In re Equalization Appeal of Kansas Entertainment

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NOT DESIGNATED FOR PUBLICATION

No. 117,406

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

In the Matter of the Equalization Appeal of
KANSAS ENTERTAINMENT, L.L.C.,
for the Tax Year 2015 in Wyandotte County, Kansas.

MEMORANDUM OPINION

Appeal from the Board of Tax Appeals. Opinion filed December 21, 2018. Affirmed.

Linda Terrill, of Property Tax Law Group, LLC, of Overland Park, for appellant/cross-appellee
Kansas Entertainment, L.L.C.

Jarrod C. Kieffer and Christina J. Hansen, of Stinson Leonard Street LLP, of Wichita, for
appellee/cross-appellant Wyandotte County.

Before MCANANY, P.J., PIERRON and LEBEN, JJ.

PER CURIAM: Kansas Entertainment, L.L.C. (Taxpayer) appeals from the ruling
by the Kansas Board of Tax Appeals (BOTA) establishing the ad valorem valuation of
the Taxpayer's real property in Kansas City for the 2015 tax year.

The Hollywood Casino is located on the Taxpayer's property, which is situated on
the edge of the Kansas Speedway. The property consists of two parcels that comprise one
economic unit. The relevant valuation date is January 1, 2015. The Taxpayer sought
review by BOTA under K.S.A. 2017 Supp. 79-1609.

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BOTA conducted an evidentiary hearing, at which the Unified Government of
Wyandotte County/Kansas City, Kansas (Unified Government) bore the burden of proof.
The Unified Government claimed that the fair market value of the property was $157
million. This valuation was based on an appraisal performed by Suzanne Mellen and
Shannon Okada, both appraisers for HVS Consulting and Valuation Services, an
appraisal and consulting firm that caters to the hospitality industry. The Unified
Government also presented testimony from Kevin Bradshaw, supervisor of the
commercial real estate section in the Wyandotte County Appraiser's Office. The
Taxpayer relied on the testimony of its retained valuation expert, David Lennhoff, who
opined that the fair market value of the property was only $68.6 million.

Following BOTA's evidentiary hearing, BOTA determined that the income
methodology was the best method to determine the value of the property. BOTA
generally adopted Lennhoff's income approach, under which the total going concern was
valued and then allocated to real, personal, and intangible property. But BOTA made a
few changes to Lennhoff's calculations—substituting values for 2014 anticipated revenue
and earnings before interest, tax, depreciation, and amortization (EBITDA)—and valued
the property at $102 million. The Taxpayer's petition for judicial review and the Unified
Government's cross-petition bring the matter to us.

On appeal, the Taxpayer contends that BOTA erred by modifying Lennhoff's
appraisal by using values with no evidentiary support and with little explanation. The
Taxpayer argues that BOTA's adjustments are not supported by substantial evidence and
are therefore unreasonable, arbitrary, and capricious.

The Unified Government filed a cross-petition for review, arguing: (1) BOTA
erred in holding that Lennhoff's income allocation approach was a better indicator of
value than Mellen's management fee approach; and (2) BOTA erred in adopting a
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valuation approach that relied on evidence that BOTA previously ruled was irrelevant
and undiscoverable.

Because BOTA's decision is based on substantial competent evidence, because
BOTA did not commit reversible err in adopting the methodology of the Taxpayer's
expert over that of the Unified Government's expert, and because the Unified
Government has failed to show that including the selling price of one particular casino
owned by a Real Estate Investment Trust (REIT) in the data set of casino sales
transactions significantly altered BOTA's decision, we affirm.

The Property

One of four state-sponsored gaming enterprises in Kansas authorized under the
Kansas Expanded Lottery Act (KELA) is located on the property. See K.S.A. 2017 Supp.
74-8733 et seq. In 2007, the Legislature passed KELA, which divided the State into four
"gaming zones"—northeast, south central, southwest, and southeast—and authorized the
Kansas Lottery to operate a single gaming facility in each zone. K.S.A. 2017 Supp. 74-
8734(a), (d), and (h)(17). Wyandotte County is in the northeast gaming zone. K.S.A.
2017 Supp. 74-8702(f). The State has set minimum infrastructure investment
requirements for proposed casino projects. The statutorily required minimum investment
in the northeast gaming zone is $225 million. K.S.A. 2017 Supp. 74-8734(g)(2). The
State also required the installation of a minimum of 2,000 slot machines in the casino.

Hollywood Casino, located on 101 acres of land, opened in February 2012. The
approximately 245,000-square foot building includes a Las Vegas-style casino with a
94,444-square foot gaming floor; a steak house, buffet, sports bar, mid-level restaurant,
coffee shop, and VIP lounge; office and administrative space; 1,253 covered parking
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spaces; and additional surface parking. The casino floor has 2,000 slot machines, 40
banked gaming tables, and 12 poker tables.

The property is situated in the Village West retail development area next to the
Kansas Speedway in Kansas City. Village West is located at the intersection of I-70 and
I-435 in Wyandotte County. The Kansas Speedway and the Village West development
have transformed the area into a major tourist destination that attracts approximately 10
million visitors annually.

Hollywood Casino's primary competition includes four full-service riverboat
casinos in the Kansas City area. Hollywood Casino's competitors have food and beverage
amenities, but according to the Unified Government's expert, Hollywood Casino's
restaurants are generally of higher quality. Hollywood Casino is designed to "cater to
high-end players in addition to mass players." In its valuation report, HVS described
Hollywood Casino as "state of the art," and offering a "sophisticated, contemporary, and
inviting atmosphere."

