1 IN THE SUPREME COURT OF THE STATE OF KANSAS No

IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 122,162

In the Matter of the Equalization Appeals of WALMART STORES, INC.; WALMART REAL

ESTATE BUSINESS TRUST; SAM'S REAL ESTATE BUSINESS TRUST; and

TMM ROELAND PARK CENTER, LLC, for the Year 2016 in Johnson County; and

WALMART REAL ESTATE BUSINESS TRUST and SAM'S REAL ESTATE BUSINESS TRUST

for the Year 2017 in Johnson County.

SYLLABUS BY THE COURT

The Board of Tax Appeals is the highest administrative tribunal established by law

to determine controversies relating to assessment of property for ad valorem tax

purposes.

A property's fair market value determination is generally a question of fact with

the fact-finder free to decide whether one appraisal or methodology is more credible than

another.

The rule of law established by In re Prieb Properties, LLC, 47 Kan. App. 2d 122,

135-36, 275 P.3d 56 (2012), that holds rental rates from commercial build-to-suit leases

do not reflect market conditions and may not be relied on by appraisers without

adjustments is overruled. Prieb's rationale invades the Board of Tax Appeals'

longstanding province as the fact-finder in the statutory process for appraising real

property at its fair market value.

Review of the judgment of the Court of Appeals in 61 Kan. App. 2d 154, 500 P.3d 553 (2021).

Appeal from the Board of Tax Appeals. Opinion filed July 1, 2022. Judgment of the Court of Appeals

affirming the Board of Tax Appeals is reversed. Decision of the Board of Tax Appeals is reversed, and

the case is remanded with directions.

Ryan L. Carpenter, assistant county counselor, argued the cause and was on the briefs for

appellant Board of County Commissioners of Johnson County.

Barbara A. Smith, of Bryan Cave Leighton Paisner LLP, of St. Louis, Missouri, argued the cause,

and Samuel E. Hofmeier, of the same firm, of Kansas City, Missouri, and Linda Terrill, of Property Tax

Law Group, LLC, of Overland Park, were with her on the briefs for appellees Walmart Stores, Inc., et al.

David R. Cooper and Andrew D. Holder, of Fisher, Patterson, Sayler & Smith, LLP, of Topeka,

were on the brief for amicus curiae Kansas Association of Counties.

Johnathan Goodyear, general counsel, and Gerald N. Capps, of Wichita, were on the brief for

amicus curiae League of Kansas Municipalities.

R. Scott Beeler and Carrie E. Josserand, of Lathrop GPM LLP, of Overland Park, were on the

brief for amicus curiae The Kansas Chamber of Commerce.

Jarrod C. Kieffer, of Stinson LLP, of Wichita, was on the brief for amicus curiae Institute for

Professionals in Taxation.

Stephen R. McAllister and Betsey L. Lasister, of Dentons US LLP, of Kansas City, Missouri, were

on the brief for amicus curiae Chamber of Commerce of the United States of America.

S. Lucky DeFries, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Topeka, was on the

brief for amicus curiae Council on State Taxation.

The opinion of the court was delivered by

BILES, J.: This is an ad valorem property tax appeal for the 2016 and 2017 tax

years involving 11 Walmart and Sam's Club "big box" stores in Johnson County that saw

their valuations nearly double from 2015. The Board of Tax Appeals concluded the

County's valuations were too high because they improperly relied on unadjusted sales and

rental income data from other properties subject to build-to-suit leases. The County

appealed, but a divided Court of Appeals panel agreed with BOTA. In re Equalization

Appeals of Walmart Stores, Inc., 61 Kan. App. 2d 154, 500 P.3d 553 (2021). On review,

we reverse the panel and return the case to BOTA to reconsider the County's evidence.

This highly contested issue boils down to deciding whether appraisal opinions

founded on unadjusted build-to-suit lease data are inadmissible as a matter of law to

support valuations used in the process of ad valorem taxation. The alternative is to treat

these opinions like other evidence. Here, BOTA dutifully followed a 2012 Court of

Appeals decision that crafted this choice as a rule of law to exclude opinions based on

this unadjusted data. See In re Prieb Properties, LLC, 47 Kan. App. 2d 122, 135-36, 275

P.3d 56 (2012) (holding rental rates from commercial build-to-suit leases "are not

reflective of market conditions and may not be utilized for purposes of the income

approach or the sales comparison approaches to value for ad valorem tax purposes in

Kansas without a disentanglement by adjustments"). Other Court of Appeals panels have

taken a similar approach since Prieb, although at times they inject some ambiguity into

what evidence is admissible. See, e.g., In re Tax Appeal of Arciterra BP, No. 121,438,

2021 WL 1228104, at *10 (2021 Kan. App.) (unpublished opinion) ("If, for example, an

appraiser can show that a build-to-suit lease was motivated by market terms and can

isolate above- or below-market rents to make the necessary adjustments, BOTA could

find that a market rent determination is properly supported and based on appropriate,

comparable leases."). This court has never considered the question.

We hold Prieb's rationale invades BOTA's longstanding province as the fact-

finder in the statutory process for appraising real property at its fair market value for ad

valorem tax purposes. See, e.g., Northern Natural Gas Co. v. Dwyer, 208 Kan. 337, Syl.

¶ 2, 492 P.2d 337 (1971) ("The State Board of Tax Appeals is the highest administrative

tribunal established by law to determine controversies relating to assessments of property

for ad valorem tax purposes."). A property's fair market value is generally a question of

fact with the fact-finder free to decide whether one appraisal or methodology is more

credible than another. City of Mission Hills v. Sexton, 284 Kan. 414, Syl. ¶ 8, 160 P.3d

812 (2007). Prieb's rule of law effectively prohibits BOTA from considering expert

opinions based on unadjusted data, even when the experts argue their methodologies

arrive at a fair market value appraisal in conformity with generally accepted procedures

and standards as required by state law. See K.S.A. 79-503a. It does this by declaring

"build-to-suit lease rental rates are not probative of market conditions." Prieb, 47 Kan.

App. 2d at 124.

By following Prieb, BOTA imposed an exclusionary rule on the County's

evidence—rather than simply considering its weight and credibility. BOTA held the

Taxpayers' expert valuation "better adhered to the Prieb mandate regarding built-to-suit

rental rates than the County appraisals." We remand this case to BOTA to reconsider the

County's evidence without Prieb's constraints. Though BOTA may reach the same result

on remand, that decision must be based on its own determinations of the facts and witness

credibility.

FACTUAL AND PROCEDURAL BACKGROUND

Johnson County appraised these 11 Walmart and Sam's Club stores for tax years

2016 and 2017 at nearly double their 2015 tax values. The taxpayers are the Walmart

Real Estate Business Trust, Sam's Real Estate Business Trust, and TMM Roeland Park

Center, LLC. All stores are owner-occupied except one, which is leased to Walmart by

TMM Roeland Park. Taxpayers unsuccessfully sought review at the county level, then

appealed to BOTA, which held a 10-day evidentiary hearing. Valuation experts on both

sides testified about their preferred methods for valuing these properties.

In finding the properties' values, BOTA adopted "the income approach," in which:

(1) market rent is estimated; (2) market vacancy and collection rates are estimated; (3)

appropriate, market expenses are deducted to determine the property's net income; and

(4) the net income as determined in the previous steps is divided by a capitalization rate

to arrive at that income's present worth. The dispute here mostly concerns the information

from which the County's experts constructed their valuation estimates. In particular, the

parties argue over the relevance of unadjusted sales and rental rates from other "big box"

retail properties subject to build-to-suit leases.

To appreciate the legal issue presented and the conflicting valuation approaches, it

is necessary first to detail each side's primary valuation evidence. Then, we will discuss

the rulings by BOTA and the Court of Appeals panel before deciding the merits.

The County's case

Kyle Blanz, the County's BOTA specialist, explained how the County used the

Valbridge Property Advisors Big Box Retail Market Study to estimate each store's

market rental rate and expenses on a square-footage basis. The rental rates varied from

$7.20 to $10 per square foot based on the County's view of each property's investment

class; a 4% vacancy and collection loss rate; operating expenses ranging from $.50 to

$.70 per square foot depending on investment class; and capitalization rates from 7.5% to

7.75%, also depending on investment class.

