Grady Hotel Investments LLC v. David Cox, Assessor Platte County

January 16th, 2018

STATE TAX COMMISSION OF MISSOURI

 

GRADY HOTEL INVESTMENTS, LLC, )

)

  
Complainant, )  
  )  
v. ) Appeal No. 16-79001
  )  
DAVID COX, ASSESSOR, )  
PLATTE COUNTY, MISSOURI, )  
  )  
Respondent. )  

 

ORDER

SETTING ASIDE HEARING OFFICER DECISION

UPON APPLICATION FOR REVIEW

HOLDING

On January 16, 2018, Senior Hearing Officer John Treu (Hearing Officer) entered his Decision and Order (Decision)  finding the subject property’s true value in money (TVM) at $7,300,000.   Grady Hotel Investments, LLC (Complainant), subsequently filed an Application for Review of Hearing Officer’s Decision and Order.  David Cox, Assessor of Platte County, Missouri (Respondent) thereafter filed his Opposition to Complainant’s Application for Review.  Complainant filed a Reply in Support of the Application for Review of the Hearing Officer’s Decision and Order.

We SET ASIDE the Decision and Order of the Hearing Officer.  Segments of the Hearing Officer’s Decision may have been incorporated into our Decision without further reference.

 

 

EXHIBITS

Complainant’s Evidence

 

Complainant offered into evidence the following:

Exhibit Description
Written Direct Testimony (WDT) Thomas Slack (Slack), Certified General Real Estate Appraiser
WDT Randy Meyer (Meyer), CFO Parent Company of Complainant
WDT David Long (Long), Dep. Dir. of Kansas City Aviation Dept.
Exhibit A Qualification of Slack
Exhibit B Appraisal of Slack
Exhibit C Purchase and Sale Agreement of April 29, 2015
Exhibit D Quitclaim Deed of August 5, 2015
Exhibit E Portion of Assessor Manual
Exhibit F Lease and Concession Agreement of October 14, 2007
Exhibit G 2015 Second Amendment to Lease and Concession Agreement
Exhibit H 2016 Real Estate Property Tax Receipt
Exhibit I Federal Aviation Administration (FAA) Assurances
Exhibit J Federal Aviation Authority Order 5190.6 (b)
Exhibit K Respondent’s 2016 Valuation Analysis for BOE
Exhibit L Slack Appraisal Review
Rebuttal WDT Slack

 

Respondent’s Evidence

Respondent offered into evidence the following:

Exhibit Description
WDT Respondent
Exhibit A Respondent’s TVM and Information on Subject Property
Exhibit B BOE Appeal
Exhibit C Letter to BOE from Marriott International, Inc.
Exhibit D Pictures of Subject Property
Exhibit E Second Amendment to Lease and Concession Agreement

 

The Subject Property is commonly known as the Marriot Hotel at KCI (hotel) and has an address of 775 N. Brasilia Ave Kansas City, Missouri 64153.  The hotel is located on land at the Kansas City International Airport.  The land is owned by the City.  The City is a political subdivision of the State of Missouri, therefore making the land on which the hotel is located exempt from the payment of real property taxes in accordance with Missouri Constitution Article X § 6.

The hotel consists of two towers:  (1) 9 story tower constructed in 1974; and (2) 6 story tower constructed in 1988.  The hotel has 384 rooms, meeting space, restaurant, business center, indoor pool, whirlpool and fitness center.  The subject property was purchased in 2015 for $8,500,000 which the appraiser attributed to the real property, not to the personal property.    (Complainant’s Addendum 8)  Complainant, pursuant to an agreement with the City, has agreed to make physical improvements to the hotel in the amount of $3,781,000 and $16,850,000 for furniture, fixtures and equipment (FF&E).  In 2015-2016, the costs incurred were $1,200,000.  (Respondent’s WDT).

The subject property has been the subject of several leases as set forth below.  Under the pertinent 2007 and 2015 leases Complainant paid ground rent and a concession fee.  Complainant offered expert testimony by Slack.  Complainant also offered the testimony of Meyer (CFO Parent Company of Complainant).   Meyer testified that he has been intimately involved in over sixty acquisitions and dispositions of properties and it was his opinion that Complainant has only a leasehold interest in the hotel. Additionally, Long asserted that he was very familiar with the terms of the Second Amendment to the Lease and Concession Agreement due to his position as Deputy Director leading the Commercial Development Division of the Kansas City Aviation Department and that it was his opinion that Complainant has only a leasehold interest in the hotel.

Slack, the expert, opined a bonus value of $0.00 as of 2016.  He examined the leases of the subject property.  He stated that “the best evidence of market rent is what the subject property leased for.”  He compared the new lease terms (contract rate) to the old lease terms (prior contract rate) in reaching his opinion of bonus value. Long testified that Section 17.11 of FAA Order requires that all rate to non-aeronautical uses on airports be based on fair market value.