BOTA Proceedings

1. Suzanne Mellen, the Unified Government's appraisal expert

Suzanne Mellen is employed by HVS as the Senior Managing Director of the
Consulting and Valuation Division and President of the Gaming Services Division.
Mellen has the MAI, CRE, and FRICS appraisal designations. She is also a member of
the International Society of Hospitality Consultants and a fellow of the Cornell Center for
Real Estate and Finance. Mellen has written and lectured on many hospitality property
related topics and specializes in appraising hospitality-related assets, including hotels,
casinos, resorts, and arenas. David Lennhoff, the Taxpayer's expert, recognizes Mellen as
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a leading expert in the field of casino appraisal. Mellen and HVS have appraised casinos
in nearly every United States jurisdiction, internationally, and for a wide variety of
purposes. Shannon Okada, also an employee of HVS, helped prepare the valuation report.

Using the income approach, Mellen: (1) projected revenue and operating expenses
for the property; (2) deducted a management fee to remove any intangible property value;
(3) deducted a reserve for replacement to allow for a return of personal property; (4)
capitalized the income stream through both (a) an earnings before interest, tax,
depreciation, and amortization (EBITDA) multiplier process and (b) a 10-year discounted
cash-flow analysis; and (5) subtracted the value of personal property to arrive at a real
estate value of $157 million.

As a part of her analysis, Mellen forecasted nongaming revenue and expenses
using the best available data in the absence of Hollywood Casino's actual financial
information. She projected the casino's EBITDA would be $33,993,000 (23.2%) for
2015, $33,539,000 (22.9%) for 2016, then modestly increasing in future years, and
stabilizing at a 22.7% EBITDA margin.

On this point, the Unified Government had formally requested detailed financial
information for the subject property in July 2015, a year before the BOTA hearing.
Following two motions to compel and several rounds of supplemental production, the
Taxpayer finally produced the financial information a couple of months before the
evidentiary hearing. The production of documents came too late for Mellen to prepare a
revised report, but Mellen indicated that if she had received the financial information
sooner, "it is highly likely that we would have forecast a higher EBITDA margin"
because "the financial statements indicate that this is a more profitable operation than we
had . . . forecasted in our appraisal."

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In concluding her analysis, Mellen reconciled the income and cost approaches to
value to arrive at a real and personal property value of $187 million. Following the
management fee methodology, she reduced the real property and tangible personal
property value of $187 million by approximately $30 million, resulting in a final
valuation under the income approach of $157 million.

2. David Lennhoff, the Taxpayer's appraisal expert

Lennhoff has earned six of the seven designations offered by the Appraisal
Institute and is a nationally recognized expert in the Uniform Standards of Professional
Appraisal Practice (USPAP). His practice is devoted to complex appraisal issues. Some
examples include being retained as a methodology expert and review appraiser of the
Flight 93 crash site for condemnation; valuing the Gettysburg Tower at the Gettysburg
National Battlefield Park on behalf of the Department of Justice; and appraising the
Alaska Pipeline. He has experience in casino appraisal, having appraised the Kansas Star
Casino twice and two other out-of-state casinos.

Like Mellen, Lennhoff chose the income approach as the best method for
appraising the subject property. The income approach for a casino property combines the
income and sales comparison approaches to find a value for the underlying real estate
alone.

For his income approach, Lennhoff used an allocation approach in which he
estimated the value of the total business enterprise and then allocated a percentage of the
total value to the real property.

Lennhoff's calculation began with the subject property's 2014 total annual revenue
of $143,390,489. He used this number because of his finding that the revenue "has sort of
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plateaued." He conceded that Hollywood Casino showed increases of 4.86% in 2013 and
2.42% in 2014, but he weighed that against the fact that the overall Kansas City gaming
revenues decreased approximately 2.7% year-over-year in both 2012-13 and 2013-14.

Next, relying on information concerning broad averages of national and
international casino operators, Lennhoff estimated a market EBITDA margin of 20%.

Next, Lennhoff determined the EBITDA multiplier, which he extracted from 12
sales of casino going concerns. The EBITDA multipliers from those transactions ranged
from 7.16 to 8.82, with a median of 7.68 and an average of 7.78. Lennhoff arrived at an
EBITDA multiplier of 7.75 based on casino sales across the country, settling on a number
roughly at the midpoint of the data set and giving the greatest weight to the most recent
transactions in the industry.

Using this total annual revenue, EBITDA margin, and EBITDA multiplier,
Lennhoff determined a total business enterprise value of approximately $222 million.

The final step in the income approach is to determine how much of the value of
the total assets of the business is attributed to real estate and separate that value from
other business assets. Lennhoff considered three sources to determine how much of the
casino's value was attributable to the real estate: (1) studies of casino sales; (2) analyses
of similar property types and the contribution to value made by the real estate in those
situations; and (3) an analysis of 10K filings by similar businesses.

Lennhoff reviewed: (1) a study by William Kinnard regarding separating real
property from the business; (2) racetrack sales with or without flagship races; and (3)
purchase price allocations of casino property in transactions across the country. The study
of casino property transactions showed that the real property contributed between 23%
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and 38% of the total value. Lennhoff concluded that in this case 30% of a casino's value
is attributable to the real property. From this he derived a real property valuation of $66.7
million.

Lennhoff then assigned an 80% weight to his income allocation approach "because
it better answers the question" of how much the real estate contributes to the assets of the
business. He concluded that a reconciled value of the fee simple interest in the real estate
was $68.6 million.