Bernie Shaner, an appraiser who co-authored the Valbridge study, explained how

he had trouble finding rental data for big box retail stores because they are seldom leased

on the open market in the traditional sense of an existing building offered for rent.

Instead, these properties are typically leased under build-to-suit arrangements in which

the end user finds a location, develops plans, and hires a contractor in exchange for a

lease. This meant the data for his Valbridge study was limited to what could be learned

from second-generation leases of big-box properties and build-to-suit rents because big-

box stores characteristically do not "changeover" often. But, he added, the rental rates for

the first- and second-generation properties compared "[r]ather consistently" and that he

expected rent for an older second-generation property to be less than for a new property,

which is typically subject to a build-to-suit lease. He said that the fact the stores operating

under build-to-suit leases are not "turning over" shows those locations remain viable. He

also believed build-to-suit tenants have "done their homework" and analyzed each site to

confirm the property's highest and best use as a big box retail store. For these reasons,

Shaner typically looked for other build-to-suit leases because they dominate this

particular lease market. In his opinion, these leases are very relevant for valuation

purposes and represent the typical transaction for this property segment.

A second County expert, Peter Korpacz, appraised the six largest properties and

presented his work as evidence supporting the County's valuations. He testified he

selected his rental and sales comparables by size and trade area data, and adjusted them

for size, year built or renovated, tenant quality, and net operating income per square foot.

He testified that when valuing big box retail stores, he looked at rentals of other big box

retail stores and for sales of properties occupied by the big box retailers. Like Shaner,

Korpacz noted retailers "don't sell these first-generation stores . . . until they no longer

have value to them . . . ." Accordingly, he said, "we look for sales of properties that have

similarities. They are occupied by retailers, and they are always going to be under a lease

because those are the ones that sell."

In his testimony, Korpacz responded to arguments against using build-to-suit and

sale leaseback data for these valuations. He disagreed with those who believe the sales of

properties subject to build-to-suit leases values the tenant, not just the real estate. He

explained that buyers purchase the fee simple subject to the lease, so they are buying

everything including the rent income. He acknowledged that every purchase in which the

buyer wants a lease has a credit component, i.e., the tenant's creditworthiness. But he said

the reason high-credit tenants are at that site is "because the location brought them there."

He added that market participants view the purchase as real estate with rent flow, which

the marketplace views as income. He also said when he verified his sales data, the

participants said they did not buy intangibles.

Korpacz disputed claims that rents for first-generation build-to-suit leases are

based on the cost to build a particular property, and not the market rate for its use. He

said a developer analyzes this before going to the marketplace any time a building is built

to be leased as income property and tries to negotiate the maximum rent. He believed this

is not amortizing construction costs but seeking a rate of return. And he said this is true

with every property built to be leased because the property would not be built if the

developer cannot see a return on the lease or a profit on the sale.

Korpacz dismissed the critique that rent under a build-to-suit lease is affected by

how long a developer wants to wait to be paid back. He testified a developer is kept in

check on the rent because the retailer can go to the market and find someone else who

wants a normal rate of return over a normal period. For example, he could not imagine

any major company willing to pay back the developer's investment in five years on a

rental basis. And consistent with this, Shaner testified he would not consider a short, 10-

year primary lease without renewals to be a market transaction. Korpacz believed his

methodology reflected the normal way real estate development works and was not

peculiar to a big box retailer.

Finally, Korpacz insisted build-to-suit lease data should not be excluded out of

hand. Rather, he said, transactions should be verified with the parties involved. And in his

view, if no non-realty components were in the rent, he would consider it to reflect the

market. He said he would not discount a lease just because it was a sale-leaseback or

build-to-suit. The bottom line, Korpacz testified, was that in his experience and training

his methodologies reflected generally accepted appraisal practices.

Robert Marx valued the remaining five properties to support the County's

valuations. He also recognized it was hard to find market rent data for big box retail

stores because most are owner-occupied or build-to-suit and not built on speculation,

unlike industrial office buildings. Part of his analysis was whether retailers were willing

to lease previously occupied single-tenant structures. He found that for a good location,

there would not be much difference in market rent because a good location will rent for

more money. Marx looked for comparable properties with the same highest and best use

as the subject properties in economically similar market areas. And for these properties,

the highest and best use was as large single-tenant retail discount stores subject to a

demand user.

Marx said when performing the income approach, properties are valued as if

vacant, ignoring contractual income and assuming market rent, vacancy, expenses, and

capitalization rates. He reviewed sales and leases on the national retail market. He

defined "market rent" as the rate a willing lessor would accept and a willing lessee would

pay, with consideration given to underlying expenses, in a transaction between a

knowledgeable landlord and knowledgeable tenant. Marx said a building's design, age,

and location are three major factors affecting the rental price. Older buildings and those

that are functionally dated or obsolete tend to rent for less, while good buildings tend to

rent for more. In addition, a long-term lease affects the rental rate, as longer leases

typically have lower rent than short term ones.

Marx said he considered his assignment to be "a big data problem trying to parse

out—I'll use the word to disentangle that leased fee from the fee simple. You've got to

take the big picture." To do this, he performed what he called a qualitative analysis using

trendlines and bracketing to estimate fair market rent. He said the presence of build-to-

suit rents put a "huge focus" on that disentanglement and he made significant efforts at

disentangling the leased fee from the fee simple. As BOTA described his process, Marx

"separated the realty and non-realty components utilizing his market rent analysis

technique, which involved an examination of each property's highest and best use, a

regional rental survey of properties over 100,000 square feet in size, a local discount

warehouse stores rental survey, a re-lease of a Home Depot located at 95th and Metcalf,

and current rental listings."

Marx then discussed the construction process for big box stores, noting one

valuation study concluded they can cost more than $100 per square foot, not including

site preparation, land, or entrepreneurial incentive for the builder, with a discount store

costing around $80 a foot. In his opinion, it is cheaper to build new than to retrofit and

convert an older discount store. And he said by talking with a big-box contractor he

learned it is a very active and competitive market for that formula-built real estate. He

said big box retailers usually use the same set of engineers and architects, and there are

traveling subcontractors that follow the projects, so the actual construction costs are

sometimes less than what they would be if a single user wants to build a building.

Based on this, Marx believed reference data for construction costs of big-box retail

stores that he reviewed may overstate what is happening, since big box retailers have an

economy of scale that lowers costs. This causes rental rates to be somewhat below market

because they are below what would be the cost otherwise. He also believed that, when all

the other units of production are in place—land, labor, and capital entrepreneurial

incentive—leased fee rents can be below or equal to market rent on build-to-suit

properties.

Blanz, Korpacz, and Marx all testified they applied generally accepted appraisal

practices in doing their work supporting the County's valuations.

The Taxpayers' case

Gerald Maier performed the Taxpayers' appraisals and testified before BOTA. He

said the County's higher valuations for 2016 and 2017 resulted from increasing the

market rent estimate and decreasing the capitalization rate. Maier compiled cost, sales

comparable, and income approaches to valuation, though he deemed the cost approach

the least reliable. In his sales comparable analysis, he excluded build-to-suit and sale

leaseback sales and excluded sales of second-generation leased properties, focusing

solely on sales in which only the real property was transferred. He adjusted the sales for

time, market conditions, location, quality, utility, and investment quality to determine a

per-square foot value that he applied to the subject properties.

For his income approach, Maier believed second-generation rents were most

probative of market value because the tenant entered the property when it was vacant and

available for lease, as compared to build-to-suit and second-generation rents involving

significant tenant improvements paid for by the property owner. He dismissed build-to-

suit leases, which he characterized as financing agreements for the property's

construction, so his analysis included some second-generation leases with minimum

tenant improvements that he adjusted for. His estimates included a vacancy rate of 7.5%,

which was greater than the County's proposal, because he assumed Walmart would

vacate the properties at the time of sale—contrary to other evidence suggesting there

would be no vacancy since the store is currently occupied. Expanding on his

capitalization rate, Maier explained the subject properties carry risks that do not apply to

a property subject to a long-term lease with a creditworthy tenant: the tenant may have

poor credit; the property may sit vacant for a period before there is any net income; and

property management would be more important. In sum, most of the elements of risk are

higher for a "fee simple" situation than for a "leased fee" situation. He estimated a 10%

capitalization rate, reflecting costs that the new owner would have to incur to re-lease the

property, such as holding cost, tenant finish, and the time and risk associated with re-

leasing.