Mid-1990’s Lease October 14, 2007 Lease April 2015 Lease
20% of room revenue $.28/sq. ft. ground rent $.33/sq. ft. ground rent
  3.42% gross revenue concession rent to increase to 5% gross revenue concession rent in 2020 Higher of 3.25% of room rents and 1.25% of all other revenue or 1/12th of 75% of previous years concession fee as concession fee

 

Respondent testified at the hearing.  Respondent testified that the TVM of the hotel in 2016 was $11,222,000.  He testified that the owner provided information regarding the property including the purchase price of $8,500,000 and that improvements were made to the property of $1,200,000 in 2015-2016.  (Respondent’s Exhibit C)

FINDINGS OF FACT

  1. 1. Jurisdiction. Jurisdiction over this appeal is proper.  Complainant timely appealed to the STC.
  2. Identification of Subject Property. The property in question is Parcel 17-5.0-22-000-000-001.001.  The Subject Property is commonly known as the Marriot Hotel at KCI (hotel) and has an address of 775 N. Brasilia Ave Kansas City, Missouri 64153.  The hotel consists of two towers:  (1) 9 story tower constructed in 1974; and (2) 6 story tower constructed in 1988.  The hotel has 384 rooms, meeting space, restaurant, business center, indoor pool, whirlpool and fitness center.
  3. Assessment. The property was classified as commercial real property and valued as follows:
Assessor Land Assessor Improvement Total BOE
$0 $13,447,000 $13,447,000 $13,447,000

 

  1. Airport Location. Subject property is located on land at the Kansas City International Airport.  The land is owned by the City.  The City is a political subdivision of the State of Missouri, therefore the City is exempt from the payment of real property taxes in accordance with Missouri Constitution article X § 6.
  2. Interest in the Property. The City is the owner of the fee simple interest in the land and improvements.  Complainant has a leasehold interest in the land and improvements.
  3. TVM. The TVM of the leasehold interest in the subject property is $0.

CONCLUSIONS OF LAW

Standard of Review

A party subject to a Decision and Order of a Hearing Officer with the State Tax Commission may file an application requesting the case be reviewed by the Commission.  Section 138.432 RSMo Cum. Supp. 2015.  The Commission may then summarily allow or deny the request.  Section 138.432.  The Commission may affirm, modify, reverse, set aside, deny, or remand to the Hearing Officer the Decision and Order of the Hearing Officer on the basis of the evidence previously submitted or based on additional evidence taken before the Commission.  Section 138.432.

Complainant’s Points on Review

            Complainant alleges the Hearing Officer’s Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that:

  1. The Hearing Officer failed to utilize the bonus value methodology when determining the TVM of the hotel.
  2. The Hearing Officer’s determination of TVM was erroneous because the Hearing Officer improperly allocated the entire purchase price to the Complainant’s possessory interest.

            Respondent’s Reply

            Respondent replied to Complainant’s points stating:

  1. The bonus value methodology is not the appropriate methodology for valuing the subject property after passage of Section 137.115.1 RSMo;
  2. Section 137.115.1 RSMo is unconstitutional as to the portion directing that “[t]he true value in money of any possessory interest in real property in subclass (3), where such real property is on or lies within the ultimate airport boundary as shown by a federal airport layout plan, as defined by 14 CFR 151.5, of a commercial airport having a FAR Part 139 certification and owned by a political subdivision, shall be the otherwise applicable true value in money of any such possessory interest in real property, less the total dollar amount of costs paid by a party, other than the political subdivision, towards any new construction or improvements on such real property completed after January 1, 2008, and which are included in the above-mentioned possessory interest, regardless of the year in which such costs were incurred or whether such costs were considered in any prior year;” and
  3. The Hearing Officer erred making an adjustment to the TVM in that there was insufficient evidence to establish expenses in the amount of $1,200,000.

State Tax Commission’s Ruling

For the reasons that follow, the State Tax Commission (STC) finds Complainant’s arguments to be persuasive.  The STC, having thoroughly reviewed the whole record and having considered the Hearing Officer’s Decision, the Application for Review of Complainant, and Respondent’s Response opposing the Application for Review, concludes that Complainant has only a leasehold interest in the subject property, that the bonus value methodology is the appropriate valuation approach, that the subject property has no bonus value (a bonus value of $0.00) and, consequently, the deduction to the TVM required by Section 137.115.1 RSMo is unnecessary.

Possessory Interest

            Complainant and Respondent agree Complainant has only the leasehold interest in the land.  The parties disagree as to the possessory interest of the Complainant in the improvement (hotel).

