In re Tax Appeal of Dillon Stores

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No. 100,499
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IN THE COURT OF APPEALS OF THE STATE OF KANSAS

IN THE MATTER OF THE PROTESTS OF
CITY OF HUTCHINSON/DILLON STORES
FOR TAXES PAID FOR 2001 AND 2002 IN
RENO COUNTY, KANSAS,

and

IN THE MATTER OF THE PROTESTS OF
DILLON REAL ESTATE CO., INC. FOR
TAXES PAID FOR 2001 AND 2002 IN
RENO COUNTY, KANSAS.


SYLLABUS BY THE COURT

1.
Judicial review of orders of Board of Tax Appeals (BOTA) is governed by K.S.A.
77-621. For purposes of this appeal, application of this statute requires the 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.
77-621(c)(8).

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2.
For purposes of K.S.A. 77-621(c)(7), "in light of the record as a whole" means that
the adequacy of the evidence in the record before the court to support a particular finding
of fact shall be judged in light of all the relevant evidence in the record cited by any party
that detracts from such finding as well as all of the relevant evidence in the record,
compiled pursuant to K.S.A. 77-620, and amendments thereto, cited by any party that
supports such finding, including any determinations of veracity by the presiding officer
who personally observed the demeanor of the witness and the agency's explanation of
why the relevant evidence in the record supports its material findings of fact.

3.
When the district court has reviewed an agency decision prior to an appellate
court's review, the appellate court focuses on the agency action and applies the same
standards of judicial review.

4.
The decision of any administrative body should contain a finding of the pertinent
facts on which it is based in order for the reviewing court to determine whether the
decision reached is reasonable and lawful.

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5.
Although a degree of clarity in agency factfinding and rationale is critical, agency
determinations which are conceptually sound but lack some mathematical precision may
be affirmed. To find a lack of substantial evidence to support the BOTA action, the
decision must be so wide of the mark as to be outside the realm of fair debate.

6.
K.S.A. 79-505 and K.S.A. 79-506 require that appraisal practice in Kansas be
governed by Uniform Standards of Professional Appraisal Practice (USPAP). These
standards are embodied in the statutory scheme of valuation, and a failure by BOTA to
adhere to them may constitute a deviation from a prescribed procedure or an error of law.

7.
Pursuant to USPAP Standard Rule 1-4(e) (2001), an appraiser must analyze the
effect on value, if any, of the assemblage of the various estates or component parts of a
property and refrain from valuing the whole solely by adding together the individual
values of the various estates or component parts. Although the value of the whole may
be equal to the sum of the separate estates or parts, it also may be greater or less than the
sum of such estates or parts. Therefore, the value of the whole must be tested by
reference to appropriate data and supported by an appropriate analysis of such data.
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8.
USPAP indicates that Standard Rule 1-4(e) is both necessary and applicable and is
not subject to departure under these circumstances.

9.
USPAP's Statement on Appraisal Standards No. 10 (E)(3) clearly demonstrates
that highest and best use of a property intended to be divided or subject to division may
not be achieved by the summation approach. Although USPAP Standard Rule 1-3
(2001) does require an opinion of highest and best use, finding the highest and best use
does not excuse compliance with Standard Rule 1-4(e).

Appeal from Reno District Court; RICHARD J. ROME, judge. Opinion filed
August 21, 2009. Reversed.

Robert O'Connor and Jarrod C. Kieffer, of Stinson Morrison Hecker L.L.P., of
Wichita, for appellants.

S. Lucky DeFries and Jeffrey A. Wietharn, of Coffman, DeFries and Nothern, A
Professional Association of Topeka, for appellee.

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Before RULON, C.J., GREENE and LEBEN, JJ.

GREENE, J.: Dillon Real Estate Company, Inc. and City of Hutchinson/Dillon
Stores (Dillon) appeal the district court's order setting aside the Kansas Board of Tax
Appeals' (BOTA) property tax valuation of $5,500,000 for a Dillon Distribution Center
(DDC) in Reno County for tax years 2001 and 2002, and adopting in its place a valuation
of $7,900,000. Concluding BOTA's valuation was adequately supported, we reverse the
district court and affirm BOTA's valuation order.

