Johnson County loses ‘dark store theory’ appeal involving Bass Pro’s property tax bill

dark story theory

The landlords of Bass Pro Shops in Olathe argued the county overvalued the property in 2016 and 2017 by millions of dollars, leading to a doubling in the company's property tax bills for those years. The Kansas Court of Appeals recently sided with the company. Image courtesy Johnson County Appraiser's Office.

Johnson County has suffered one more loss in its battle with big box retailers over property valuations.

The Kansas Court of Appeals has sided with the landlords of Bass Pro Shops in Olathe, who contended the county overestimated its property value by millions of dollars in 2016 and 2017, resulting in a sudden jump in property tax the company owed.

In an opinion filed Friday, April 2, the court upheld a ruling by the Kansas Board of Tax Appeals that substantially reduced the property taxes the Bass Pro landlords owed for those two years.

The panel said Johnson County failed to make a compelling case for its argument for a higher valuation on the property.

Property taxes doubled

This latest decision is one of several cases the county has fought in recent years regarding big retailers’ property valuations.

They relate to how big box stores should be appraised for property tax purposes. Local governments have worried that the precedent set by such cases could catastrophically affect tax revenues for years to come.

So far the Board of Tax Appeals, known as BOTA, has consistently ruled on the side of retailers like Target, Walmart, Walgreens and CVS. Bass Pro is one of those that has been appealed to the next highest level.

The Bass Pro in Olathe was built in 2006, and the retailer has a build-to-suit lease with an option to buy the property for $10 when it ends in 2025. The property itself is owned by Arciterra, a real estate company based in Phoenix that manages big box stores and commercial properties in some two dozen states.

In 2016 and 2017, the county valued the property at around $17.5 million, according to the Court of Appeals’ opinion. That doubled the value and caused property taxes Arciterra owed to jump from $295,800 the previous year to $553,115 in 2016.

Difference in appraisals

The subsequent appeal hearing at BOTA centered around two appraisal methods, which yielded greatly different results.

At the hearing, the county recommended valuation at about $14.5 million. But the company offered two other possibilities – about $7.5 million or around $9 million.

BOTA opted for one of the company’s lower valuations.

Kansas law prescribes “fair market value” as the basis for property taxes, but when it comes to big box stores, there is vast disagreement on how to get to that number.

In recent years,  there has been a national trend of big box retailers contesting their valuations, arguing that local taxing bodies should not figure in the value of the business itself.

Essentially, the argument goes, these stores should be valued as if they’re empty.

Hence what’s become known as the “dark store” theory, a term used mainly by critics who argue that determining property values in this way doesn’t represent reality.

To figure out what a reasonable buyer might expect to pay for the Bass Pro property, Arciterra’s expert set up a hypothetical situation in which the property would have a short term lease with a moderate credit tenant that wasn’t Bass Pro.

That option showed that Bass Pro’s occupancy did increase the value of the property, as compared to a vacant store, and reflected the real possibility that the sports outfitter would exercise its option to buy when the lease is up, according to the court document.

The method also used nine other similar leases as comparisons.

The court and tax appeal board liked the company’s “hypothetical lease” method for determining the property’s value because it did not base the value on the build-to-suit lease Bass Pro is currently under.

Those types of leases often are more expensive because the initial tenants are willing to pay more for a property built to their intended use, the court said.

The county’s argument and response

The county argued that those types of leases could be used if adjustments were made to show the best use of the property “as improved,” rather than “as vacant.”

However, the appeals court jurists were unconvinced that the county’s appraisal method reflected the most accurate market value.

The opinion noted a difference between hypothetically vacant and actually vacant values, saying the lease could be considered as part of the value.

“We have never held that an appraisal of real property must exclude the value that a lease brings to a landowner,” the panel wrote.

Nevertheless, Johnson County failed to convince the Court of Appeals that the tax appeal board erred in the Bass Pro case.

“There may be legitimate questions about some of the assumptions that underlie the final appraised value, but they are not briefed here,” the court’s opinion said.

In a brief statement emailed to the Shawnee Mission Post, a county spokesperson said, “Johnson County Government is disappointed with the court’s decision and is reviewing its impact. We will have more information soon.”

County and city officials, as well as those in other local taxing jurisdictions, including the Shawnee Mission School District, have raised the alarm about the wave of “dark store theory” cases and their potential threat to local tax revenues.

Many local officials have been preparing for the possibility of millions of dollars in commercial property tax revenue disappearing and having to pay back money collected in recent years if the county keeps losing such “dark store” appeals.

A 2018 analysis by the County Appraiser’s Office concluded that the county would lose more than $130 million in commercial property tax revenue if Kansas were to adopt the “dark store” valuation method.

County Commission Chairman Ed Eilert, who has been highly critical of big box retailers wanting their property valued as if their stores are empty, would only say after this latest ruling that county officials are still in the process of reviewing the decision.