Respondent argues that Complainant has a fee simple interest in the hotel.  The lease provides that title to the premise, not improvements, shall remain with the City.  Title to the improvement, approved by the City, are the property of the lessee until expiration of the lease.  Respondent contends Complainant’s interest is a type of fee simple.  A fee simple determinable and a fee simple condition subsequent transfer property to another party with the possibility that said property will return back to the original grantor.  A fee simple determinable will automatically end and revert to the grantor if a specified event occurs.  An estate in fee simple determinable is created by any limitation which, in an otherwise effective conveyance of land creates an estate in fee simple and provides that the estate shall automatically expire upon the occurrence of a stated event.  Board v. Nevada School District, 251 S.W.2d 20 (1952). Respondent contends that Complainant’s interest in the property is such type of fee simple.

Complainant contends that the City is the fee simple owner of the hotel and Complainant merely holds a leasehold interest.  A title to a building constructed by a tenant passes to the lessor upon completion of the building if the lease stipulates that upon termination or expiration of the lease, the building will belong to the lessor.  Buetlermann v. United States, 155 F.2d 597, 599 (8th Cir. 1946).  The lessor maintains a present interest in the building prior to the termination or expiration of the lease.  Buhlinger v. United Firemen’s Ins. Co. of Philadelphia, 16 S.W.2d 699, 700 (Mo. App. 1929).  Complainant contends that the lease terms in this appeal provide for the ownership by the City upon expiration of the lease, therefore Complainant’s interest is a leasehold interest.

Complainant further contends they only hold a leasehold interest because they have no right to remove the hotel, they are required to operate the hotel and maintain the hotel during the terms of the lease.  Complainant’s leasehold interest is also evidenced by the requirement to obtain the City’s approval prior to constructing improvements or prior to making alterations to the hotel.  Lastly, the terms of the lease limit Complainant’s ability to mortgage the hotel.

Meyer testified that Complainant does not own the hotel, the City owns the hotel.  Complainant has a leasehold interest in the buildings, structures, fixtures and improvements.  Meyer testified that the prior operators were only able to transfer their interest – a leasehold interest – in the property to Complainant.

Slack also testified as to the leasehold interest.  Slack testified that the owner of the hotel was the City.  Complainant received a leasehold interest in the land and improvements under a long-term Lease and Concession Agreement with the City.

Complainant’s interest in the hotel is a leasehold interest.  The City is the fee simple owner of the land and improvements.  A leasehold interest is considered to be real property for the purpose of ad valorem taxation.  The TVM of Complainant’s interest in the subject property must be determined for ad valorem taxation.

 

Methods of Valuation/ Bonus Value

Proper methods of valuation and assessment of property are delegated to the Commission.  It is within the purview of the Hearing Officer to determine the method of valuation to be adopted in a given case.  See Nance v. STC, 18 S.W.3d 611, 615 (Mo. App. W.D. 2000); Hermel, Inc., 564 S.W.2d at 897; Xerox Corp. v. STC, 529 S.W.2d 413 (Mo. banc 1975).  

The bonus value methodology applicable where a political subdivision leases their property. Frontier Airlines, Inc. v. State Tax Commission, 528 S.W. 2d 943 (Mo. banc 1975).

Generally if the property is owned by the State, a county or any other political subdivision of the State on the relevant tax day, it is exempt from taxation. The exception to this rule is a taxable leasehold interest in property owned by a governmental entity. The exemption accorded to the governmental entity does not extend to a leasehold interest in such property because a leasehold interest is considered to be “real property” for the purpose of ad valorem taxation. Iron County v. State Tax Commission, 437 S.W.2d 665 (Mo. banc 1968).  Such an interest should be valued by the bonus value method which is defined as the difference between economic rent and the contract rent for use and occupancy of the premises. Frontier Airlines, Inc.id.

Because Complainant holds a leasehold interest in the hotel which is owned by the City, a political subdivision, the bonus value methodology should be used to value Complainant’s interest.  The bonus value is calculated by determining the difference between the economic rent and the contract rent.  The appraiser for Complainant, Slack, used the bonus value methodology for determing the value of the leasehold interest.

Slack analzed three factors to determine the market rent for the hotel.  The first factor was the leases on the subject property.  The property has been the subject of two leases.  One lease was in effect on the date of valuation and the second lease was in effect a few months after the date of valuation.  Given the close proximity of the date of valuation and the second lease, Slack opined it was a very good comparable for market rent. In comparing the leases, Slack noted that concession fees differed between the leases and if the new lease was in effect at the date of valuation, Complainant would have paid significantly less concession fees.  Consequently, the lease in effect on January 1, 2015, was above market rent.