Factual and Procedural Background

The subject property, or DDC, is held under a single ownership and used for a
common purpose, which is as a storage and distribution center to support Dillon's network
of retail grocery stores. The property is located on approximately 84 acres, consists of 10
separate but contiguous buildings that collectively total more than 700,000 square feet,
and includes: (1) the perishables warehouse, (2) the main building, (3) the bakery, (4) the
dispatch office, (5) the salvage building, (6) the truck wash, (7) the truck garage, (8) the
maintenance building, (9) the quonset building, and (10) the dairy.

The Reno County Appraiser valued the DDC for tax year 2001 based on an
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appraisal from Wayne Kubert that concluded a value of $7,900,000. Dillon protested
this valuation, suggesting a value instead in the range of $4,400,000 to $4,900,000,
although the formal protest forms appear to be incomplete in this regard. No relief was
granted at the local level, and Dillon perfected a protest to BOTA. Before a hearing
could be conducted, the parties repeated their valuation positions and protests for the
2002 tax year. Thereafter, and for purposes of this appeal, the parties have agreed that
the valuation determined herein shall be applicable to both tax years 2001 and 2002.

In the hearing before BOTA, Dillon contended that the County's valuations did not
reflect the fair market value of the subject property for each of the years at issue, as
required by K.S.A. 79-501 et seq., and specifically violated appraisal standards
prohibiting a summation approach to value. The County argued that its valuation
represented the fair market value, and specifically, that the existence of valuable
refrigerated space had not been adequately considered by Dillon's appraiser. Dillon's
expert appraisal witnesses, Grant Gardner and Daniel Craig, valued the DDC at
$4,400,000 and $4,910,000 respectively. The County's appraisal expert, Wayne Kubert,
valued the DDC at $7,900,000.

After hearing the evidence, BOTA concluded the Kubert valuation violated a
uniform appraisal practice standard by valuing buildings separately and summing their
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values. BOTA found Dillon's appraiser Craig's valuation to be reasonable but found that
he did not adequately account for the more valuable freezer/cooler space. Due to this
failing, BOTA determined the valuation of the property to be $5,500,000, adding
$590,000 to Craig's valuation conclusion. On reconsideration, BOTA explained that,
"[b]ased upon the comparable properties with freezer/cooler space," this adjustment
"more accurately estimates the additional value contributed by the freezer/cooler space."

The County appealed BOTA's value determination to the district court, arguing
that BOTA failed to adequately explain its decision and that BOTA's valuation was not
adequately supported by the record. The district court set aside BOTA's order, adopted
the Kubert appraisal, and valued the property at $7,900,000. Dillon timely appeals.

Standards of Review

Judicial review of orders of BOTA is governed by K.S.A. 77-621. For purposes
of this appeal, application of this statute requires the 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
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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. 77-621(c)(8).

The legislature recently clarified our standard of review of an agency factfinding
by the enactment of L. 2009, ch. 109, sec. 28, with the following language:

"For purposes of this section, 'in light of the record as a whole'
means that the adequacy of the evidence in the record before the court to
support a particular finding of fact shall be judged in light of all the relevant
evidence in the record cited by any party that detracts from such finding as
well as all of the relevant evidence in the record, compiled pursuant to
K.S.A. 77-620, and amendments thereto, cited by any party that supports
such finding, including any determinations of veracity by the presiding
officer who personally observed the demeanor of the witness and the
agency's explanation of why the relevant evidence in the record supports its
material findings of fact. In reviewing the evidence in light of the record
as a whole, the court shall not reweigh the evidence or engage in de novo
review."

This clarification became effective on July 1, 2009, and we apply it here.

The County generally bears the burden of proof at BOTA in matters of residential
and commercial property valuations.
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"With regard to any matter properly submitted to the board relating to the
determination of valuation of residential property or real property used for
commercial and industrial purposes for taxation purposes, it shall be the
duty of the county appraiser to initiate the production of evidence to
demonstrate, by a preponderance of the evidence, the validity and
correctness of such determination except that no such duty shall accrue to
the county or district appraiser with regard to leased commercial and
industrial property unless the property owner has furnished to the county or
district appraiser a complete income and expense statement for the property
for the three years next preceding the year of appeal. No presumption shall
exist in favor of the county appraiser with respect to the validity and
correctness of such determination." K.S.A. 2003 Supp. 79-2005(i).

