May a Kansas county appraiser use a developer's discount or discounted-cash-flow method to value subdivision lots, especially after the Hixon decision?
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Plain-English summary
Kansas PVD Directive 92-013 describes a developer's-discount method for subdivision inventory, while its attached 1995 memorandum explains a crucial limit: the method may help estimate value, but the final objective remains fair market value for each parcel.
The original directive's method
If a county appraiser elected to use the developer's discount, the directive said to appraise the subdivision tract as a whole and then allocate the resulting market value among the individual lots. Although K.S.A. 79-405 required each platted lot to be identified and taxed separately, the analysis distinguished:
- gross sellout value — the total of the lots' individual retail prices; from
- market value of the development as one unit — the wholesale value estimated for the tract.
The appraiser was to obtain income and expense data from the developer and calculate the present worth of the projected income stream. The discounted-cash-flow analysis itemized income and expense year by year over the expected absorption period.
The selected discount rate had to account for project desirability, risk, and the competitive return needed to attract capital. Every year, the appraiser was to reexamine the absorption rate, discount rate, lot prices, and operating expenses before recalculating.
Individual lot sales could help set lot values, but the directive excluded those sales from the official state assessment/sales ratio study and instructed CAMA users to enter source code 7. Separately, if the land was actually used for agriculture, the appropriate agricultural-use value applied.
What the attached 1995 memorandum changed or clarified
The Division reviewed the directive after Hixon v. Lario Enterprises, Inc., 257 Kan. 377, 892 P.2d 507 (1995), and decided not to rescind it.
The memorandum explained that Hixon rejected the developer's-discount methodology as applied to fully developed lots under the statutory scheme then before the Court. K.S.A. 79-501 required each parcel to be appraised at fair market value, so the value could not turn on how many lots one taxpayer happened to own. Valuation had to be tied to factors associated with each parcel.
The memorandum also noted that the Court did not need to decide the separate constitutional uniformity question. It then pointed to the amendment of K.S.A. 79-503a by L. 1995, ch. 254, § 5, which added absorption or sell-out period as a fair-market-value factor connected with the sales, cost, and income approaches.
The Division's bottom line was narrow: appraisers could follow Directive 92-013 when they found the developer's-discount method necessary to determine subdivision-lot value, but the statutory goal remained the fair market value of each parcel.
What this means for you
Subdivision developers
Holding many unsold lots does not itself justify reducing each lot's value. The method must be supported by project-specific absorption, income, expense, risk, price, and return data and must lead back to a defensible value for each parcel.
County appraisers
Do not substitute aggregate ownership for parcel-level valuation. Build the cash flow from developer data, review the inputs annually, allocate the tract result among the lots, and keep the final value tied to each parcel's fair-market-value factors.
Owners of land still used for agriculture
The directive separately requires the appraiser to determine actual use. If the property is being used for agricultural purposes, apply the appropriate agricultural-use value rather than assuming subdivision treatment controls every acre.
Tax professionals and appraisers
Read the directive and 1995 memorandum together. The first supplies the discounted-cash-flow mechanics; the second records the Hixon limitation and the later statutory absorption-factor response.
Common questions
Q: Are platted lots taxed together as one parcel?
A: No. K.S.A. 79-405 required individual identification and taxation, even though the directive's method first estimated the whole tract and then allocated value among the lots.
Q: What is the difference between gross sellout and market value here?
A: Gross sellout is the sum of individual retail lot prices. The directive describes the whole development's market value as its wholesale value as one unit.
Q: What inputs go into the discounted cash flow?
A: Projected income and expenses over the absorption period, plus a discount rate reflecting desirability, risk, and the competitive return required to attract capital.
Q: Must the analysis be updated?
A: Yes. The directive calls for annual review of absorption, discount rate, lot prices, operating expenses, and other pertinent data.
Q: Did Hixon invalidate Directive 92-013?
A: The attached 1995 memorandum says no and expressly declined to rescind it. But it also says fully developed lots could not be discounted in a way that violated the requirement to appraise each parcel at fair market value.
Q: Can individual lot sales be used?
A: They were useful for individual lot values, but the directive said not to use them in the official state assessment/sales ratio study and specified CAMA source code 7 for exclusion.
Q: What dates do the two documents carry?
A: The directive's signature date is blank and its second-page header shows 11-30-1992. The attached memorandum is dated November 3, 1995.
Citations and references
- K.S.A. 79-405 — separate identification and taxation of platted lots.
- K.S.A. 1994 Supp. 79-501 — fair-market-value appraisal of each parcel.
- K.S.A. 1994 Supp. 79-503a, as amended by L. 1995, ch. 254, § 5 — absorption or sell-out period among fair-market-value factors.
- Kan. Const. art. 11, § 1 — uniformity and equality question discussed but not reached by the Court, as described in the memorandum.
- L. 1992, ch. 249, § 1 — authority cited for the directive.
- Hixon v. Lario Enterprises, Inc., 257 Kan. 377, 892 P.2d 507 (1995).