Slack also reviewed market leases.  He found one lease of a hotel in the market.  Slack reviewed the terms of comparable lease.  Slack analyzed the terms of the comparable lease with the reported income and expenses of the subject.  He found that under the terms of the comparable lease, the return for the subject’s leasehold interest would be too low given the expenses to upgrade the hotel.

The last factor Slack reviewed to determine the market rent for the hotel was the lease of the subject property in place on the date of valuation.  Slack noted that the leasehold interest, fixtures, furniture, equipment and intangible assets sold for $8,500,000.  The buyer was also required to spend an additional $20,500,000 for upgrading the hotel.  The net income forecast for 2015 was only $1,600,000.  Slack concluded that a leasehold investment of $29,000,000 would not be undertaken for the income projected under the lease in effect on the date of valuation.

After reviewing the lease in effect on the date of valuation, comparing the lease in effect at the time of valuation with the new lease, and noting the only other market lease, Slack concluded that the difference between the economic rent and the contract rent was $0.  Slack testified that the contract rent for the leasehold was greater than market rent for such an interest.  He stated that “the best evidence of market rent is what the subject property leased for.”

In addition to the analysis of Slack, Long testified that Section 17.11 of FAA Order requires that all rates to non-aeronautical uses on airports be based on fair market value.

Complainant holds a leasehold interest in the hotel which is owned by the City, a political subdivision.  Such an interest should be valued using the bonus value method which is defined as the difference between economic rent and the contract rent for use and occupancy of the premises. Using the bonus value method, it is determined that Complainant’s leasehold interest is valued at $0.

Section 137.115.1 RSMo.

Respondent contends that even if the STC finds that Complainant’s interest is a leasehold, the bonus value methodology is not applicable  because the subject property lies within an airport boundary.  Respondent advocates that Section 137.115.1 RSMo modifies or supersedes the bonus value methodology.

Section 137.115.1 RSMo states in part:

“…  The true value in money of any possessory interest in real property in subclass (3), where such real property is on or lies within the ultimate airport boundary as shown by a federal airport layout plan, as defined by 14 CFR 151.5, of a commercial airport having a FAR Part 139 certification and owned by a political subdivision, shall be the otherwise applicable true value in money of any such possessory interest in real property, less the total dollar amount of costs paid by a party, other than the political subdivision, towards any new construction or improvements on such real property completed after January 1, 2008, and which are included in the above-mentioned possessory interest, regardless of the year in which such costs were incurred or whether such costs were considered in any prior year….”

 

Under this provision, costs expended for the renovation of the subject property may be used to reduce the valuation for ad valorem purposes.  If the BOE’s valuation of $13,447,000 is affirmed, the TVM would be reduced by the dollar amount of expenditures made subsequently to the subject property.  Complainant’s requirement to expend $20,500,000 for upgrading the property, would result in a decreasing value of the subject property and potentially a $0 TVM.

Although Respondent contends that Section 137.115.1 RSMo supercedes the bonus value, Respondent also asserts that Section 137.115.1 RSMo violates the Uniformity Clause of the Missouri Constitution.

The “uniformity requirement” states in relevant part:

Taxes … shall be uniform upon the same class or subclass of subjects within the territorial limits of the authority levying the tax … Except as otherwise provided in this constitution, the methods of determining the value of property for taxation shall be fixed by law.

 

Mo. Const. art. X §3.

 

Respondent argues that the statute requires treating property within the airport boundary differently than property outside the airport boundary.  The statute reduces the TVM (and potentially the taxes) for properties within the same subclass and similarly situated based on its location on one side or the other of an airport boundary. Additionally, Section 137.115.1 RSMo provides for a reduction in TVM each and every year regardless of the year in which such costs were incurred or whether such costs were considered in any prior year.  This reduction in TVM is a special privilege available only to those properties within the airport boundary and therefore treats properties within the same subclass differently and likely in a manner resulting in higher taxes (at least pro rata on a per dollar basis relative to the property’s market value) for the properties outside the airport boundary. Respondent argues that the airport property provision effectively creates a new statutorily created exception that is not authorized by the Missouri Constitution.