3. Scott Biethan, the Unified Government's appraisal review expert

Scott Biethan, CBRE Hotels consulting and gaming services expert, conducted an
appraisal review. He testified that Lennhoff's income approach was incorrectly performed
for several reasons. First, Lennhoff took Hollywood Casino's 2014 revenue as the starting
point for an EBITDA reconstruction and failed to account for the trend of increasing
revenues:

"The area of disagreement is that when I reviewed and looked at his report, I see
that net revenues from 2012 through 2014 have been increasing and—you know, and I
heard the testimony and discussion around his thoughts of the market, but there was not
a—a detailed analysis of the subject property related to the market and where those
revenues might be in 2015.
"And, you know, as we understand, you know, buyers and [sellers] and market
participants, they're really looking at a forward number, and that's very important. And
when the property has been trending forward historically, the question of why you would
not have considered a—a higher number on a going forward basis is a question that I
didn't—that I didn't see answered nor would I agree with just leaving it flat. I would have,
you know, thought there would have been a lot more consideration to growing the
revenue in 2015 to use as the basis for the income approach."

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Second, Biethan did not agree with the 20% EBITDA margin used by Lennhoff,
noting that it jumped out at him as low and unsupported. Lennhoff selected 20% based on
his review of a number of broad averages of public information regarding various gaming
companies. Biethan thought Lennhoff should have gathered specific data to compare the
style of casino, market conditions, and the location to support his EBITDA margin.

Finally, Biethan took issue with Lennhoff's 30% allocation to the real estate,
explaining that the allocation to real estate is not widely used as a method to appraise
property in the gaming industry.

4. Projected revenue and economic concerns

The parties disagreed about the projected revenue and economic forecast for the
Hollywood Casino. The Unified Government pointed to evidence showing a projected
growth in revenue. But the Taxpayer highlighted evidence showing a saturated market
with little room for economic growth.

From its opening in 2012 through fiscal year 2015, this casino increased its
revenue and profits each year. Moreover, its EBITDA and EBITDA margin both
increased annually every year for the first three years of operation. Its fiscal year ends on
June 30 each year, so fiscal year 2013 includes figures for the last half of 2012. Its actual
net revenues from 2013 to 2015 are:

 $133,253,000 in 2013,
 $140,771,000 in 2014, and
 $151,453,000 in 2015.

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The property had actual EBITDA margins of 29% in 2013, 31.1% in 2014, and
32.9% in 2015. The Taxpayer projected further EBITDA margins of 33.3% for 2016
through 2018.

The casino's financial data through fiscal year 2015 and projections through 2018
show that revenues were increasing and that trend was expected to continue. In a
forecasted statements of operations, the Taxpayer represented the projected income of the
casino as follows:

 $156,611,000 for 2016,
 $159,847,000 for 2017, and
 $161,445,000 for 2018.

Hollywood Casino's increase in revenue and projected increase contrasted with the
overall Kansas City gaming market which experienced a general post-recession decline,
interrupted only by a one-year increase of 7% due to the opening of the Hollywood
Casino in 2012. Mellen explained that Hollywood Casino's market share had increased in
a relatively saturated market by taking demand from the other casinos in the area.

In contrast, Lennhoff testified that the overall conditions for gaming on a national
level are not very good, with national forecasts showing a "saturated flat" market with
very little increase.

BOTA's Decision

BOTA issued a summary decision in which it found the methodology used by
Lennhoff to be the best method of determining the fair market value. The Unified
Government requested a full and complete opinion under K.S.A. 2017 Supp. 74-2426(a).
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In the complete opinion that followed, BOTA explained that it found the Lennhoff
appraisal to be the "best indicator of value as it is the best methodology presented for
determination of the subject real estate value." BOTA accepted Lennhoff's EBITDA
multiplier of 7.75% and his conclusion that the real estate makes up 30% of the value of
the total assets of the business. But in adopting Lennhoff's approach, BOTA made two
changes to Lennhoff's calculations.

First, BOTA rejected Lennhoff's forecast of net revenues and instead found
Mellen's 2015 revenue estimate of $146,254,000 to be more accurate. BOTA explained:
"Lennhoff failed to project any increase in the Taxpayer's total revenue. This is at odds
with the Taxpayer's actual revenue that has been increasing annually. Therefore, we find
Mellen's 2015 total revenue determination to be more accurate than that sponsored by
Lennhoff."

Second, BOTA found Lennhoff's EBITDA margin of 20% "inconsistent" with the
casino's actual performance. Mellen estimated an EBITDA margin in her 10-year
discounted cash-flow approach of 27.5% to 27.9%. But Mellen testified that if she had
received all of the figures requested in discovery at the time she prepared her valuation,
she would have increased the EBITDA margin a little. The property had actual EBITDA
margins of 29% in 2013, 31.1% in 2014, and 32.9% in 2015. BOTA placed "primary
weight" on the property's actual performance and adopted an EBITDA margin of 30%.

After applying these inputs to Lennhoff's methodology, BOTA concluded the
2015 appraised value of the subject property was $102 million.

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Motions for Reconsideration

The Taxpayer filed a motion for reconsideration under K.S.A. 2017 Supp. 74-
2426(b). It claimed that BOTA erred in selecting "bits and pieces from the Mellen
Method." It asked BOTA to reconsider and adopt Lennhoff's appraisal in full, with an
appraised value of the real estate of $68.6 million.

The Unified Government also filed a motion for reconsideration, asserting that
BOTA's conclusion that the Lennhoff allocation approach is the "best indicator of value"
was erroneous and directly conflicted with its prior discovery ruling that sales data held
by a nonparty Real Estate Investment Trust (REIT) was irrelevant to valuing the subject
property.

BOTA denied both motions for reconsideration. With regard to the Unified
Government's argument that BOTA's prior discovery ruling was inconsistent with its
conclusion, BOTA noted that it denied the Unified Government's motion due to relevance
and noted that the discovery request was directed to nonparties to this action. BOTA
noted that the scope of discovery differs significantly between parties and nonparties, and
the Kansas Rules of Civil Procedure do not apply to nonparties. See In re Cusumano, 162
F.3d 708, 717 (1st Cir. 1998); Bio-Vita, Ltd. v. Biopure Corp., 138 F.R.D. 13, 17 (D.
Mass. 1991).

