Here are the arguments both sides made in JoCo ‘dark store’ theory case at KS Supreme Court

At the heart of the case is the appraised value of 11 Walmart properties in Johnson County in the years 2016 and 2017. File photo.

Kansas Supreme Court justices began the process of disentangling legal arguments Thursday on the “dark store” theory of appraisals – a complex issue that could have big ramifications for county, city and school board budgets down the road.

The background: The case is an appeal by Johnson County of a lower court decision validating the state tax appeal board’s ruling that the county had overvalued 11 Walmart and Sam’s Club properties in 2016 and 2017, resulting in too high a tax bill.

The stakes: If the court rejects the county’s plea, the result could be refunds of millions of dollars and diminished property tax revenue coming in from them in the future.

Bigger picture: Big box retailers in different parts of the country have challenged appraisal methods in a trend that started before the pandemic.

In simple terms, the retailers’ argue the fair market value of their properties should not include consideration of the value of the lease and should focus more on the bricks and mortar.

Some critics have dubbed this the “dark store” theory because, in essence, retailers are arguing their properties should be appraised as if the buildings are empty.

The discussion in court: Justices sought Thursday to pry apart arguments that have up until now been heavily hypothetical on both sides.

Much of the discussion boiled down to what Kansas law says about how commercial real estate is valued, and whether the state Board of Tax Appeals misinterpreted and misapplied the law, as the county contends.

Retailers’ argument: Attorney Barbara Smith, representing the commercial taxpayers, said state law is readily understandable.

“Affirming the decision below means adopting the law as the Kansas Legislature has written it, as Kansas courts have interpreted it and as Kansas taxpayers have understood it for years,” she said. “Reversing and adopting the county’s theory would upend those settled expectations and do violence to the Kansas statutes.”

She maintained the law means fair value is based on a hypothetical sale with “fee simple” and not “leased fee” interest in the land.

The county’s argument: Attorney Ryan Carpenter, representing the county, said the state Board of Tax Appeals overstepped its jurisdiction by using an earlier court case to rule out a valid method of appraisal the county was using.

That created an “implied mandate” that is a misinterpretation of what Kansas law says, he said.

The statute doesn’t say courts should favor any particular method among those generally accepted, he said, adding multi-tenant commercial property is valued by stabilized occupancy and market rent.

Using the method big box retailers prefer would result in “liquidation value,” Carpenter said.

County challenged: Justice Melissa Taylor Standridge asked why lease value played a role when all but one of the Walmart properties was owner occupied.

Did that amount to a “pretend lease”?” she wondered.

Carpenter, the attorney for the county, said restrictions on competitors complicate the process.

“When you look at a sales comparison approach you have to look at everything,” he said. “When these big boxes sell, particularly Walmart, the deed restrictions are such that oftentimes the highest and best user becomes a church.”

The retailers often move a short distance and prohibit a competitor in the old building, meaning the church use is not a fair market comparison of what the store would be worth, he said.

Retailers also questioned: The retailers’ views of market reality were also challenged.

Justice Eric Rosen asked, “It seems to me that your position requires that we just hypothesize that the property is available and ready for lease as opposed to the reality that it is not. How is that a common sense approach?”

Smith, representing the retailers, responded that appraisers also have to take into account the age, location and position. The county failed to prove that build-to-suit lease values which had never been exposed to the market, were valued correctly, she said.

Other points: Carpenter said later that the county’s experts used generally accepted methods to arrive at the property values and did not consider other business statistics like gross sales.

Justices questioned lawyers on whether the case is really about what appraisal experts the Board of Tax Appeals is allowed to consider.

Justice Dan Biles noted that the county appraiser testified that the methods complied with generally accepted practices. But the tax appeal board mandated that the county’s method could not be considered, he said.

Standridge wondered if experts’ appraisal methods have to have some foundation to be generally accepted in the industry. “I mean why are we evaluating that?”

The case was heard by the entire court over Zoom. The court took it under advisement.

Roxie Hammill is a freelance journalist who reports frequently for the Post and other Kansas City area publications. You can reach her at roxieham@gmail.com