Source
- Landing page: Kansas Property Tax Directives
- Original PDF: PVD Directive 92-013 with attached 1995 memorandum
Original ruling text
David C. Cunningham, Director
Robert B. Docking State Office Building (913) 296-2365
915 S.W. Harrison St. FAX (913) 296-2320
Topeka, Kansas 66612-1585
Department of Revenue
Division of Property Valuation
DIRECTIVE #92-013
TO: County Appraisers
SUBJECT: Appraisal of Subdivision Lots
This directive is adopted pursuant to the provisions of L. 1992, ch. 249, § 1, and
shall be in force and effect from and after the Director's approval date.
The county appraiser shall follow the procedures set forth herein if, in the appraisal
of subdivision lots, the county appraiser elects to use the developer's discount
methodology.
Although K.S.A. 79-405 requires platted lots in a subdivision to be identified and
taxed individually, the appraisal should be based upon the entire tract of land.
When the appraisal of the whole tract is complete, the market value shall be
allocated among the developer's individual lots. This requires the county appraiser
to distinguish between the gross sellout (aggregate of individual retail prices) and
the market value (wholesale value of the development as one unit).
County appraisers shall obtain pertinent income and expense data from developers
and prepare an estimate of value based on the present worth of the projected
income stream.
The appraiser shall use a discounted cash flow analysis that itemizes the entire
income and expense flow on a year-by-year basis during the absorption period. In
selecting the discount rate, the appraiser is to consider the desirability of the
project, the risk involved and the competitive rate of return required to attract
capital to the project. This methodology shall be subject to an annual review of all
pertinent data. Factors such as the absorption rate, discount rate, lot prices and
operating expenses shall be reexamined annually before the discounted cash flow
analysis is recalculated.
Page 2
Directive #92-013 11-30-1992
Although the sale data of individual lots shall be very useful for arriving at
individual lot values it shall not be used in the official state assessment/sales ratio
study. To properly flag this sale data in CAMA for exclusion, a source code of 7 is to
be entered when the transfer is processed.
Actual use of the land should be determined. If the property is being used for
agricultural purposes, the appropriate agricultural use value should be applied to
the land.
Approved:
(Date) David C. Cunningham
Director of Property Valuation
Page 3
STATE OF KANSAS DEPARTMENT OF REVENUE
Bill Graves, Governor John D. LaFaver, Secretary
Mark S. Beck, Director
Kansas Department of Revenue (913) 296-2365
915 SW Harrison St. FAX (913) 296-2320
Topeka, KS 66612-1585 Hearing Impaired TTY (913) 296-2366
Division of Property Valuation
MEMORANDUM
TO: County Appraisers
FROM: Mark S. Beck, Director of Property Valuation
SUBJECT: Developer’s Discount; Appraisal Directive #92-013; K.S.A. 1994 Supp. 79-503a, as
amended by L. 1995, ch. 254, § 5
DATE: November 3, 1995
Appraisal Directive #92-013 sets forth the procedures to be used if the county appraiser elects to use the
developer's discount methodology in valuing subdivision lots. I have reviewed this directive in light of
the Supreme Court's decision in Hixon v. Lario Enterprises, Inc., 257 Kan. 377, 892 P.2d 507 (1995)
("Lario Enterprises") and L. 1995, ch. 254, § 5, and have decided not to rescind the directive for the
following reasons:
In Lario Enterprises the Court determined that the developer's discount methodology violated the
statutory scheme for determining the fair market value of property when applied to fully developed lots.
K.S.A. 1994 Supp. 79-501 requires "[each] parcel of real property [to] be appraised at fair market value
in money" using the factors outlined in K.S.A. 1994 Supp. 79-503a. Appraising all of the lots owned
by Lario and discounting them violated the terms of K.S.A. 1994 Supp. 79-501, which requires each
parcel to be appraised at fair market value. Valuation must be tied to factors associated with each parcel
of real property, not the number of lots held by the taxpayer. Lario Enterprises, 257 Kan. at 383.
In Lario Enterprises, the Court modified an earlier finding by the Court of Appeals that the developer's
discount methodology violated the uniformity and equality provisions of art. 11, § 1 of the Kansas
Constitution, finding it unnecessary to reach the constitutional question, but leaving open the door that a
future Court might invalidate the developer's discount methodology upon constitutional grounds.
The 1994 legislature, apparently in reaction to Lario Enterprises, amended K.S.A. 1994 Supp. 79-503a
to add absorption or sell-out period as a factor to be considered in connection with sales, cost and
income in determining fair market value. L. 1995, ch. 254, § 5. County appraisers should comply with
this legislation keeping in mind that the goal is to determine the fair market value of each parcel. The
Division and county appraisers are required to presume that legislation is constitutional and will be
upheld by the courts.
Appraisal directive #92-013 sets forth the procedures to be used should the county appraiser find that
the use of the developer's discount methodology is needed to determine the fair market value of
subdivision lots.
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