BOTA's decision

BOTA adopted the Taxpayers' appraisal approach. It first concluded it needed to

determine the fair market value of only the real estate. And to do so, it held valuing the

properties as vacant and available to be rented at market rate was supported by substantial

competent evidence and complies with the Uniform Standards of Professional Appraisal

Practice (USPAP). It decided it was permissible to determine the difference between the

property's value under a hypothetical vacant condition and its value as occupied to isolate

the taxable real estate's value from the value of the business conducted on it.

BOTA cited Prieb for the proposition that build-to-suit rental rates do not derive

from the market, and as a matter of law cannot be used to establish a property's income-

generating potential without disentanglements and adjustments to show the rent paid is

for the real estate alone. It noted K.S.A. 74-2433(a) requires BOTA to "be bound by the

doctrine of stare decisis limited to published decisions of an appellate court." And it

observed, "We find Prieb's admonition against the use of build-to-suit transactions to be

clear and unambiguous."

BOTA then examined the County's evidence and observed its appraisals relied on

unadjusted build-to-suit comparables and rental rates contrary to Prieb. BOTA concluded

that neither the Valbridge study nor Korpacz made the adjustments required by Prieb's

rule of law. It also decided Marx's purported adjustments were "lacking and conclusory."

It held the Taxpayers' analysis by Maier "better adhered to the Prieb mandate regarding

build-to-suit rental rates than the County appraisals." And it decided Maier's income

approach best reflected the properties' values.

But BOTA also held Maier's 10% and 10.5% capitalization rates were too high. It

concluded substantial credible evidence supported an 8.5% rate for all but the Frontage

Rd. and Roe Blvd. stores, for which a 9% rate was appropriate. This chart reflects the

properties, the County's valuations, the Taxpayers' proposed valuations, and BOTA's

valuations:

BOTA Docket

Nos.

Taxpayer

Address

County

2016/

2017

Taxpayers

2016/

2017

BOTA

2016/

2017

2016-2700 &

2017-4166

Walmart Real

Estate

Business

Trust

5701

Silverheel,

Shawnee

$17,751,000

$8,750,000/

$9,150,00

$10,153,000/

$10,548,000

2016-2698 &

2017-4172

Walmart Real

Estate

Business

Trust

15700

Metcalf,

Overland

Park

$18,584,000

$10,000,000/

$10,500,000

$11,738,000/

$12,229,000

2016-2701 &

2017-4171

Sam's Real

Estate

Business

Trust

1725 E Santa

Fe, Gardner

$15,778,000

$10,150,000/

$10,650,000

$11,924,000/

$12,447,000

2016-2697 &

2017-4173

Walmart Real

Estate

Business

Trust

16100 W

65th,

Shawnee

$20,875,000

$10,150,000/

$10,700,000

$12,048,000/

$12,603,000

2016-2699 &

2017-4170

Walmart Real

Estate

Business

Trust

395 N K7,

Olathe

$21,558,000

$11,600,000/

$12,150,000

$13,578,000/

$14,137,000

2016-2694 &

2017-4169

Walmart Real

Estate

Business

Trust

13600 S

Alden, Olathe

$16,104,000

$11,350,000/

$11,900,000

$13,381,000/

$13,957,000

2016-2705

TMM

Roeland Park

Center, LLC

5150 Roe

Blvd, Roeland

Park

$9,264,000

$5,000,000

$5,700,000

2016-2696 &

2017-4167

Walmart Real

Estate

Business

Trust

7701

Frontage Rd,

Overland

Park

$10,947,000

$5,350,000/

$5,650,000

$6,409,000/

$6,718,000

2016-2695 &

2017-4168

Walmart Real

Estate

Business

Trust

11701

Metcalf,

Overland

Park

$13,977,000

$6,950,000/

$7,300,000

$8,144,000/

$8,471,000

2016-2702 &

2017-4175

Sam's Real

Estate

Business

Trust

8300 W

135th,

Overland

Park

$15,648,000

$8,050,000/

$8,400,000

$9,356,000/

$9,712,000

2016-2703 &

2017-4174

Sam's Real

Estate

Business

Trust

12200 W

95th, Lenexa

$13,150,000/

$14,756,000

$6,650,000/

$7,000,000

$7,838,000/

$8,183,000

The Court of Appeals panel's split decision

A divided Court of Appeals panel affirmed BOTA's decision. In re Equalization

Appeals of Walmart Stores, Inc., 61 Kan. App. 2d 154, 168, 500 P.3d 553 (2021). The

majority applied Prieb's holding that "build-to-suit leases 'may not be utilized for

purposes of the income approach or the sales comparison approaches to value for ad

valorem tax purposes in Kansas without a disentanglement by adjustments . . . .'" 61 Kan.

App. 2d at 166.

The Walmart majority began by explaining how the County sought to value the

"fee simple subject to a lease" to tax both the properties' real estate value and other value

created by a contract right, rather than valuing just the fee simple interest. 61 Kan. App.

2d at 164. Next, the majority decided BOTA did not prevent the County from presenting

evidence that the unadjusted build-to-suit data reflected market conditions, nor prevent it

from presenting evidence of any necessary adjustments. And it held the County "failed to

meet its burden of proof because it made the decision to stand on its belief that the rental

rates in its build-to-suit lease comparables inherently reflected the actual rental rates in an

open and competitive market." 61 Kan. App. 2d at 168.

Addressing the County's bid to overrule Prieb, the majority held Prieb should be

adhered to because it had been "relied on by courts, by BOTA, by attorneys, by

appraisers, and by litigants for nearly a decade." 61 Kan. App. 2d at 169. It also reasoned

the Legislature acquiesced in Prieb's decision by failing to statutorily respond to it,

"confirm[ing] that BOTA is required to decide valuation appeals based "upon a

determination of the fair market value of the fee simple of the property." 61 Kan. App. 2d

at 169. It also believed "the 2016 amendment to K.S.A. 74-2433 passed by the Kansas

Legislature," which specified BOTA must determine the value of the "fee simple" in a tax

appeal, suggested Prieb accurately reflected legislative intent. 61 Kan. App. 2d at 169-70.

Finally, the majority said it was not clearly convinced Prieb was wrongly decided or no

longer sound because of changing conditions. It observed, "[a]t most, we find that the

County has presented an argument in support of its position in the ongoing policy dispute

regarding the methodology to use in the appraisal of real property on which big-box retail

stores or similar businesses are operated." 61 Kan. App. 2d at 170.

Given its rejection of the County's legal attack against Prieb, the panel majority

held substantial competent evidence supported BOTA's decision because it

"was based on Maier's valuation opinions that were supported by comparables that

reflected market conditions in an open and competitive market. In rendering his opinions

regarding valuation of the subject properties, Maier examined sales of nine properties

utilized for big-box retail stores. However, he excluded build-to-suit leases and leaseback

sales as well as the sales of second generation leased properties. Maier testified that he

focused on fee simple sales and adjusted the sale price for time and market conditions,

location, quality and utility, and investment quality to derive a square foot unit value that

he then applied to each of the subject properties." 61 Kan. App. 2d at 172.

And in holding BOTA's decision reasonable, the majority advanced alternative

rationales. It held the County waived any argument that BOTA's decision was

unreasonable, arbitrary, or capricious by failing to support it with factual argument or

legal authority. It then held that even if the argument was not waived, BOTA adequately

explained its decision. Finally, the panel concluded BOTA reasonably adopted Maier's

valuations with the adjusted capitalization rates because the County failed to show his

"appraisal methodology was inconsistent with Kansas law or the USPAP." 61 Kan. App.

2d at 173.

Judge Steve Leben dissented. He argued for Prieb to be overturned and the case

remanded to BOTA for full consideration of the County's evidence. He said Prieb went

outside the bounds of proper judicial review by holding build-to-suit leases generally may

not be used in the sales comparison and income approach. He reasoned no statute

permitted a reviewing court to determine what was generally accepted appraisal practice.