BOTA also rejected the Taxpayer's position that it must adopt an appraisal in its
entirety. BOTA reaffirmed its decision to adjust Lennhoff's method by using two figures
to make an adjustment to value. It noted that BOTA is required to render decisions based
on substantial competent evidence in light of the record as a whole, and it is "duty bound"
to "implement warranted adjustments when supported by substantial credible evidence."

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The Taxpayer filed a petition for judicial review, and the Unified Government
filed a cross-petition for judicial review under K.S.A. 2017 Supp. 74-2426(c)(4)(A),
which permits a review of BOTA's decision by the Court of Appeals without prior
judicial review by the district court.

Standards of Review

In this review our role is not to conduct a de novo examination of the fair market
value of the subject property for ad valorem tax purposes. Instead, we review BOTA's
decision in the manner prescribed by the Kansas Judicial Review Act (KJRA), K.S.A.
2017 Supp. 77-601 et seq., which defines the scope of review of state agency actions. See
K.S.A. 2017 Supp. 74-2426(c).

The Unified Government bears the burden of proof before BOTA under K.S.A.
2017 Supp. 79-1609. But on appeal, the burden of proving the invalidity of the agency's
actions and decision is on the party asserting the invalidity. K.S.A. 2017 Supp. 77-
621(a)(1); In re Equalization Appeal of Wagner, 304 Kan. 587, 597, 372 P.3d 1226
(2016). Further, when reviewing an agency action as set forth in K.S.A. 2017 Supp. 77-
621(c), we take into account the rule of harmless error. K.S.A. 2017 Supp. 77-621(e);
Sierra Club v. Moser, 298 Kan. 22, 47, 310 P.3d 360 (2013).

In our review, we construe tax statutes strictly in favor of the taxpayer. See In re
Tax Appeal of Harbour Brothers Constr. Co., 256 Kan. 216, 223, 883 P.2d 1194 (1994);
In re Tax Protest of Jones, 52 Kan. App. 2d 393, 396, 367 P.3d 306 (2016), rev. denied
305 Kan. 1252 (2017). The interpretation of a statute is a question of law over which we
have unlimited review. Unruh v. Purina Mills, 289 Kan. 1185, 1193, 221 P.3d 1130
(2009). In reviewing Kansas statutes, we no longer defer to the agency's interpretation.
See Douglas v. Ad Astra Information Systems, 296 Kan. 552, 559, 293 P.3d 723 (2013);
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In re Tax Exemption Application of Kouri Place, 44 Kan. App. 2d 467, 472, 239 P.3d 96
(2010). But this principle applies only to the interpretation of statutes.

Under K.S.A. 2017 Supp. 74-2426(c), BOTA is an agency subject to KJRA
review. Under the KJRA, K.S.A. 2017 Supp. 77-621(c) sets out eight standards under
which an appellate court may grant relief. In this case, the parties are relying on K.S.A.
2017 Supp. 77-621(c)(4), (c)(7), and (c)(8) to support their argument that relief should be
granted. See In re Tax Appeal of Brocato, 46 Kan. App. 2d 722, 727, 277 P.3d 1135
(2010).

● K.S.A. 2017 Supp. 77-621(c)(4) requires us to grant relief if the agency
erroneously interpreted or applied the law.

● K.S.A. 2017 Supp. 77-621(c)(7) allows us to grant relief if the agency action is
based on a determination of fact, made or implied by the agency, that is not
supported by evidence that is substantial when viewed in the light of the record
as a whole. "[I]n light of the record as a whole" includes evidence both
supporting and detracting from an agency's finding. K.S.A. 2017 Supp. 77-
621(d); Redd v. Kansas Truck Center, 291 Kan. 176, 183-84 239 P.3d 66
(2010). To be substantial competent evidence, the evidence must provide a
substantial basis in fact from which the issues can be reasonably determined.
Frick Farm Properties v. Kansas Dept. of Agriculture, 289 Kan. 690, 709, 216
P.3d 170 (2009). To find that a decision is not supported by substantial
evidence requires that the decision be "so wide of the mark as to be outside the
realm of fair debate. [Citation omitted.]" In re Equalization Appeal of Prieb
Properties, 47 Kan. App. 2d 122, 137, 275 P.3d 56 (2012). We are specifically
instructed not to "reweigh the evidence or engage in de novo review." K.S.A.
2017 Supp. 77-621(d).
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● Finally, K.S.A. 2017 Supp. 77-621(c)(8) requires us to grant relief if BOTA's
action is otherwise unreasonable, arbitrary, or capricious.

The Taxpayer's Contentions on Appeal

The Taxpayer agrees with BOTA's decision to adopt Lennhoff's income approach
methodology as the better way to arrive at a value for the subject property. But the
Taxpayer argues that BOTA erred when it made two adjustments to Lennhoff's appraisal
by using two different values that increased Lennhoff's estimate of value. The Taxpayer
asserts this adjustment is not supported by substantial evidence and is otherwise
unreasonable, arbitrary, and capricious.

BOTA found Lennhoff's income approach represented the "best indicator of
value." It found Lennhoff's methodology to be "more comprehensive and compelling than
that of County expert witness Suzanne [Mellen]." But BOTA made two adjustments to
Lennhoff's income approach by using different values for (1) the casino's anticipated
revenue and (2) its EBITDA margin.

Lennhoff used actual revenue of $143,390,489. He estimated the EBITDA margin
to be 20% based on an industry-wide survey of average profits for casino operators.
Finally, he extracted an EBITDA multiplier of 7.75 from a nationwide sampling of casino
sales, using roughly the midpoint of the data set and giving the greatest weight to the
"most recent transactions in the industry."