The provision was passed by the Missouri Legislature in 2008.  The Missouri Court of Appeals, Western District stated in regards to the language of Section 137.115.1 RSMo:

“The purpose of the bill was to change the ‘bonus value’ method of taxing real property leasehold interests on airport property.  Rather than ad valorem taxes being applied to the difference in value between the fair market rental value of the property and the actual rent paid by the leaseholder, the taxing authority was require to subtract the cost of new construction of any buildings on the property from the difference in rental value.”  In re Removal of Human Remains from Cemeteries in Kansas City, Platte County v. Unknown, 297 S.W.3d 616 (2009)

 

The legislative change in 2008 modified the “bonus value” method, but did not remove it.  The legislative change modified the method by adding the requirement that “the total dollar amount of costs paid by a party…towards new construction or improvements” be subtracted from the “bonus value,” resulting in a TVM equal to or lower than the previous “bonus value” only calculation.   The Court of Appeals acknowledged that the “change could result in a significant decrease in the property value subject to ad valorem property taxation, in some cases resulting in a 100-percent property tax abatement.”  In re Removal of Human Remains from Cemeteries in Kansas City, Platte County v. Unknown, 297 S.W.3d 616 (2009)

The State Tax Commission acknowledges the seriousness of these points; however, deciding constitutional issues is beyond the authority of an administrative agency…” Fayne v. Department of Social Services, 802 S.W.2d 565, 567 (Mo.App.1991); Duncan v. Missouri Board for Architects, Professional Engineers and Land Surveyors, 744 S.W.2d 524, 530–31 (Mo.App.1988) “Administrative agencies lack the jurisdiction to determine the constitutionality of statutory enactments. City of Joplin v. Industrial Commission of Missouri, 329 S.W.2d 687 (Mo. banc 1959). Such jurisdiction is vested in the the courts of Missouri.

Conclusion

Complainant has a leasehold interest in property owned by the City.  The subject property’s TVM, for ad valorem purposes, is determined using the bonus value.  The STC finds that the subject property has no bonus value as the contract rent is greater than or equal to the economic rent resulting in a value of $0.00.  There is no need to subtract “the total dollar amount of costs paid by a party…towards new construction or improvements”  provided for in Section 137.115.1 RSMo given the bonus value is $0.00.

ORDER

The Decision of the Hearing Officer is SET ASIDE.  Subject properties’ total assessed value is set at $0.00.

Segments of the Decision and Order of the Hearing Officer, including the findings of fact and conclusions of law therein, have been incorporated without reference, as if set out in full, in this final decision of the STC.

Judicial review of this Order may be had in the manner provided in Sections 138.432 and 536.100 to 536.140, RSMo within thirty days of the mailing date set forth in the Certificate of Service for this Order.

If judicial review of this decision is made, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the courts unless disbursed pursuant to Section 139.031.8, RSMo.

If no judicial review is made within thirty days, this decision and order is deemed final and the Collector of  Platte County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.

SO ORDERED June 26, 2018.

STATE TAX COMMISSION OF MISSOURI

 

Bruce E. Davis, Chairman

 

Victor Callahan, Commissioner

 

Will Kraus, Commissioner

 

Certificate of Service

I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 26th day of June, 2018: Complainants(s) counsel and/or Complainant, the County Assessor and/or Counsel for Respondent and County Collector.

Jacklyn Wood

Legal Coordinator

 

 

STATE TAX COMMISSION OF MISSOURI

 

GRADY HOTEL INVESTMENTS, LLC )
)
             Complainants )
)
v. ) Appeal No 16-79001
)
DAVID COX, ASSESSOR )
PLATTE COUNTY, MISSOURI, )
)
             Respondent )

 

DECISION AND ORDER

 

HOLDING

 

Decision of the Platte County Board of Equalization (BOE) is SET ASIDE. The evidence presented was substantial and persuasive evidence to rebut the presumption of correct assessment by BOE.

Grady Hotel Investments, LLC (Complainant), appeared by counsel Lowell Pearson.

David Cox, the Assessor of Platte County (Respondent), appeared by counsel Ferdinand Niemann.

Case heard and decided by Senior Hearing Officer John Treu (Hearing Officer).

ISSUE

            Complainant appealed, on the ground of overvaluation, the decision of the Platte County BOE. Complainant contends the property’s true value in money (TVM) is $0.

The Commission takes this appeal to determine the TVM for the subject property on January 1, 2015. The value as of January 1 of the odd numbered year remains the value as of January 1 of the following even numbered year unless there is new construction and improvement to the property. Section 137.115.1 RSMo

Evidence Presented

Complainant’s Evidence.   Complainant offered into evidence the following:

Exhibit Description
Written Direct Testimony (WDT) Thomas Slack (Slack), Certified General Real Estate Appraiser
WDT Randy Meyer (Meyer), CFO Parent Company of Complainant
WDT David Long (Long), Deputy Dir. of Kansas City Aviation Dept.
Exhibit A Qualification of Slack
Exhibit B Appraisal of Slack
Exhibit C Purchase and Sale Agreement of April 29, 2015
Exhibit D Quitclaim Deed of August 5, 2015
Exhibit E Portion of Assessor Manual
Exhibit F Lease and Concession Agreement of October 14, 2007
Exhibit G 2015 Second Amendment to Lease and Concession Agreement
Exhibit H 2016 Real Estate Property Tax Receipt
Exhibit I Federal Aviation Administration (FAA) Assurances
Exhibit J Federal Aviation Authority Order 5190.6 (b)
Exhibit K Respondent’s 2016 Valuation Analysis for BOE
Exhibit L Slack Appraisal Review
Rebuttal WDT Slack

 

Complainant presented the testimony and appraisal report of Thomas Slack (Slack), Certified General Real Estate Appraiser, and Exhibits supporting his determination of value.

