorization to continue the 2012 case). Now the County argues that because there was not a proper authorization, the appeal for 2013 is invalid and should be dismissed. This argument is at best disingenuous. When the Clerk signed the 2013 and 2014 declaration, the taxpayers had no reason to suppose that this did not represent proper authority for their appeal. The Clerk had the implied and apparent authority to sign the document. Golden Rule Ins. Co. v. Tomlinson, 300 KAN. 944, 956, 335 Pl.3d 1178 (2014). Further, under K.S.A. 74-2437(c) the BOTA may not determine who may sign the appeals form nor determine who may represent taxpayers in any matter before the Board. So the question of whether or not the document was properly signed is moot. DID BOTA ERRONEOUSLY INTERPRET OR APPLY THE LAW? The characteristics of the Council Grove Lake property as an income generating property have been defined by the leases set by the Council. Where local governing bodies create

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restrictions on how the property is to be used and sets the level of the rent, the statute requires that this be taken into account in establishing a fair market value. K.S.A. 79-503a. BOTA’S resultant appraisal did not violate the law nor was it otherwise unreasonable or arbitrary. The method of valuation using part of the appraisal of Mr. Johnson and the approach used conformed to law and the USPAP. For the reasons as stated herein, the Decision of BOTA is AFFIRMED. IT IS BY THE COURT SO ORDERED. Chambers: July 22, 2016.

___________________________ STEVEN HORNBAKER District Judge CERTIFICATE OF MAILING I, Lynn Hartung, Deputy Clerk of the District Court of Geary County, Kansas, do hereby certify that a copy of the court’s Memorandum Decision was delivered to the following persons on the _____ day of _____________, 2016, to-wit: --Deliver by First Class Mail— Linda Terrill, KS Supreme Ct Property Tax Law Group, LLC 7285 W. 132nd St., Suite #160 Overland Park, KS 66213

--Deliver by First Class Mail— Michael A. Montoya, PA 256 South Santa Fe P.O. Box 1220 Salina, KS 67402-1220

Original filed: Clerk of the Morris County District Court Kathleen Rohloff 501 W. Main Street, Ste 12 Council Grove, KS 66846

________________________________ Lynn Hartung, Deputy Clerk Geary County, Kansas

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