Both parties agree that the casino revenues and the EBITDA margin are factors to
be considered when appraising the fair market value of the casino. Both appraisers use
the casino's revenues as the starting point for their income approaches. The issue before
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us is whether BOTA erred in modifying Lennhoff's valuation by using its own values for
expected revenue and the EBITDA margin in order to reach its own valuation of the real
property. BOTA explained its reasoning for these modifications:

"In his income approach, however, Lennhoff failed to project any increase in the
Taxpayer's total revenue. This is at odds with the Taxpayer's actual revenue that has been
increasing annually. Therefore, we find Mellen's 2015 total revenue determination to be
more accurate than that sponsored by Lennhoff. Further, Lennhoff's EBITDA margin of
20% is inconsistent with the Taxpayer's actual performance. Mellen determined an
EBITDA margin in her 10 year discounted cash flower approach of 27.5% to 27.9%.
Further, the subject property had an actual EBITDA margin of 31% in 2014 and 33% for
2015, with forecasted EBITDA margins of 33% for years 2016 to 2018. Giving primary
weight to the subject property's actual performance, we find an EBITDA margin of 30%
is in order."

The Taxpayer takes issue with BOTA's findings, noting that BOTA is charged
with separately stating findings of fact, conclusions of law, and the reasons for its
decision. See K.S.A. 77-526(c). But BOTA is not required to render the explanation for
its findings in detail so long as the explanation is "specific enough to allow judicial
review of the reasonableness of the order." Zinke & Trumbo, Ltd. v. Kansas Corporation
Comm'n, 242 Kan. 470, 475, 749 P.2d 21 (1988); Rhodenbaugh v. Kansas Employment
Sec. Bd. of Review, 52 Kan. App. 2d 621, 631, 372 P.3d 1252 (2016) (explaining that
under K.S.A. 77-621, the court must "review the agency's explanation as to why the
evidence supports its findings"), rev. denied 306 Kan. 1319 (2017).

BOTA did not change Lennhoff's valuation formula, it merely applied different
values into the formula for projected revenue and the EBITDA multiplier. In its decision,
BOTA provided a reason for each of the modifications:

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 BOTA stated that it rejected Lennhoff's revenue projection of $143,390,489
because he did not account for an increase in revenue despite the fact that
revenues had increased each year and were projected to increase in fiscal
year 2015. Thus, BOTA found Mellen's 2015 revenue projection of
$146,254,000 to be more accurate.
 BOTA adopted an EBITDA margin of 30%, which was higher than the
number relied on by either appraiser. But BOTA explained that it based its
number on actual and forecasted EBITDA multipliers for the Hollywood
Casino.

Finding BOTA's reasoning clear, our role is to determine whether each of these
modifications is supported by substantial competent evidence in the record. See In re Tax
Appeal of Dillon Stores, 42 Kan. App. 2d 881, 891-92, 214 P.3d 707 (2009) (upholding
BOTA's adjustment for freezer space/cooler space that was not accounted for in the
appraisal). Our task is not to reweigh evidence. We will uphold findings that are
supported by substantial evidence even though evidence in the record supports contrary
findings. Chowning v. Cannon Valley Woodwork, Inc., 32 Kan. App. 2d 982, 987, 93
P.3d 1210 (2004). As noted earlier, for a decision to lack substantial competent evidence,
it must be "so wide of the mark as to be outside the realm of fair debate." Dillon Stores,
42 Kan. App. 2d at 889.

The law does not require BOTA to adopt either party's appraisal in full so long as
there is evidence in the record to support BOTA's adjustments. In Dillon Stores, BOTA
made an upward adjustment to the taxpayer's appraisal because it failed to adequately
account for the value of the freezer/cooler space. A panel of this court affirmed BOTA's
ruling even though the taxpayer had not asked for the adjustment, reasoning that the
adjustment was derived from information contained in the record. 42 Kan. App. 2d at
888-89.
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The USPAP valuation standards are a part of our statutory valuation scheme, and
BOTA's failure "to adhere to them may constitute a deviation from a prescribed
procedure or an error of law." Dillon Stores, 42 Kan. App. 2d at 890. In In re 2013
Equalization Appeal of Kansas Star Casino, No. 115,587, 2018 WL 2748748, at *10
(Kan. App. 2018) (unpublished opinion), the appellant complained that BOTA picked
values from the competing valuation reports "without providing expert testimony to
establish the proper relationship between the data points." A panel of our court concluded
that BOTA was not required to adopt either party's appraisal report in full provided that
any adjustment to value is supported by evidence in the record. 2018 WL 2748748, at
*11.

Here, BOTA adopted Lennhoff's methodology, and neither party has effectively
argued how a substitution of the two values—projected revenue and EBITDA margin—
invalidated the methodology or deviated from the USPAP standards. Because there is
nothing in the record to indicate—nor does either party argue—that BOTA's adjustments
violated USPAP standards, we find BOTA did not err in adjusting these values provided
that the adjustments are supported by substantial evidence.

BOTA found Lennhoff's projected revenue to be too low. It based its reasoning on
the fact that the casino's revenue had increased every year, and Lennhoff's projected
revenue did not account for an increase in revenue. Instead, BOTA adopted Mellen's
2015 projected revenue number. This modification is clearly supported by evidence in the
record.

The record also supports BOTA's modification to the EBITDA margin. BOTA
specifically rejected Lennhoff's EBITDA multiplier of 20% as too low because it was not
consistent with the casino's actual performance. Mellen estimated the EBITDA margin to
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be in the range of 27.5% to 27.9%. But Mellen did not receive all of Hollywood Casino's
financial information until well after she completed her valuation report. At the hearing,
Mellen testified that she would have projected a higher EBITDA margin if she had
received Hollywood Casino's full financial information at the time of her valuation. She
testified:

"[T]he income and expense statements that we received of the subject property reflect a
modestly higher gaming revenue that we had projected. But the most market contrast to
our own projections of what the subject property—how the subject property has been
performing, because we had no—really, no basis to understand exactly how this hotel is
performing, that it's significantly more profitable than we had projected. We were
projected at 27 percent EBITDA and this property is throwing about a 33 percent
EBITDA margin, and that makes for a significant different in EBITDA and net income
available to be generated by the property."