The subject property is an improvement on land. The improvement is a hotel at the Kansas City Airport. The hotel consists of two towers: (1) 9 story tower constructed in 1974; and (2) 6 story tower constructed in 1988. The hotel has 384 rooms, meeting space, restaurant, business center, indoor pool and fitness center.

The land in which the hotel is located is leased from the City of Kansas City, Missouri (City). Pursuant to “Definitions. L” of the (original) Lease and Concession Agreement (the “Original Lease” or Exhibit F[1]), “Leasehold Improvements” means, collectively all improvements located on and within the Leased Premises. Pursuant to the first “[t]herefore clause in the Second Amendment to the Lease and Concession Agreement (as amended, the “Lease”), the Definitions therein are the same as the Original Lease unless defined differently. Pursuant to Section 501 of the Lease, title to the Leased Premises shall remain and are at all times in the City. Pursuant to Section 503 of the Lease, title to “[a]ll Leasehold Improvements approved by the City and any city-approved additions and alterations to these Leasehold Improvements shall become and remain the property of Lessee until the expiration or termination of this Agreement.” Pursuant to Section 508 of the Lease, Lessee shall have the right to mortgage or otherwise encumber its interest without the consent of the City.

Slack testified that in a prior agreement with the City, the hotel was required to make approximately $6,000,000 of improvements between 2008 and 2014.   The renovations were to be made to the guest rooms, restaurant, ballroom and meeting space, roof and exterior.

The subject property was purchased in 2015 for $8,500,000. The appraiser concluded that the purchase price is appropriately allocated to the interest in the real property (hotel) because the fixtures, furniture and equipment (FF&E) would be replaces and the cost of the replacements would be approximately $16,850,000.   In addition to the $16,850,000 of FF&E, the buyer was obligated to pay $3,781,000 for real property improvements.  The City required that Complainant enter into a 20-year franchise license agreement as a Marriott Hotel as of the date of mutual execution of the Lease, and continue to operate the Hotel under a franchise license agreement pursuant to the terms of Section 802 of the Lease. Exhibit G, § 507. The City and its authorized officers, employees, agents, contractors, subcontractors and other representatives shall have the right to enter upon the parcel for the following purposes: (i) inspect the parcel during normal business hours after the City has given Complainant reasonable notice to determine whether Complainant has complied and is complying with the terms and conditions of the Lease and (ii) perform maintenance and to make repairs in any case where Complainant is obligated, but has failed to do so, after the City has given Complainant reasonable notice to do so, in which event, Complainant shall reimburse the City for the reasonable cost thereof promptly upon demand. Complainant, at its expense, is required to maintain the Property in a good and safe condition. Complainant may not assign the Lease without first obtaining the written approval of the Director of the Kansas City Aviation Department (Director). Upon default by the Complainant, Director may declare the Lease terminated in its entirety and may exercise all rights of entry and re-entry, with or without process of law, and all right, title and interest of Complainant in and to the Lease and the Property shall expire.

Complainant also presented the testimony of Randy Meyer (Meyer), the Chief Financial Officer of the parent company of Complainant. Meyer testified he has been intimately involved in over sixty acquisitions and dispositions of properties. Meyer testified that Complainant has only a leasehold interest in the land and the improvement. Meyer testified that Host Hotels & Resorts, L.P. (Host) previously had a Lease and Concession Agreement with the City, which provided Host with a leasehold interest in the improvement. Meyer testified that Complainant and Host subsequently entered into a purchase and sale agreement, dated April 29, 2015, whereby Complainant purchased all of Host’s interest. Meyer testified a quitclaim deed was executed and recorded transferring Host’s interest to Complainant.

Complainant additionally presented the testimony of David Long (Long), the Deputy Director of Aviation for the Kansas City Aviation Department. Long testified he was very familiar with the terms of the Second Amendment to the Lease and Concession Agreement, due to his position as Deputy Director leading the Commercial Development Division of the Kansas City Aviation Department. Long testified that the City owns the subject property and that Complainant has a leasehold interest in the land and improvement.