Moreover, on appeal of BOTA's decision, the party complaining bears the burden
of demonstrating that the agency erred. K.S.A. 77-621(a)(1). When the district court has
reviewed an agency decision prior to this court's review, we focus on the agency action
and apply the same standards of judicial review. Connelly v. Kansas Highway Patrol,
271 Kan. 944, 964, 26 P.3d 1246 (2001), cert. denied 534 U.S. 1081 (2002). This court,
however, has exclusive jurisdiction of all BOTA (now "COTA," the Court of Tax
Appeals) orders issued after June 30, 2008. K.S.A. 2008 Supp. 74-2426(c)(2).

Were BOTA's Findings of Fact Supported
by Evidence that Is Substantial
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When Considered in Light of the Record as a Whole?

Dillon argues on appeal that BOTA's valuation was adequately supported and
should not have been set aside by the district court. Dillon argues BOTA's adjustment
and final value was "well within the range and limits of the evidence," as the valuations
offered by all the parties' experts were between $4.4 million and $7.9 million.

In contrast, the County argues that BOTA's valuation could not be affirmed by the
district court because its $590,000 adjustment was not supported or explained and that
BOTA therefore adjusted Craig's appraisal by an arbitrary amount. The County argues
BOTA erred in relying on Craig's appraisal because he failed to recognize (1) the value
and importance of the freezer space, and (2) the divisible nature of the property. For
these reasons, the County argues that the district court was correct to set aside BOTA's
valuation.

Was BOTA's adjustment to value in order to adequately account for freezer space
adequately supported or was the adjustment arbitrary?

After finding Craig's appraisal to be reasonable, BOTA found that Craig did not
adequately account for the value of the freezer/cooler space. In order to adjust for this
deficiency, BOTA added $590,000 to Craig's valuation to arrive at a value of $5,500,000,
citing "comparable properties with freezer/cooler space."
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In rejecting BOTA's $5,500,000 valuation of the subject property and assigning a
value of $7,900,000, the district court found in part that (1) BOTA's order was not
supported by fact or law, and (2) BOTA's conclusion regarding value was unreasonable,
capricious, and arbitrary. See K.S.A. 77-621(c)(7) and (8).

The testimony from the appraisers presented differing views on the value
contribution of the freezer/cooler space to the subject property. Kubert credited the
freezer/cooler building as the primary value on campus. Kubert testified that additions to
the freezer/cooler building were not burdened by the obsolescence associated with the
other buildings. In contrast, Gardner and Craig concluded the value of freezer/cooler
space was not significant. Craig concluded that it did not significantly contribute to the
value of the subject property. Craig testified that the broker of one of the comparables
with freezer/cooler space advised him that only one of the prospective buyers had been
interested in the freezer/cooler space. Gardner testified that to the extent that the
perishables building was 3/7 of the property, the freezer/cooler space was a significant
attribute of the property, but then credited the value to the equipment and not the real
estate.

In finding that the freezer/cooler space was the most valuable portion of the
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property, BOTA essentially rejected testimony from Craig and Gardner regarding the
value of the freezer/cooler space. On reconsideration, BOTA stated:

"The Board finds that while Mr. Craig's appraisal approach was
reasonable, the appraisal did not fully account for the more valuable
freezer/cooler space. Based upon the comparable properties with
freezer/cooler space, the Board finds that its adjustment of $590,000 more
accurately estimates the additional value contributed by the freezer/cooler
space."

Dillon attempts to support BOTA's valuation adjustment with two primary
arguments. First Dillon argues that the "slight increase" added to Craig's valuation was
consistent with Craig's testimony that the freezer/cooler space did not have any significant
value and was consistent with rejecting Kubert's estimate that the freezer/cooler space
contributed one-half of the total value. Second, Dillon argues that BOTA's final
valuation was 30% of Kubert's valuation, a figure which accounts for fees associated with
splitting the property. Craig estimated the costs for splitting up the property would
include 15% holding costs, 3-6% realtor fees, and 10-15% developer fees. Dillon argues
that reducing Kubert's $7.9 million by 30% to adjust for these costs yields a valuation of
approximately $5.53 million, which is within $300,000 of BOTA's ultimate valuation of
$5.5 million. We view both of these arguments as post-hoc rationalization, neither of
which were articulated by BOTA.
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Unfortunately, neither of BOTA's Orders are a model for clarity in explaining the
basis for the $590,000 valuation adjustment. Examining BOTA's Order carefully,
however, the conceptual basis for the valuation adjustment is clearly stated: Craig's
appraisal was a reasonable approach to value but it failed to adequately value the
freezer/cooler space. This shortcoming caused BOTA to turn to Craig's comparable
properties and make its own adjustment based on those comparables. Those
comparables reflect a variance in price per square foot from $6.78 to $11.69 (unadjusted),
and from $6.71 to $7.91 (adjusted). BOTA's adjustment brought the valuation per square
foot of the DDC to $7.83, well within the variance shown by the evidence. Moreover, we
note that BOTA's value per square foot slightly exceeds (by 50 cents per square foot) the
average of Craig's adjusted comparables for freezer properties, and it represents the
precise median value of all unadjusted comparables studied by Craig.