Biethan criticized Lennhoff's valuation primarily because he thought the
forecasted revenue and EBITDA margin were too low. Biethan's testimony supports the
adjustments that BOTA made to Lennhoff's values.

The property had actual EBITDA margins of 29% in 2013, 31.1% in 2014, and
32.9% in 2015. BOTA placed "primary weight" on the property's actual performance and
adopted an EBITDA margin of 30%. This modification to the EBITDA margin is
supported by evidence in the record.

In In re 2014 Equalization Appeal of Kansas Star Casino, No. 116,421, 2018 WL
2749734 (Kan. App. 2018) (unpublished opinion), the income allocation approach to
value used by Lennhoff and approved by BOTA was the same methodology used here. A
panel of this court did not explicitly rule on the methodology because it found no support
for BOTA's decision to use median numbers from the information in both appraisals. The
20

court found BOTA's method to be its "version of splitting the baby." 2018 WL 2749734,
at *19. The court rejected BOTA's figures and agreed with the Unified Government's
argument that "BOTA seems to have selected figures out of thin air and provided no
explanation for its 21% profit margin." 2018 WL 2749734, at *20.

In contrast, the adjustments made to Lennhoff's methodology in our present case
are supported by evidence in the record. BOTA did not change Lennhoff's method. It
merely used different values in the same formula relied on by Lennhoff to reach the
valuation of the property. BOTA did not rely on arbitrary or median numbers to
determine revenues or the EBITDA margin. Rather, the record contains substantial
evidence, in light of the record as a whole, in support of BOTA's adjustments.
Additionally, the parties have not shown that BOTA acted arbitrarily or unreasonably in
adjusting the final valuation of the subject property.

The Unified Government's Contentions in its Cross-Appeal

In its cross-appeal, the Unified Government first argues that BOTA erred in not
adopting Mellen's management fee approach over Lennhoff's approach to value.

When reviewing whether a decision by a fact-finder is supported by substantial
competent evidence, we do not reweigh the evidence, pass on the credibility of witnesses,
or resolve conflicts of evidence. In re Guardianship & Conservatorship of Burrell, 52
Kan. App. 2d 410, 419, 367 P.3d 318 (2016); see K.S.A. 2017 Supp. 77-621(d). Thus, we
will uphold findings that are supported by substantial evidence even though there is
evidence in the record that supports contrary findings. Chowning, 32 Kan. App. 2d at
987.

21

The Unified Government complains that BOTA adopted Lennhoff's approach
without any clear rationale. But in adopting Lennhoff's approach, BOTA stated that
Lennhoff's approach was "more comprehensive and compelling" than Mellen's approach.
It noted that Lennhoff's income approach methodology, with warranted adjustments, was
"the best indicator of value as it is the best methodology presented for determination of
the subject real estate value." On appeal, the Unified Government has the burden to show
that BOTA's decision to adopt Lennhoff's approach is not supported by the evidence, is
contrary to law, or is arbitrary and capricious.

Both parties agree with BOTA that the primary challenge in this case "lies in
properly distilling the market value for the subject real estate from the market value of
the business enterprise/going concern." This is a challenging task because casinos are
rarely sold as business enterprises separate and apart from the underlying real estate.
Rather, they are sold as going concerns with the underlying real estate included in the
sale price.

Several approaches can be used to separate intangible ongoing business values
from the real and personal property values. Those approaches include: (1) the cost
approach; (2) the management fee approach; (3) the market participant survey approach;
and (4) the parsing of income approach. The Appraisal of Real Estate, Appraisal Institute,
711-13 (14th ed. 2013). Both parties here relied on an income approach: Mellen used the
management fee approach and Lennhoff relied on the income capitalization approach.
Mellen's management fee approach is known as the Rushmore model.

"The Rushmore model is a method of valuing hotels. It was developed in Hotels
and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations, a book
written by Stephen Rushmore, MAI, published in 1992. The book is now published by
22

the Appraisal Institute." Marriott Corp. v. Board of Johnson County Comm'rs, 25 Kan.
App. 2d 840, 843, 972 P.2d 793 (1999).

The Unified Government provides two main reasons for its position that BOTA
erred in adopting Lennhoff's approach: (1) Mellen's approach was superior for
determining fair market value; and (2) Lennhoff's approach was flawed and required
adjustments.

In support of Mellen's approach, the Unified Government claims:

 The management fee approach—which operates under a theory that the
subtraction of the management fee removes all intangible value—is the
generally accepted method of valuing hospitality properties among
appraisers and courts;
 Lennhoff's approach is the source of much controversy, with critics
asserting that Lennhoff's method is designed to minimize real estate value
and lessen property tax appeals;
 Lennhoff did not use the same approach in his appraisal of the Kansas Star
Casino; and
 The management fee approach is the preferred method of appraising hotel
properties in Kansas.

In its appellate brief the Unified Government gives a detailed analysis of the two
approaches, compares the approaches, and concludes that Mellen's approach is the
superior method. In comparing Mellen's Rushmore approach to Lennhoff's approach to
value, the Unified Government argues that "Rushmore developed what is now a widely-
accepted approach for valuing the real property components of hospitality properties."
(Emphasis added.) Mellen testified that her approach "has become the commonly
23

accepted approach" in casino valuations. According to the Unified Government, "[f]or
decades, courts have recognized the Management Fee Approach as an accepted method
for determining the fair market value of a property's real property components."
(Emphasis added.) The Unified Government argues that Lennhoff's approach to value
"certainly has not been endorsed as superior to the well-recognized, widespread, and
longstanding Management Fee Approach for valuing hospitality properties."