Walmart, 61 Kan. App. 2d at 175 (Leben, J., dissenting). And, he noted, Prieb's rejection

of the agency fact-finder's acceptance of one expert's valuation over another was highly

unusual. He asserted this could not have been done in Prieb without first imposing

improper legal limits on what could be considered generally accepted appraisal practices

to justify excluding some expert testimony. 61 Kan. App. 2d at 175. Judge Leben

continued:

"The essence of Prieb is that the leases now in place and generating an income stream for

the owner of the buildings housing these big-box stores—leases that may be in place for

many years to come—must be ignored altogether. That makes no sense to me either

under Kansas law or based on real-estate appraisal principles." 61 Kan. App. 2d at 181.

In support of this, Judge Leben quoted from a concurring opinion in the same

Wisconsin case cited by the Prieb panel:

"Property is assessed at the amount the property would sell for as a result of arm's-length

negotiations in the open market between an owner willing to sell and a buyer willing to

buy. A buyer generally would pay more for real property that has a high stream of

income from a lease than for property with a lower stream of income from a lease.

Because the sum at which a property will be bought and sold is dictated in part by the

income from a lease attaching to the property, the actual income stream from the lease

should be capitalized to reach the assessed value of the property." (Emphasis added.)

Walgreen Co. v. Madison, 311 Wis. 2d 158, 209, 752 N.W.2d 687 (2008) (Abrahamson,

C.J., concurring).

Finally, Judge Leben argued stare decisis did not compel continued adherence to

Prieb. He believed any reliance interest in Prieb is not strong, given big-box retailers'

sophistication and their awareness that the proper method to appraise their stores is a

hotly contested issue. And he pointed out Prieb is only an intermediate appellate court

decision, so he dismissed any legislative acquiescence argument as weak rationale for

reaffirming Prieb, as compared to legislative acquiescence in a Supreme Court decision.

61 Kan. App. 2d at 182-83.

The County asked for our review of the panel's split decision, which we granted.

Jurisdiction is proper. See K.S.A. 20-3018(b) (providing for petitions for review of Court

of Appeals decisions); K.S.A. 60-2101(b) (Supreme Court has jurisdiction to review

Court of Appeals decisions upon petition for review).

DISCUSSION

As seen from the conflicting views, this case presents two basic alternatives for

big box store valuations: continue to consider unadjusted build-to-suit lease data

inadequate as a matter of law when it is used to support a valuation opinion; or

acknowledge that data's use simply goes to the credibility and persuasive weight of an

opinion founded upon it. We consider first Prieb and its application to the County's

valuations.

Standard of review

The Kansas Judicial Review Act controls our review of BOTA decisions. See

K.S.A. 74-2426(c). The County, as the party challenging BOTA's decision, carries the

burden to show its invalidity. K.S.A. 77-621(a). The KJRA permits judicial relief only for

statutorily enumerated reasons, three of which are raised here:

"(4) the agency has erroneously interpreted or applied the law;

. . . .

"(7) the agency action is based on a determination of fact, made or implied by the

agency, that is not supported to the appropriate standard of proof by evidence that is

substantial when viewed in light of the record as a whole, which includes the agency

record for judicial review, supplemented by any additional evidence received by the court

under this act; or

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

77-621(c).

A court's review of BOTA's application and interpretation of the law is unlimited

and performed without deference to the agency. In re River Rock Energy, 313 Kan. 936,

944, 492 P.3d 1157 (2021).

"As to whether BOTA's decision was based on factual determinations

unsupported by the record as required for relief under K.S.A. 77-621(c)(7), a reviewing

court must determine whether the evidence supporting the agency's factual findings is

substantial when considered 'in light of the record as a whole.' K.S.A. 77-621(d) defines

substantial evidence '"in light of the record as a whole"' to include evidence both

supporting and detracting from an agency's findings. But if BOTA's findings of fact are

determined to be so supported, 'the findings cannot be disregarded or contradicted on

appeal.' In re CIG Field Services Co., 279 Kan. 857, Syl. ¶ 2, 112 P.3d 138 (2005); see

also K.S.A. 77-621(d) ('[T]he court shall not reweigh the evidence or engage in de novo

review.').

"Finally, as to whether BOTA's decision was 'otherwise unreasonable, arbitrary

or capricious' as required for relief under K.S.A. 77-621(c)(8), we review those questions

for abuse of the agency's discretion." River Rock, 313 Kan. at 945.

General statutory background

The County attacks Prieb as judicial overreach unsupported by legal or statutory

authority. Taxpayers defend Prieb as legally correct and shielded by stare decisis. Our

statutes control much of this debate.

State law requires each parcel of real property to be appraised for ad valorem

property taxation purposes "at its fair market value in money, the value thereof to be

determined by the appraiser from actual view and inspection of the property." K.S.A. 79-

501.

"'Fair market value' means the amount in terms of money 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, assuming that the parties are acting without undue

compulsion. . . . For the purposes of this definition it will be assumed that consummation

of a sale occurs as of January 1." K.S.A. 79-503a.

And when valuing real property,

"Sales in and of themselves shall not be the sole criteria of fair market value but shall be

used in connection with cost, income and other factors including but not by way of

exclusion:

"(a) The proper classification of lands and improvements;

"(b) the size thereof;

"(c) the effect of location on value;

"(d) depreciation, including physical deterioration or functional,

economic or social obsolescence;

"(e) cost of reproduction of improvements;

"(f) productivity taking into account all restrictions imposed by the state

or federal government and local governing bodies, including, but not

limited to, restrictions on property rented or leased to low income

individuals and families as authorized by section 42 of the federal

internal revenue code of 1986, as amended;

"(g) earning capacity as indicated by lease price, by capitalization of net

income or by absorption or sell-out period;

"(h) rental or reasonable rental values or rental values restricted by the

state or federal government or local governing bodies, including, but not

limited to, restrictions on property rented or leased to low income

individuals and families, as authorized by section 42 of the federal

internal revenue code of 1986, as amended;

"(i) sale value on open market with due allowance to abnormal

inflationary factors influencing such values;

"(j) restrictions or requirements imposed upon the use of real estate by

the state or federal government or local governing bodies, including

zoning and planning boards or commissions, and including, but not

limited to, restrictions or requirements imposed upon the use of real

estate rented or leased to low income individuals and families, as

authorized by section 42 of the federal internal revenue code of 1986, as

amended; and

"(k) comparison with values of other property of known or recognized

value. The assessment-sales ratio study shall not be used as an appraisal

for appraisal purposes.

"The appraisal process . . . shall conform to generally accepted appraisal

procedures and standards which are consistent with the definition of fair market value

unless otherwise specified by law." K.S.A. 79-503a.

In addition, the Director of Property Valuation is statutorily required to "adopt

appraiser directives prescribing appropriate standards for the performance of appraisals in

connection with ad valorem taxation," and those directives "shall require, at minimum . . .

[t]hat appraisals be performed in compliance with the uniform standards of professional

appraisal practice, commonly referred to as 'USPAP,' promulgated by the appraisal

standards board of the appraisal foundation." K.S.A. 79-505.

Finally, K.S.A. 74-2433(g) requires valuation appeals before BOTA must be

decided "upon a determination of the fair market value of the fee simple of the property."

(Emphasis added.)

Valuing large, big box retail properties under Prieb

All agree big box retail properties like the ones here present unique appraisal

problems. As one commentator noted:

"[O]nly four to five real users of these vacant big-box stores exist: Walmart, Target,

Lowe's, Home Depot, and Costco. Because each one of these retailers' use of the actual

big-box building is specific to the individual retailer, each prefers to build its own, new

store rather than take someone else's box and try to retrofit it for its footprint.

"The build of the physical structure and outward appearance of these national

retailers is just as much a part of their identity as the goods they sell. This idea, known as

Build-to-Suit, constitutes a construction or alteration of a property to the specifications of

the property owner or tenant. These big-box 'properties are never built speculatively and

then placed on the market for either sale or rent.' Rather, they are custom built to suit the

needs of a particular entity. With every retailer comes a very specific design for their

racking and in-store layout." Grant, Who's Afraid of the Dark?: Shedding Light on the

Practicality and Future of the Dark Store Theory in Big-Box Property Taxation, 38 Va.

Tax Rev. 445, 451-52 (2019).