The decision of any administrative body should contain a finding of the pertinent
facts on which it is based in order for the reviewing court to determine whether the
decision reached is reasonable and lawful. Neeley v. Board of Trustees, Policemen's &
Firemen's Retirement System, 205 Kan. 780, Syl. & 5, 473 P.2d 72 (1970). As expressed
in appellate decisions,

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"[i]t is a general rule of administrative law that an agency must make
findings that support its decision, and those findings must be supported by
substantial evidence. [Citation omitted.] The necessity for findings is to
'facilitate judicial review, avoid judicial usurpation of administrative
functions, assure more careful administrative consideration to protect
against careless and arbitrary action, assist the parties in planning their
cases for rehearing and judicial review, and keep such agencies within their
jurisdiction as prescribed by the Legislature.' [Citations omitted.]" In re Tax
Appeal of Bernie's Excavating Co., 13 Kan. App. 2d 476, 478, 772 P.2d 822
(1989).

"Lack of expressed findings of fact may not be supplied by implication,
and, where they are required, courts will not search the record in order to
ascertain whether there is evidence from which the ultimate findings could
be made. . . .

"[A]n agency is not required to furnish detailed reasons for its
decision; however, the decision must be sufficiently clear so that a court is
not required to speculate as to its basis." Water District No. 1 v. Kansas
Water Authority, 19 Kan. App. 2d 236, 242, 866 P.2d 1076 (1994).

Despite these authorities insisting on a degree of clarity in agency factfinding and
rationale, our courts have consistently affirmed agency determinations which are
conceptually sound but lack some mathematical precision. Our appellate courts have
consistently stated that to find a lack of substantial evidence to support the BOTA action,
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the decision must be so wide of the mark as to be outside the realm of fair debate. In re
Tax Appeal of Horizon Tele-Communications, Inc., 241 Kan. 193, 203, 734 P.2d 1168
(1987); In re Tax Refund Application of Affiliated Property Services, Inc., 19 Kan. App.
2d 247, 250, 870 P.2d 1343 (1993). We have also adopted this standard for the review of
orders of the Kansas Corporation Commission. See, e.g., Mobil Exploration &
Producing U.S. Inc. v. Kansas Corporation Comm'n, 258 Kan. 796, Syl. & 6, 908 P.2d
1276 (1995); Farmland Industries, Inc. v. Kansas Corp. Comm'n, 25 Kan. App. 2d 849,
851, 971 P.2d 1213 (1999).

Here, we believe BOTA could have been more precise in stating its basis for the
adjustment to value. Nevertheless, we conclude that the adjustment is not so wide of the
mark as to be outside the realm of fair debate. The conceptual basis for the adjustment,
Craig's comparable properties study, provides something of substance and relevant
consequence which furnishes a substantial basis of fact from which the issue tendered can
reasonably be resolved. Citizens' Utility Ratepayer Bd. v. Kansas Corporation Comm'n,
28 Kan. App. 2d 313, 316, 16 P.3d 319 (2000), rev. denied 271 Kan. 1035 (2001). We
must conclude that BOTA's adjustment to value was adequately supported by the
evidence and not otherwise arbitrary, capricious, or unreasonable.


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Was the basis for BOTA's value otherwise flawed?

Although BOTA's adjustment to the Craig valuation was the principal focus of the
County's criticism and the district court's finding of arbitrariness, the County argues on
appeal that Craig's work was otherwise flawed. First, the County argues that Craig failed
to recognize "the value and importance of the freezer cooler space." We disagree; BOTA
recognized and compensated for this "flaw" by an adjustment to value. Second, the
County argues that Craig failed to recognize "the divisible nature of the property." This
criticism merits further discussion.