Respondent’s Evidence. Respondent offered into evidence the following:

Exhibit Description
WDT Respondent
WDT, Exhibit A Respondent’s TVM and Information on Subject Property
WDT, Exhibit B BOE Appeal
WDT, Exhibit C Letter to BOE from Marriott International, Inc.
WDT, Exhibit D Pictures of Subject Property
WDT, Exhibit E Second Amendment to Lease and Concession Agreement

 

Respondent testified at the hearing. The Respondent testified that the TVM of the property for 2016 was $11,222,000. He testified that the owner provided information regarding the property including the purchase price of $8,500,000 and that improvements were made to the property of $1,200,000 in 2015-2016. (Respondent’s Exhibit C)

The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.

FINDINGS OF FACT

  1. Jurisdiction. Jurisdiction over this appeal is proper. Complainant timely appealed to the State Tax Commission from the decisions of the BOE.
  2. Evidentiary Hearing. The Evidentiary Hearing occurred on September 18, 2017, in Kansas City, Missouri.
  3. Identification of Subject Property. The property in question is Parcel 17-5.0-22-000-000-001.001. The Subject Property is commonly known as the Marriot Hotel at KCI (hotel) and has an address of 775 N. Brasilia Ave Kansas City, Missouri 64153. The hotel consists of two towers: (1) 9 story tower constructed in 1974; and (2) 6 story tower constructed in 1988. The hotel has 384 rooms, meeting space, restaurant, business center, indoor pool. Whirlpool and fitness center.
  4. Assessment. The property was classified as commercial real property and valued as follows:
Assessor Land Assessor Improvement Total BOE
$0 $13,447,000 $13,447,000 $13,447,000

 

  1. Airport Location. Subject property is located on land at the Kansas City International Airport. The land is owned by the City. The City is a political subdivision of the State of Missouri, therefore making it exempt from the payment of real property taxes in accordance with Missouri Constitution article X § 6.
  2. Purchase Price of the Possessory Interest. The subject property was purchased in 2015 for $8,500,000 all of which is attributable to the real property.
  3. Cost Paid. Complainant, pursuant to an agreement with the City, has agreed to expend $3,781,000 on the real property. In 2015-2016, the costs incurred were $1,200,000.
  4. TVM. The TVM of the subject property for 2016, is $7,300,000, a commercial assessed value of $2,336,000. (see Method of Valuation)

CONCLUSIONS OF LAW AND DECISION

Jurisdiction

The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious. The Hearing Officer shall issue a decision and order affirming, modifying or reversing the determination of the BOE, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious. Article X, Section 14, Mo. Const. of 1945; Sections 138.430, 138.431, 138.431.4, RSMo.

Presumption In Appeal

            There is a presumption of validity, good faith and correctness of assessment by the BOE. Hermel, Inc. v. STC, 564 S.W.2d 888, 895 (Mo. banc 1978); Chicago, Burlington & Quincy Railroad Co. v. STC, 436 S.W.2d 650, 656 (Mo. 1968); May Department Stores Co. v. STC, 308 S.W.2d 748, 759 (Mo. 1958). The presumption of correct assessment is rebutted when the taxpayer presents substantial and persuasive evidence to establish that the BOE’s valuation is erroneous and what the fair market value should have been placed on the property. Hermel, supra; Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).

Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. See, Cupples-Hesse, supra. Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief.   Brooks v. General Motors Assembly Div., 527 S.W.2d 50, 53 (Mo. App. 1975).

Complainant’s Burden of Proof

In order to prevail, a Complainant must present an opinion of TVM and substantial and persuasive evidence that the proposed value is indicative of the TVM of the subject property. Hermel, supra. There is no presumption that Complainant’s opinion is correct. The Complainant still bears the burden of proof in a STC appeal. Complainant is the moving party seeking affirmative relief.   Therefore, the Complainant bears the burden of proving the vital elements of the case, i.e., the assessment was “unlawful, unfair, improper, arbitrary or capricious.” See, Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003); Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. 1991).

Section 137.115.1 RSMo.

Section 137.115.1 RSMo states in part:

“…  The true value in money of any possessory interest in real property in subclass (3), where such real property is on or lies within the ultimate airport boundary as shown by a federal airport layout plan, as defined by 14 CFR 151.5, of a commercial airport having a FAR Part 139 certification and owned by a political subdivision, shall be the otherwise applicable true value in money of any such possessory interest in real property, less the total dollar amount of costs paid by a party, other than the political subdivision, towards any new construction or improvements on such real property completed after January 1, 2008, and which are included in the above-mentioned possessory interest, regardless of the year in which such costs were incurred or whether such costs were considered in any prior year….”