And as a New Jersey Tax Court judge recently observed:

"[I]ssues and pitfalls . . . have plagued the courts in accepting build-to-suit lease

agreement[s] as evidence of market or economic rent. Some of those considerations have

included: (i) how the rental rate was arrived at; (ii) whether the property was adequately

exposed to the marketplace; (iii) whether the contract rent represents a full or partial

repayment of the development and construction costs; (iv) whether the lease terms were

comparable to and competitive with other retail leases in the marketplace; and (v)

whether the tenant was unusually motivated to enter the marketplace." W. Orange Twp. v.

Westrange LLC CVS, No. 005443-2015, 2022 WL 682250, at *11 (N.J. Tax Ct. 2022)

(unpublished opinion).

Prieb represents a judicial attempt to address these concerns by simply

announcing a rule of law. In that case, the owner of a 45,000 square foot Best Buy store

appealed Shawnee County's valuations for the 2006 and 2007 tax years. Best Buy

occupied the building under a build-to-suit lease. In resolving the dispute, BOTA's

predecessor, the Court of Tax Appeals,

"took a hybrid approach to the valuation issue, concluding that for 2006 tax year, the

Taxpayer's appraisal approach would be endorsed with a replacement of the rental rate of

$7 per foot with $8.50 per foot—which was apparently derived from the County's

appraisal for 2007—and appeared to be based upon the lease rate for a single property

that was subject to a second-generation build-to-suit lease. For the 2007 tax year, COTA

embraced the County's appraisal approach and value, even though that approach utilized

as comparables three big box properties with first generation tenants." Prieb, 47 Kan.

App. 2d at 129.

The taxpayer appealed, arguing build-to-suit lease rental rates as a matter of law

do not reflect market conditions. The Prieb panel generally agreed with the taxpayer and

reversed the agency. The panel held "rental rates contained in or reflected by commercial

build-to-suit leases are not reflective of market conditions and may not be utilized for

purposes of the income approach or the sales comparison approach[] to value for ad

valorem tax purposes in Kansas without a disentanglement by adjustments that is beyond

the scope of this appeal." 47 Kan. App. 2d at 135-36.

To get to its holding, the Prieb panel concluded Kansas law requires the "fee

simple interest" in real estate to be valued. And it defined this as "'[a]bsolute ownership

unencumbered by any other interest or estate, subject only to the limitations imposed by

the governmental powers of taxation, eminent domain, police power, and escheat.'" 47

Kan. App. 2d at 130 (quoting The Appraisal of Real Estate, p. 114 [13th ed. 2008]). The

panel then distinguished a fee simple interest from a "leased fee estate," which it defined

as "a lesser estate in property [that] includes only the landowner's right to receive rents

during the term of the lease, plus the value of the reversion upon its expiration." 47 Kan.

App. 2d at 132.

Next, the Prieb panel held build-to-suit rental rates do not reflect market rent as a

matter of law. It took what it characterized as a "common-sense approach to the

problem," and reasoned

"such a lease is essentially a financing agreement between a lessor and lessee, and the

rental rates therein are based in large part upon the revenue needed to amortize the

investment required for the required construction—plus a measure of profit—over the

lease term or extensions thereof. Accordingly, when one takes a snapshot view of rental

rates at any time during such a lease, these rates are not reflective of market rent, but

rather just reflective of the rate required in that specific situation to continue an agreed

revenue stream to amortize the lessor's investment, subject to a host of financial risks. In

other words, contract rents in a build-to-suit lease are not designed to capture market

value for each period within the lease term, but rather are designed to amortize an

investment made at the outset and may vary dependent on factors that are unrelated to the

real estate market thereafter. Reliable source material is in agreement with this

overview." 47 Kan. App. 2d at 132-33.

The Prieb panel believed its perspective was supported by The Appraisal of Real

Estate (13th ed. 2008), which "recognize[d] the essential difference in build-to-suit rental

rates and true market rentals." Adding:

"'Like all contracts, a real estate lease depends on the actual performance of all

parties to the contract. A weak tenant with the best of intentions may still be a high risk.

The same is true of a financially capable tenant who is litigious and willing to ignore

lease terms, break a lease, and defy lawsuits. If the tenant defaults or does not renew a

lease, the value of the underlying property does not change, but the value of the leased

fee may be seriously affected.

"'Because a leasehold or a leased fee is based on contract rights, the appraiser

needs special training and experience to differentiate between what is generally

representative of the market and other elements of a contract that are not typical of the

market. An understanding of the risks associated with the parties and the lease

arrangement is also required. A lease never increases the market value of real property

rights to the fee simple estate. Any potential value increment in excess of a fee simple

estate is attributable to the particular lease contract, and even though the rights may

legally "run with the land," they constitute contract rather than real estate rights.'

(Emphasis added.) The Appraisal of Real Estate, p. 447." Prieb, 47 Kan. App. 2d at 133.

The Prieb panel also quoted this from an article in The Appraisal Journal:

"'Direct capitalization seems to be the preferred model to develop an opinion of

value for custom commercial properties via the income capitalization approach. To apply

this approach properly, support is needed for its three major ingredients: potential gross

income, operating expenses, and overall capitalization rate. The same issues arise with its

application as with the sales comparison approach when the appraisal problem involves

estimating the market value of the fee simple interest of the custom-built property.

"'The first step in applying the income capitalization approach is to determine the

market rent. In order to properly develop the market rent, sufficient market evidence must

be found of the amount that a willing lessee would pay a willing lessor to occupy the

space. A search of sources usually available to appraisers (such as CoStar, NNNEx.com,

or similar services) will quickly reveal many leases. When these leases are scrutinized,

however, it will be apparent that almost every one is a lease to the original tenant based

on a rate that was driven by that tenant's custom-construction specifications. As such

these lease rents have little in common with the rent a second-generation tenant would be

willing to pay for the space. Evidence of this is both obvious and available.

"'For example, when the fast-food franchise Roy Rogers Restaurants closed,

many of its stores went to other fast-food franchises or to local restaurants. However, the

buyers stripped the restaurants to their shells, removing all evidence of the prior user, and

then rebuilt the restaurants to their own prototypical specifications. The buyers clearly

did not want—nor were they willing to pay for—the sometimes expensive custom

features of the original construction. So, it quickly becomes apparent that what may look

like a substantial pool of potential leases that might be used as comparables in an

estimate of market rent for the subject is really of no use whatsoever in determining how

much a second-generation tenant would be willing to pay in rent for these custom-built

properties.'" 47 Kan. App. 2d at 133-34 (quoting Lennhoff, You Can't Get the Value

Right If You Get the Rights Wrong, The Appraisal Journal 55, 57 [Winter 2009]).

Aligning with these secondary sources, the Prieb panel discussed the Wisconsin

decision, Walgreen Co. v. City of Madison, 311 Wis. 2d 158, 752 N.W.2d 687 (2008),

that held a fee simple interest in a property subject to a build-to-suit lease must be valued

based on market rents rather than an above-market contract rent specified in the lease.

That Wisconsin court explained,

"'[F]reestanding drug stores are typically developed on a build-to-suit basis between a

developer, acting as the landlord, and the planned tenant. In these instances, the

developer is responsible to construct the premises to the specifications provided by the

tenant. Construction costs often include a higher than average entrepreneurial profit to

guarantee against cost overruns and time delays. Subsequently, the rental rate is an

amortization over the lease term of the expenses incurred to construct the tenant-specific

improvement.

"'These long-term build-to-suit leases typically do not allocate any marketing or

leasing expenses. Also, vacancy rates are likely understated because these single-tenant

properties require a longer leasing period to find a suitable tenant . . . . By factoring in

these associated costs the resulting rate is most often well above the open market rate

commanded by other similar retail properties in the same area.'

"The appraisals conclude: 'Similar to a sale-leaseback transaction, a build-to-suit

lease is really a financing tool used by companies to keep capital available for other core

business purposes. As such, we will estimate a market rent for the subject building rather

than rely on the current contract rent.'" Walgreen, 311 Wis. 2d at 189-90." Prieb, 47 Kan.

App. 2d at 134-35.