Although the County argues that Kubert's recognition of the "divisible nature of
the property" was critical to value, BOTA concluded that Kubert's appraisal was a
summation approach expressly prohibited by Uniform Standards of Professional
Appraisal Practice (USPAP). K.S.A. 79-505 and K.S.A. 79-506 require that appraisal
practice be governed by USPAP. Board of Saline County Comm'rs v. Jensen, 32 Kan.
App. 2d 730, Syl. & 4, 88 P.3d 242, rev. denied 278 Kan. 843 (2004). These standards
are embodied in the statutory scheme of valuation, and a failure by BOTA to adhere to
them may constitute a deviation from a prescribed procedure or an error of law. 32 Kan.
App. 2d at 735.

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USPAP Standard Rule 1-4(e) (2001) provides the following:

"An appraiser must analyze the effect on value, if any, of the assemblage of
the various estates or component parts of a property and refrain from
valuing the whole solely by adding together the individual values of the
various estates or component parts." (Emphasis added.)

The Comment to Rule 1-4(e) explains the rationale for this rule:

"Although the value of the whole may be equal to the sum of the
separate estates or parts, it also may be greater or less than the sum of such
estates or parts. Therefore, the value of the whole must be tested by
reference to appropriate data and supported by an appropriate analysis of
such data."

This Comment seems to indicate that a summation approach may be acceptable as long as
the value of the whole is tested and supported. According to the rule, however, an
appraiser must analyze or test the effect on value of the assemblage of the various estates
or component parts.

BOTA restated its rejection of Kubert's approach in the order denying
reconsideration, together with a finding that Kubert failed to adequately test his
summation approach:
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"The Board is not persuaded that Mr. Kubert adequately accounted for the
effect of valuing each segment separately and then summing the indicated
values or tested the reasonableness of the summed value indication, which
are required by USPAP Standard Rule 1-4(e)."

There is no question that Kubert violated USPAP Rule 1-4(e). In executing each
of his approaches to value, Kubert segmented the property, valued each segment
individually, and then added the values to get his final valuation. USPAP indicates that
Rule 1-4(e) is both necessary and applicable and is not subject to departure under these
circumstances. See USPAP, Statement on Appraisal Standards No. 7 (SMT-7), pp.
87-88 (2001). Moreover, when asked about any test of his summation values as required
by USPAP, Kubert was unable to identify any reference to such testing in his appraisal.

On appeal, the County abandons the argument that Kubert was justified in
departing from the USPAP Rule 1-4(e), and instead argues that Kubert complied with the
USPAP by assessing for the highest and best use, which required an appraisal of the
property in separate parcels. Indeed, Kubert insisted that in order to assess the highest
and best use of the subject property, the property had to be valued by valuing individual
buildings. We disagree. USPAP's Statement on Appraisal Standards No. 10 (E)(3)
clearly demonstrates that highest and best use of a property intended to be divided or
subject to division may not be achieved by the summation approach. The example given
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in USPAP is a tract development intended for eventual division and sale in individual
units; despite the highest and best use for the tract, valuation may not be achieved by
summation of the individual units. Although USPAP Standard Rule 1-3 (2001) does
require an opinion of highest and best use, finding the highest and best use does not
excuse compliance with Rule 1-4(e). We agree with BOTA that Kubert's appraisal
violated USPAP, that USPAP departure was prohibited, and that no justification for the
violation should be permitted by reason of the highest and best use conclusion.

In summary, applying our standard of review to BOTA's order, we are unable to
conclude that BOTA erred in its valuation of the DDC. Kubert's violation of USPAP so
contaminated his appraisal that it is of no utility in valuing this property, and BOTA
correctly so concluded. The district court's conclusion to the contrary was erroneous and
must be reversed. BOTA's value should have been affirmed by the district court.

Other issues raised by Dillon are rendered moot by our holdings.

The district court's judgment is reversed.

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REPORTER'S NOTE: Previously filed as an unpublished opinion, the Supreme Court
granted a motion to publish pursuant to Rule 7.04 (2009 Kan. Ct. R. Annot. 54). The
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published version was filed with the Clerk of the Appellate Courts on November 30,
2009.