While asserting the widespread popularity of the Management Fee Approach, the
Unified Government does not provide us with any authority in the context of a casino
valuation declaring Lennhoff's approach to be so deficient as to require reversal of a
BOTA valuation decision based upon it. Our role is not to determine which approach is
superior. Rather, we are limited to determining whether substantial competent evidence
supports BOTA's ruling. Chowning, 32 Kan. App. 2d at 987.

The Unified Government relies on Marriott Corp. for the proposition that the
Rushmore Method—used by Mellen in her appraisal—is the preferred method to
determine the value of hotels in Kansas. In that case, the attack—unlike here—was on the
propriety of the Rushmore Method. The court in Marriott Corp. recognized the
Rushmore model for valuing hotels as "a valid method for determining the fair market
value of the hotel in this case." 25 Kan. App. 2d 840, Syl. ¶ 4. The court did not state it is
the only proper method of valuation. It did not state that it is the preferred method, as
represented by the Unified Government. In fact, in arriving at its valuation in Marriott
Corp. BOTA stated:

"'While we find that the county's use of the Rushmore method represents the fair
market value of the property in this case, we stop short of saying that the Rushmore
model is THE method to value all hotels. We do find that, in this instance, however, the
24

Rushmore method was supported by the county's own figures and does represent the fair
market value of the subject property.'" Marriott Corp., 25 Kan. App. 2d at 844.

In reaching its conclusion, the court in Marriott Corp. recognized it should not
substitute its judgment for that of BOTA and stated there is nothing in the record "to
indicate the Rushmore method was so inappropriate and so badly flawed that its use
requires a reversal of the valuation of the Marriott." 25 Kan. App. 2d at 844.

The Unified Government notes that the Marriott Corp. court cited numerous cases
outside of this jurisdiction approving of the Rushmore approach. See, e.g., Hull Junction
Holding Corp. v. Princeton, 16 N.J. Tax 68, 84 (1996); Prudential Ins. v. Tp. of
Parsippany, 16 N.J. Tax 58, 60 (1995). But none supports the Unified Government's
position that BOTA erred in adopting Lennhoff's appraisal methodology in this case.

We find the Marriott Corp. holding more supportive of the Taxpayer's position
rather than the Unified Government's position because it appropriately identifies the role
of this court in reviewing BOTA's determination of the proper valuation method. As in
Marriott Corp., the party challenging BOTA's ruling has failed to show that the adopted
valuation method was inappropriate or badly flawed.

The Unified Government also cites various cases in which Lennhoff's appraisals
were rejected by various courts outside of this jurisdiction:

● Vienna Metro LLC v. Bd. of Supervisors, 86 Va. Cir. 421, at *2 (Va. Cir.
2013) (noting that Lennhoff employed adjustments in his appraisal which
seriously undermine the credibility of his opinion).
● GGP - Maine Mall, LLC v. City of South Portland (South Portland Board
of Assessment Review's Findings of Fact and Conclusions of Law on
25

Petitions for Tax Abatement, August 17, 2011) (the Board notes that other
jurisdictions have expressed misgivings about Lennhoff's Business
Evaluation Approach).
● RRI Acquisition Co., Inc. v. Supervisor of Assessments of Howard
County, No. 03-RP-HO-0055, 2006 WL 925212, at *6 (Md. Tax 2006)
(court rejects Lennhoff's impermissible adjustments to the Rushmore
approach).
● Chesapeake Hotel LP v. Saddle Brook Tp., 22 N.J. Tax 525, 532-33
(2005) (Lennhoff's proposed adjustments are not persuasive).
● Tennessee State Board of Equalization's Initial Decision and Order in In
re Wolf-chase Galleria Ltd. Partnership for Tax Years 2001, 2002, and
2003 (August 26, 2003 and March 16, 2005) (ALJ finds that Rushmore
persuasively argues that Lennhoff's methodology for separating the real
property from the hotel's value understates the value of the real property).
● Merle Hay Mall v. Board of Review, 564 N.W.2d 419, 424 (Iowa 1997)
(business enterprise value theory is not a generally recognized appraisal
method).

But none of these cases shows that Lennhoff's methodology or approach in this case was
flawed. They are all fact-specific and none involves the valuation of real estate
underlying a casino. Both parties agree that Lennhoff is widely accepted as an appraisal
expert regarding special use properties. The Unified Government merely asserts that its
expert is superior.

The Unified Government attacks Lennhoff's approach as a violation of Kansas
law, asserting that it fails to take into account any of the specific aspects of the real estate.
See K.S.A. 2017 Supp. 79-503a (definition of fair market value includes a list of factors
that should be considered in valuing property, including the size of land, improvements,
26

and the effect of location on value). The Unified Government asserts that Lennhoff's
approach fails to take into account improvements, amenities, or location. The Unified
Government further complains that Lennhoff failed to conduct any market participant
interviews. See The Appraisal of Real Estate, Appraisal Institute, 712-13 (14th ed. 2013)
(in valuing specific property types, appraisers may interview market participants to
ascertain how buyers and sellers of the properties valued or allocated intangible assets in
pricing decisions). And the Unified Government claims that by failing to conduct the
interviews, Lennhoff ignored a whole category of insightful information. Finally, the
Unified Government attacks the Kinnard Study that Lennhoff relies on in conducting his
market study analysis.

This comprehensive attack to Lennhoff's approach illustrates why our court's role
on appeal is limited. With a broader standard of review, parties could endlessly pick apart
every aspect of a methodology or the specific data relied on by the appraiser to reach his
or her conclusions as to value. Despite all of this information, we find the Unified
Government has failed to show that BOTA's decision is not supported by the evidence, is
contrary to law, or is arbitrary or capricious. Lennhoff's methodology was accepted by
BOTA as a credible and comprehensive approach to value in this case, and the Unified
Government has failed to show otherwise. Our role is not to reweigh the evidence.