Finally, the Prieb panel reasoned,

"with a very few exceptions, it is generally recognized that build-to-suit lease rental rates

are not reflective of market conditions. See, e.g., Grant County Assessor v. Kerasotes,

955 N.E.2d 876 (Ind. Tax Ct. 2011); Federated Retail Holdings, Inc. v. County of

Ramsey, Nos. 62-CV-08-5061, CO-07-4069, 2011 WL 3821296 (Minn. Tax Ct. 2011)

(unpublished opinion); Shapiro, Big–Box Retailers Beware How Assessors Overvalue

Your Property, National Real Estate Investor (Sept. 2000)

(http://www.aptcnet.com/articles/big_box_ retailers.htm); Lennhoff, You Can't Get the

Value Right If You Get the Rights Wrong, The Appraisal Journal, pp. 55-60; Lennhoff,

Fee Simple? Hardly, The Appraisal Journal, pp. 400-02; c.f. Rhodes v. Hamilton Cty. Bd.,

117 Ohio St.3d 532, 533-35, 885 N.E.2d 236 (2008); see also Matter of Eckerd

Corporation v. Burin, 83 A.D.3d 1239, 1241-43, 920 N.Y.S.2d 824 (2011) (finding that

the weight of evidence supported appraiser's finding that build-to-suit properties were not

truly reflective of market value); Matter of Rite Aid of New York No. 4928 v. Assessor of

Town of Colonie, 58 A.D.3d 963, 964-66, 870 N.Y.S.2d 642 (2009) (finding that the

lower court's decision crediting one appraiser who utilized build-to-suit leases went to the

weight of the evidence, not its competency, and affirming the lower court's decision)." 47

Kan. App. 2d at 135.

Other Court of Appeals panels have embraced Prieb or rejected challenges against

its holding. See In re Walgreen Co, No. 119,684, 2021 WL 4929099, at *7 (Kan. App.

2021) (unpublished opinion); In re Equalization Appeal of Kansas CVS Pharmacy, No.

119,683, 2021 WL 4929096, at *1 (Kan. App. 2021) (unpublished opinion); In re Tax

Appeal of Arciterra BP, No. 121,438, 2021 WL 1228104, at *9 (Kan. App. 2021)

(unpublished opinion); see also In re Equalization of Target Corporation, 55 Kan. App.

2d 234, 244, 410 P.3d 939 (2017) (holding County failed to adequately brief argument

that BOTA misapplied Prieb).

The fee simple/leased fee red herring

Taxpayers argue Prieb is supported by the statutory requirement that tax value

must be based on "the fair market value of the fee simple of the property" and not "fee

simple subject to a lease." See K.S.A. 74-2433(g). They suggest the County aims to add

value attributable to contract rights the owner of a similar property might hold under a

build-to-suit lease, rather than simply valuing their real estate.

This discussion about the definition of fee simple relates mostly to the Taxpayers'

evidence implementing the "dark store theory" in their sales-comparable valuations.

Under this approach,

"the owners or retailers that occupy these large plots of property consider the recent trend

of big-boxes selling for significantly less than the cost of construction as an appropriate

set of market data to utilize when attempting to pinpoint their true market value for tax

purposes. At the heart of this new strategy is the contention that using vacant properties

as comparable sales for the valuation of big-box stores is viable under generally accepted

appraisal methods.

"Conversely, the property tax assessing community argues that if the big-box

store were owner-occupied at the start of the year, then stores that were closed at the start

of the year should not be used as comparable properties to show market value." Grant,

Who's Afraid of the Dark?, 38 Va. Tax Rev. at 464.

But the parties' dispute here over defining the interest to be valued for ad valorem

tax purposes as the "fee simple" or the "fee simple subject to a lease" appears to be

largely a red herring. The County's BOTA specialist, Blanz, testified the County used

only the cost and income approaches to fix the subject properties' 2016 and 2017 values.

And although Korpacz, Marx, and Maier all testified about sales comparison approaches,

BOTA disagreed with the Taxpayers' sales comparison valuations because Maier's

comparables were "generally much older and situated in less desirable locations than the

subject stores." In doing so, BOTA rejected the so-called "dark store" sales comparison

method based on the evidence presented, even though the "dark store" theory is reflected

in the rents, vacancy and expense, and capitalization rates proposed by the Taxpayers

flowing from Maier's premise that the properties should be valued as if vacant and

available to be leased.

In any event, our focus here is on Prieb's condemnation of the County's efforts to

use unadjusted build-to-suit rents to determine the market rental rate of the subject

properties. The Appraisal of Real Estate 471 (15th ed. 2020), recognizes "[t]he remaining

term of a lease, the creditworthiness of the tenants, the influence of atypical lease clauses

and stipulations, and other factors can affect the value of the sum of the parts, causing the

sum to be greater or less than the value of the fee simple, sometimes significantly so." In

other words, it acknowledges a particular lease can bring the market value of a property

subject to that lease out of line with the real estate's fair market value. And the County

concedes this, agreeing that "'a real property assessment should not be based on factors

such as unusual financing or above market rent that are not normal conditions of sale

reflected in the sale of the fee simple property interest.'"

Similarly, neither party disputes that "earning capacity as indicated by lease price"

and "rental or reasonable rental values" are both factors that may be considered when

valuing real estate. See K.S.A. 79-503a(g), (h). So while 10 of the 11 properties here are

owner-occupied, the possibility of leasing "constitutes—as a purely factual matter—one

method of realizing the value of legal ownership of the property." Meijer Stores Ltd.

Partnership v. Franklin Cty. Bd. of Revision, 122 Ohio St. 3d 447, 452-53, 912 N.E.2d

560 (2009). Before BOTA, of course, both parties put on evidence of the properties'

income generating capacity, and the agency based its valuation determination on its view

of what that was.

Moreover, Kansas law requires BOTA to value the fee simple interest. See K.S.A.

74-2433(g). And as the USPAP's author, the Appraisal Foundation, explains in The

Appraisal of Real Estate:

"Income-producing real estate is usually leased. Once a lease is created the fee

simple estate is split into two partial interests: the landlord's interest (i.e., the leased fee)

and the tenant's interest (i.e. the leasehold). The interest to be valued depends on the

intended use and intended user of the appraisal. Federal or state law often requires

appraisers to value leased properties as fee simple estates, not leased fee estates, for

eminent domain and ad valorem taxation. When the fee simple interest is valued, the

presumption is that the property is available to be leased at market rates. When an

appraisal assignment involves the valuation of the fee simple interest in a leased property,

the valuation of the entire bundle of rights applies. The value of a leasehold estate may be

positive, zero, or negative, depending on the relationship between market rent and

contract rent, the remaining term of the lease, and other factors, as explained in Chapter

7. The difference between the market rent and contract rent may be capitalized at an

appropriate rate or discounted to present value to produce an indication of the leasehold

value, if any, without consideration of the value of the leased fee estate.

"Appraisers should not assume that the sum of the values of the two partial

interests equals the value of the fee simple as this is often not the case. In some instances

the sum of the values of the partial interests may equal the value of the fee simple, but

each partial interest represents a different ownership interest that must be valued on its

own merit . . . . This comparison is particularly important when contract benefits or

detriments are substantial. Detrimental aspects of a lease may result in a situation in

which either or both of the parties to the lease, and their corresponding value positions,

may be diminished.

"It is possible that in some cases both the leaseholder and the leased fee owner

are at an advantage or disadvantage because of the terms of the lease. In other cases, there

may be an apparent advantage of one party over the other when compared with other

leases. . . .

"Like all contracts, a real estate lease depends on the actual performance of all

parties to the contract. A weak tenant with the best of intentions may still be a high risk to

the lessor. The same is true of a financially capable tenant who is litigious and willing to

ignore lease terms, break a lease, and defy lawsuits. If the tenant defaults or does not

renew a lease, the value of the leased fee may be seriously affected.

"Because a leasehold or leased fee interest is based on contract rights, appraisers

differentiate between lease provisions that are generally representative of the market and

other elements of a contract that are not typical of the market. An understanding of the

risks associated with the parties to the lease and the lease arrangement is also required. A

lease never increases the market value of real property rights to the fee simple. Any

potential value increment in excess of a fee simple estate is attributable to the particular

lease contract, and even though the rights may legally 'run with the land' they constitute

contract rather than real property rights." (Emphases added.) The Appraisal of Real

Estate 415.