Method of Valuation

Section 137.115.1 RSMo sets forth a methodology for valuing certain properties. The method requires the finding:

  1. Property is located in, on or lies within the airport boundary having FAR Part 139 certification;
  2. Airport is owned by a political subdivision;
  3. Complainant has a possessory interest in the commercial property;
  4. The valuation is the true value in money of the possessory interest in real property; and
  5. Less total dollar amount of costs paid by a party, other than the political subdivision, toward any new construction or improvements on the real property completed after January 1, 2008.

 

Property is Located within the Airport Boundary having FAR Part 139 Certification

 

The Kansas City International Airport is a Class I, FAR Part 139 certified airport.

 

Airport is Owned by a Political Subdivision

 

City of Kansas City, Missouri is a municipal corporation. (Exhibit F)

 

Complainant Has a Possessory Interest in Subject Property

Respondent contends, even if Section 137.115.1 RSMo is constitutional, it is not applicable due to Complainant’s interest in the property. Respondent contends that Complainant has a fee interest in the Hotel and such interest does not qualify it for valuation under Section 137.115.1 RSMo. Complainant contends it has only a leasehold interest in the Hotel.

Respondent acknowledges that Complainant has only a leasehold interest in the land owned by the City, both because there is not a deed conveying the land and because the Lease clearly states “[u]nless otherwise provided in the Lease, title to the Leased Premises, but not the Leasehold Improvements, whether existing or installed by Lessee as part of the Lease, shall remain and are at all times in the City.” Exhibit G (Lease, Section 501). Differently, title to “[a]ll Leasehold Improvements approved by the City and any city-approved additions and alterations to these Leasehold Improvements shall become and remain the property of Lessee until the expiration or termination of this Agreement.” Exhibit G (Lease, Section 503).

A possessory interest is defined as: (1) an interest of a person in an article of property arising from a physical relationship to the article of such nature as to confer on him or her a degree of physical control over it, coupled with the intent so to exercise such control as to exclude the general public from use of it; (2) the right to occupy and use any benefit in a transferred property, granted under lease, licenses, permit, concession, or other contract; and, (3) a private taxable interest in public tax-exempt property. Possessory Interest, Glossary for Property Appraisal and Assessment, Second Edition, International Association of Assessing Officers (2013).

Whether the Complainant’s interest is a leasehold interest or a fee simple is irrelevant, as the Complainant, regardless if holding the property as a leasehold or fee simple, has a possessory interest in the real property, in that, Complainant may occupy and use the property. Hence, Section 137.115.1 RSMo. is applicable.

TVM of the Possessory Interest in Real Property

The TVM of the possessory interest in the subject property is $8,500,000 – the purchase price of the interest in 2015 by the Complainants.

Less Costs Paid after January 1, 2008.

 

The cost paid by any party toward new construction or improvements completed after January 1, 2008 is $1,200,000. Slack testified that prior agreements may have required costs for construction or improvements of $6,000,000, but he did not have records for such expenditures. The Respondent testified to expenditures by the Complainant of $1,200,000.

Using the methodology found in 137.115.1 RSMo, the TVM of the subject property is $7,300,000. (TVM [$8,500,000] – Cost [$1,200,000]).

Constitutionality of a Statute

 

Respondent contends that Section 137.115.1 RSMo. is unconstitutional. The State Tax Commission will not address the point raised. “Deciding constitutional issues is beyond the authority of an administrative agency…” Fayne v. Department of Social Services, 802 S.W.2d 565, 567 (Mo.App.1991); Duncan v. Missouri Board for Architects, Professional Engineers and Land Surveyors, 744 S.W.2d 524, 530–31 (Mo.App.1988) “Administrative agencies lack the jurisdiction to determine the constitutionality of statutory enactments. City of Joplin v. Industrial Commission of Missouri, 329 S.W.2d 687 (Mo. banc 1959).

 

ORDER

The assessed valuation for the subject property as determined by the BOE, for the subject tax day, is set at $2,336,000; TVM of $7,300,000.

Application for Review

A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.

          Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432, RSMo.

Disputed Taxes

The Collector of Platte County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.

Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.

SO ORDERED this 16th day of January 2018.

 

STATE TAX COMMISSION OF MISSOURI

John J. Treu

Senior Hearing Officer

 

Certificate of Service

 

I hereby certify that a copy of the foregoing has been emailed on this 16th day of January, 2018 to:

 

Chris.Kline@huschblackwell.com; ferd@christiedev.com; ferdinandniemann@yahoo.com; Lowell.Pearson@huschblackwell.com; Charles.Renner@huschblackwell.com; david.cox@co.platte.mo.us and county Collector.

 

Jacklyn Wood

Legal Coordinator

[1] All references to Exhibits refer to Complainant’s Exhibits, unless specifically stated otherwise.