Finally, the Unified Government argues that BOTA erred in adopting Lennhoff's
valuation approach because it relied on evidence that BOTA had determined to be
irrelevant and nondiscoverable.

In its discovery request, which BOTA denied, the Unified Government sought
sales and lease information from Penn National Gaming—an out-of-state nonparty—
about real estate transactions relating to Penn's casino properties held by Gaming and
Leisure Properties, Inc. in a publicly traded REIT. Penn is a publicly traded Pennsylvania
27

corporation and is "several layers beyond any direct joint venture equity ownership of
[Kansas Entertainment]."

● One of Penn's many subsidiaries is Penn Tenant, LLC, a Pennsylvania limited
liability company.
● One of Penn Tennant's many subsidiaries is Delvest, LLC, a Delaware limited
liability company.
● One of Delvest's many subsidiaries is PHKI.
● PHKI owns 50% of the Taxpayer, Kansas Entertainment.
● Kansas Entertainment owns the Hollywood Casino at the Kansas Speedway.

The Unified Government argued that the sought-after information included
relevant sales data of the real estate component of casinos that would assist the Unified
Government in establishing the value of the Taxpayer's property. Neither the Taxpayer
nor either of its joint venture owners has an interest in the REIT. The requested
documents were in the sole possession of Penn, and the Taxpayer did not have a right to
demand them. The Taxpayer argued that the sales data from Penn's REIT-owned
properties were not relevant to the valuation issue.

BOTA denied the Unified Government's discovery request for two reasons: (1)
that valuation of other properties owned by the Taxpayer's parent corporation or
subsidiaries was not relevant to the valuation of the subject property; and (2) the
discovery request attempted to obtain documents from nonparties not involved in the
joint venture. BOTA's order on the Unified Government's second motion to compel
states:

"The Board finds that the request made of the Taxpayer is overly broad and that
nothing is presented to show that the valuation of other properties owned by the parent
28

corporations or subsidiaries of the subject property's owners are relevant to the valuation
of the subject property. In addition, the Unified Government's discovery request attempts
to obtain documents from non-parties.
. . . .
"Here, the Unified Government is seeking information from entities that are not part of
the joint venture which includes the subject property."

BOTA concluded that the sales information about Penn's REIT-owned properties
was irrelevant in the valuation of the Taxpayer's property, and the Unified Government
claims it relied on this ruling in proceeding to the hearing.

As part of Lennhoff's income approach, he estimated the business enterprise value
of Hollywood Casino using "broad averages of national and international casino
operators." Lennhoff then evaluated the percentage of the property allocated to real
estate—i.e., the percentage of the total enterprise value that is typically real estate. In
determining the allocation percentage applicable to the subject property, Lennhoff relied
primarily on casino sales to arrive at an allocation of 30%. BOTA adopted this
conclusion. In relying on sales from across the country, Lennhoff included one property
that was sold to Penn and later transferred to Penn's REIT.

As a preliminary matter, the Unified Government fails to show how this issue was
preserved for appeal. Because this is an evidentiary matter, the Unified Government was
required to state its objection on the record to the complained-of evidence. If no objection
was made, then this issue has not been preserved for appeal. K.S.A. 60-404 generally
precludes an appellate court from reviewing an evidentiary challenge absent a timely and
specific objection made on the record. Foster v. Stonebridge Life Ins. Co., 50 Kan. App.
2d 1, 25, 327 P.3d 1014 (2012). We find this evidentiary issue was not properly
preserved because the Unified Government failed to make a specific objection to the
admission of Lennhoff's appraisal based on the discovery ruling.
29


Even so, the Unified Government has failed to show reversible error. The scope of
discovery differs significantly between parties and nonparties. The relevance standard of
Kansas Rules of Civil Procedure is not the sole measure of discovery requests to
nonparties. See Bio-Vita, Ltd., 138 F.R.D. at 17. "To obtain discovery from nonparties, a
party must establish that its need for discovery outweighs the nonparty's interest in
nondisclosure." 138 F.R.D. at 17; see In re Cusumano, 162 F.3d at 717 ("Although
discovery is by definition invasive, parties to a lawsuit must accept its travails as a natural
concomitant of modern civil litigation. Non-parties have a different set of expectations.
Accordingly, concern for the unwanted burden thrust upon nonparties is a factor entitled
to special weight in evaluating the balance of competing needs.").

Here, Lennhoff apparently considered one sale that might have been discoverable
in the Unified Government's discovery request. But in looking at the record as a whole,
we fail to see—and the Unified Government fails to explain—how considering this one
transaction had any significant effect on Lennhoff's valuation of the Taxpayer's property.
When reviewing an agency action under K.S.A. 2017 Supp. 77-621(c), we take into
account the rule of harmless error. K.S.A. 2017 Supp. 77-621(e); Sierra Club, 298 Kan.
at 47. The Unified Government does not explain how Lennhoff considering this one sale
among all the others affected BOTA's valuation decision.

The information regarding the REIT-owned casino was used to calculate the
portion of the purchase price that was allocated to the real estate. Lennhoff's allocation
conclusion was based on the average of numerous casinos. The evidence in this case
consisted of hundreds of pages of appraisals and exhibits, as well as about 900 pages of
testimony. The fact that the selling price of one REIT-owned casino made it into the data
set is harmless without a showing that it significantly altered the results. Here, the
Unified Government contends that its trial strategy would have changed if it had that
30

information, but it does not show that it was prejudiced by the inclusion of the number in
Lennhoff's appraisal. Any error was harmless.

Affirmed.