And the USPAP Standards Rule 1-4 requires appraisers encountering leased fees

to consider the lease terms' effect on value:

"(a) When a sales comparison approach is necessary for credible assignment

results, an appraiser must analyze such comparable sales data as are available to indicate

a value conclusion;

. . . .

"(c) When an income approach is necessary for credible assignment results, an

appraiser must:

(i) analyze such comparable rental data as are available and/or

the potential earnings capacity of the property to estimate the gross

income potential of the property;

(ii) analyze such comparable operating expense data as are

available to estimate the operating expenses of the property;

(iii) analyze such comparable data as are available to estimate

rates of capitalization and/or rates of discount; and

(iv) base projections of future rent and/or income potential and

expenses on reasonably clear and appropriate evidence.

. . . .

"(d) When developing an opinion of the value of a leased fee estate or a

leasehold estate, an appraiser must analyze the effect on value, if any, of the terms and

conditions of the lease(s)." (Emphasis added.) USPAP 2016-17, p. 20.

The point to all this is that deciding whether build-to-suit lease rates reflect market

rent—like any rental rate—does not turn on whether the "fee simple" or the "leased fee"

is being valued. And while contract rental rates necessarily reflect upon the value of the

"leased fee," more analysis is always required when deciding whether that contract rate is

the market rate and whether the leased fee reflects the fee simple value. See The

Appraisal of Real Estate, 437-38 (non-arm's length transactions often not reliable

indicators of market rent; parties may have motives not typical of the market). This is true

for any lease, not just sale-leaseback and build-to-suit lease arrangements. As a result, the

fee/leased-fee distinction does not compel Prieb's rule of law singling out build-to-suit

rental rates as necessarily requiring a "disentanglement by adjustments" before they can

be used to support an appraisal.

Persuasiveness of these appraisals is a credibility question

The County argues Prieb improperly requires BOTA to consider only a single

appraisal methodology that rejects build-to-suit rents even if expert witnesses testify there

are no rights to disentangle from a build-to-suit lease rate. The Taxpayers respond that

Prieb and its progeny do not categorically reject or prohibit the use of build-to-suit

leases. Instead, their argument continues, these cases simply require any build-to-suit rent

comparables be adjusted to reflect market rent so that the resulting value derived from

them reflects fair market value. We agree with the County.

In our reading, Prieb effectively prohibits BOTA from relying on any expert

opinion that build-to-suit rents reflect the market rent for a property unless the expert

"adjusted" or "disentangled" the data. As BOTA observed, "In no uncertain terms, Prieb

instructs that an income approach based on build-to-suit rental rates was improper

'without a disentanglement by adjustments.'" Prieb's dictate makes no allowance for when

an expert testifies adjustments are unnecessary under the circumstances. And as argued

by the Kansas Association of Counties in its Amicus Brief, this dictate "requires the

assumption of a nonmarket hypothetical as the starting point," by skewing appraisers

against sale-leaseback and build-to-suit projects that "comprise a majority of the market

activity" for these types of properties; and ignores "a majority of the behavior of market

participants active in this property use group."

The Walmart panel's majority decision illustrates this point well. It suggests

Prieb's rule does not apply when "'an appraiser can show that a build-to-suit lease was

motivated by market terms and can isolate above- or below-market rents to make the

necessary adjustments, [in which case] BOTA could find that a market rent determination

is properly supported and based on appropriate, comparable leases.'" Walmart, 61 Kan.

App. 2d at 168 (quoting In re Arciterra, 2021 WL 1228104). As summarized by the

Walmart majority,

"[O]ur caselaw simply recognizes that build-to-suit leases do not—in and of

themselves—represent actual market conditions. As a result, taxing entities seeking to

use the rental rates in build-to-suit leases as part of their valuation process should be

prepared to either come forward with evidence to establish that they are equal to actual

market rents or show that appropriate adjustments have been made to bring the lease rates

in line with the actual conditions in an open and competitive market." Walmart, 61 Kan.

App. 2d at 168.

But here, qualified experts testified that income-generating property comparable to

the subject properties are typically covered by build-to-suit lease agreements, and that the

build-to-suit lease data they used were probative of the market rental rate for the subject

properties. For example, Shaner testified a property should be valued using its market

rent at its highest and best use and assuming it is leased at market terms and market

occupancy. And in his view, the terms of a build-to-suit lease reflected the market for

big-box retail properties because it is the typical transaction in that property segment.

And in supporting the County's appraisals, Korpacz testified rents under build-to-suit

leases reflect market rent when the lease rate is for the realty alone. He concluded the

cost-plus-return formula for build-to-suit lease rates was indistinguishable from a

developer setting rent rates for a building built on speculation. He also testified the

developer's need to recoup its expenses and make a profit is the normal way real estate

development works and is not peculiar with a big box retailer.

Yet despite this evidence, the panel majority held "the County failed to meet its

burden of proof because it made the decision to stand on its belief that the rental rates in

its build-to-suit lease comparables inherently reflected the actual rental rates in an open

and competitive market." 61 Kan. App. 2d at 168. And so despite the relief valve the

panel majority claimed to read into Prieb, it still applied Prieb's rule of law to declare

inadequate the County's experts' explanations about why appraisals using the build-to-suit

comparables were "equal to actual market rents" consistent with generally accepted

appraisal practices.

We also find support in statute for a departure from Prieb. BOTA is not "bound by

technical rules of evidence, but shall give the parties reasonable opportunity to be heard."

See K.S.A. 77-524. And under the Kansas Code of Evidence,

"If scientific, technical or other specialized knowledge will help the trier of fact to

understand the evidence or to determine a fact in issue, a witness who is qualified as an

expert by knowledge, skill, experience, training or education may testify thereto in the

form of an opinion or otherwise if: (1) The testimony is based on sufficient facts or data;

(2) the testimony is the product of reliable principles and methods; and (3) the witness

has reliably applied the principles and methods to the facts of the case." K.S.A. 2021

Supp. 60-456.

There is no question the direct capitalization income approach to valuation is a

"reliable principle[ ] and method[ ]" of forming an opinion about property value. So when

an expert's opinion is based on "experiential, rather than experimental reliability," the

fact-finder is within its discretion to receive it when reasonable minds could differ

whether the data relied on was enough to establish an opinion. See State v. Aguirre, 313

Kan. 189, 206-07, 485 P.3d 576 (2021). But Prieb limits the data an appraiser may

employ to form an acceptable opinion, because it sees this disagreement as a legal

question, even though both parties' experts testified their methods complied with the

USPAP and generally accepted appraisal practice. Cf. In re Appeal of ANR Pipeline, 276

Kan. 702, 720-21, 79 P.3d 751 (2003) (upholding BOTA's exclusion of actual earnings

beyond valuation date in income approach, when experts who testified in the case and

other authorities agreed actual income figures may not be considered).

So based on the record here, there was evidence tending to show reasonable minds

can differ on whether the build-to-suit data was enough to support the County's experts'

valuation opinions. And that conflict should be resolved by BOTA—the agency

statutorily charged with the decision-making.

The Appraisal of Real Estate, 436-38, describes the detail in estimating market

rent:

"An investigation of market rent levels starts with the subject property and the

property's attributes. . . .

"When a market rent estimate for the subject property is required, comparable

rental data is gathered, compared, and adjusted. The parties to each lease should be

identified to ensure that those held responsible for rent payments are actually parties to

the leases . . . . It is also important to ascertain that the lease represents a freely

negotiated, arm's length transaction. A lease that does not meet these criteria—such as a

lease between related entities (e.g., the landlord and the tenant have common ownership

or common interests)—often does not provide a reliable indication of market rent. Sale-

leaseback transactions must be used with caution because the lease is usually negotiated

as part of the sale rather than as an independent, market-based lease negotiation. Sale-

leasebacks that are negotiated as financing vehicles may reflect motivations of the tenant

and landlord that are not typical of the market.

". . . Comparable rents may be adjusted just as the transaction prices of

comparable properties are adjusted in the sales comparison approach. Recently executed

and pending leases for the subject property may be a good indication of market rent, but

lease renewals or extensions negotiated with existing tenants should be analyzed with

caution. . . .

"The amount of data needed to support a market rent estimate for a subject

property depends on the complexity of the appraisal problem and the availability of

directly comparable rentals. When sufficient, closely comparable rental data is not

available, an appraiser should include other data, preferably data that can be adjusted.

When analyzed properly, a reasonably clear pattern of market rents should emerge."

We also observe that other jurisdictions are split on the utility of using raw build-

to-suit lease data in determining value and that contributes to a conclusion BOTA should

decide this. For example, in West Orange the New Jersey Tax Court—a trial-level

tribunal—found an appraiser's income-based valuation for a Walgreen's drug store using

build-to-suit leases lacked credibility:

"Without having conferred with any of the lease transaction participants and

conducted an in-depth examination and inquiry into the marketing, negotiation, and

motivations of the parties in executing the leases, West Orange's expert's conclusion that

these five build-to-suit lease agreements reflect market rent lacks credibility. Moreover,

West Orange's expert's exclusive reliance on build-to-suit leases, without evidence of

other retail pharmacy rents in the marketplace, leaves the court unable to accurately

gauge whether the build-to-suit leases represent accurate evidence of market or economic

rent in the subject property's competitive market area.

"Accordingly, without credible evidence of economic or market rent, the court

accords West Orange's expert's conclusions of value under the income capitalization

approach no weight." 2022 WL 682250, at *13.

And at the appellate level, New York courts have approved valuations of big box

retail stores based on approaches much like those taken by both parties here. In one

instance, the court affirmed a decision that "chose to credit the testimony of the [taxing

authority's] expert over that of the [taxpayer]," reasoning that the decision was "a

credibility determination." Rite Aid of New York No. 4928 v. Assessor of Town of

Colonie, 58 A.D.3d 963, 966, 870 N.Y.S.2d 642 (2009); but see Home Depot U.S.A. Inc.

v. Assessor of Town of Queensbury, 129 A.D.3d 1427, 1429-30, 12 N.Y.S.3d 364 (2015)

(affirming fact-finder's decision to adopt taxpayer's valuation). See also Meijer Stores

Ltd. Partnership v. Franklin Cty. Bd. of Revision, 122 Ohio St. 3d 447, 453, 912 N.E.2d

560 (2009) (approving the use of build-to-suit comparables to determine the value of

large, big-box retail stores and adopting a theory of fee simple value in line with the one

advanced here by the County); Rite Aid of Ohio, Inc. v. Washington Cty. Bd. of Revision,

146 Ohio St. 3d 173, 180, 54 N.E.3d 1177 (2016) (limiting Meijer to "special-purpose"

cases in which the property's highest and best use is "continued use by the current

occupant in its ongoing business").

Even in Walgreen Co. v. City of Madison, the case Prieb most prominently relied

on, the facts were undisputed that the properties were subject to build-to-suit leases under

which Walgreens engaged a developer to find and purchase the sites, buy out existing

businesses, and develop the property with "'super adequacies' to suit Walgreens' needs,"

and that the lease payments included compensation to the developer for the land

acquisition, construction, development and financing costs, and a profit margin.

Walgreen Co. v. City of Madison, 311 Wis. 2d 158, 166, 752 N.W.2d 687 (2008). And

the parties also did not dispute that including the costs in the lease terms led to higher

than market rental rates. So based on that, as well as a provision in a binding state

assessment manual requiring assessors to examine financing terms and determine

whether sale price accurately reflects market value, the court applied the same principles

to hold "tax assessors must refrain from including creative financing arrangements under

a specific property's lease in their valuations of that property." 311 Wis. 2d at 191-92.

We conclude from all of this that the weight of authority does not support Prieb's

rule of law that "build-to-suit lease rental rates are not probative of market conditions."

47 Kan. App. 2d at 124. "The determination of the fair market value of property—

whether real or personal—is generally a question of fact." Hutson v. Mosier, 54 Kan.

App. 2d 679, Syl. ¶ 8, 401 P.3d 673 (2017). And this court has recognized in the

condemnation context that when "an expert utilizes a legally accepted methodology" to

determine value,

"the question as to whether the legally acceptable methodology most appropriately

measures fair market value under the facts of the case and any deficiencies in the expert's

analysis can be explored through cross-examination. Ultimately, the weight to be given

an expert's opinion is left in the hands of the jury. Without question, a factfinder can find

one expert opinion more credible than another. It is not this court's duty to pass on the

credibility of witnesses, including expert witnesses." City of Mission Hills v. Sexton, 284

Kan. 414, 415, 160 P.3d 812 (2007).

BOTA is the highest administrative tribunal established by statute to determine

controversies relating to assessments of property for ad valorem tax purposes. Prieb's

rationale invades BOTA's longstanding province as the fact-finder in the statutory

process of appraising real property at its fair market value.

Principles of stare decisis do not bind this court to Prieb

Stare decisis recognizes that once a point of law has been established by a court,

that point of law will generally be followed by the same court and all courts of lower rank

in later cases when the same legal issue is raised. McCullough v. Wilson, 308 Kan. 1025,

1032, 426 P.3d 494 (2018). This means stare decisis does not bind this court to follow

lower court decisions. And even though the Legislature has not acted to reject Prieb, we

find this an unpersuasive reason to adhere to its rule of law for the reasons described.

After all, this court

"should observe legislative inaction with a gimlet eye. Legislative inaction is not

necessarily indicative of legislative intent. See Board of Leavenworth County Comm'rs. v.

McGraw Fertilizer Serv., Inc., 261 Kan. 901, 916, 933 P.2d 698 (1997) (the court can

draw many contradictory inferences from the legislature's failure to pass a bill); Higgins

v. Cardinal Manufacturing Co., 188 Kan. 11, 25, 360 P.2d 456 (1961) (it is 'highly

speculative' to conclude legislature's failure to pass a bill on the subject at hand to be

indicative of legislative intent; legislature may have considered the legislation

unnecessary in light of current state law)." USD 501 v. Baker, 269 Kan. 239, 246-47, 6

P.3d 848 (2000).

As Judge Leben's dissent suggests, the ongoing controversy surrounding valuation

of big-box retail properties should have cautioned against strong reliance interests being

formed based on the Prieb panel's decision. See Suesz v. Med-1 Sols., LLC, 757 F.3d 636,

649-50 (7th Cir. 2014) ("[A] prior decision of one intermediate appellate court does not

create the degree of certainty concerning an issue of federal law that would justify

reliance so complete as to justify applying a decision only prospectively in order to

protect settled expectations."). This is especially true when, as here, the valuation of these

properties occurs anew every tax year. See K.S.A. 79-503a (property to be appraised at

value on January 1 of tax year); K.S.A. 79-1412a Second (county appraiser's duty to

supervise listing and appraisal of real estate annually as of January 1).

The County's remaining issues

In its petition for review, the County broadly asked in the closing paragraph that

"the Court grant this Petition for Review for analysis on the issues raised at the Court of

Appeals and in this petition for review." But besides the challenge to Prieb, those other

issues were not addressed more specifically either in the petition for review or the

County's Supplemental Brief. We understand those issues to be (1) whether BOTA's

decision was supported by substantial competent evidence considering the record as a

whole; and (2) whether BOTA's decision was unreasonable, arbitrary, and capricious.

We conclude the County created a preservation and waiver problem by handling

these issues as it did. "A party aggrieved by a decision of the Court of Appeals on a

particular issue must seek review in order to preserve the matter for Kansas Supreme

Court review." Castleberry v. DeBrot, 308 Kan. 791, 795, 424 P.3d 495 (2018). In

Castleberry, the court held a litigant preserved for review only items expressly listed in

the petition, even though the litigant wrote through introduction that he "believes all of

the issues raised in this appeal should be considered." We explained this introductory

phrase was insufficient for the unlisted issues to be "'fairly included' in the petition," so

permitting the litigant to raise the issues after the petition was granted "would do a

disservice to the other parties who must decide whether to oppose review." 308 Kan. at

796. We hold the County failed to preserve its sufficiency of the evidence and

arbitrariness claims by not addressing them more fully in its petition for review or

supplemental briefing.

Judgment of the Court of Appeals affirming the Board of Tax Appeals is reversed.

Decision of the Board of Tax Appeals is reversed, and the case is remanded with

directions.