The Missouri Supreme Court heard arguments Feb. 10 in a case challenging how a hotel at Kansas City International Airport was valued for property tax purposes and whether a state statute allowing deductions for airport property improvements is constitutional.

The dispute centers on the valuation of the Marriott Hotel located at Kansas City International Airport and whether a provision in Section 137.115.1 of state law improperly reduces the taxable value of certain airport properties.

At issue is a challenge by the Platte County assessor and the Park Hill School District to a decision by the Missouri State Tax Commission that resulted in a lower valuation for the 2016 tax year.

The assessor was represented during arguments by Stephen E. Magers, an attorney for Platte County in Platte City; Grady Hotel Investments was represented by Peter A. Corsale of McCarthy, Leonard & Kaemmerer in Town & Country.

Magers argued the statute effectively creates a special class of property that receives favorable tax treatment.

“This case concerns a truly novel item of the Missouri statutes,” he said. “It stands alone as the only statute within the entirety of the Missouri framework that gives a certain set of taxpayers a tax advantage of having real property located within an airport receive a deduction for new construction and improvements.”

The property at issue is a Marriott hotel located on land owned by Kansas City within the boundaries of Kansas City International Airport. The city leases the land to a private operator.

In 2015, Grady Hotel Investments purchased the prior operator’s interest in the property for about $8.5 million. As part of the transaction, Grady entered into an amended lease and concession agreement with the city and committed to making capital improvements to repair and renovate the property.

For the 2016 tax year, the Platte County assessor valued Grady’s interest in the hotel at approximately $13.45 million. After the county board of equalization upheld that valuation, Grady appealed to the Missouri State Tax Commission.

The commission initially set the hotel’s assessed value at zero using the “bonus value” methodology for leasehold interests, but the Missouri Court of Appeals Western District later reversed that ruling and remanded the case. On remand, the commission ultimately determined the hotel’s “true value in money” was about $6.14 million. The commission reached that figure after deducting the value of personal property included in the purchase and approximately $1.2 million in costs paid toward new construction and improvements made after 2008, as permitted under Section 137.115.1.

Magers argued that the statute operates as an unconstitutional tax break for properties located within airport boundaries.

“At its core, what the statute does is create a special kind of property that receives a reduction to its value based on new construction and improvements spent toward such possessory interests in real property,” said Magers.

He also said the provision treats airport properties differently from other commercial properties.

“A homeowner doesn’t get a reduction to their value when they get a new roof on their property,” he said. “But for property that is located within an airport boundary that undertakes new construction or improvements, there is a deduction to that value that the statute mandates.”

Corsale countered that the statute does not create a tax exemption but instead establishes a permissible method for valuing certain types of property.

“To me the answer is no. This is a method of valuation,” he said, arguing that the Missouri Constitution gives the legislature authority to determine how property is valued for tax purposes.

Judge Mary R. Russell questioned whether the deduction could potentially reduce a property’s value to zero if improvements continue over time.

“But couldn’t it be, at some point, a perpetual exemption,” she said, noting the statute allows deductions regardless of when improvement costs were incurred.

Corsale said the improvements ultimately revert to the city when the lease ends.

“What we are dealing with is a private company improving public land that eventually reverts back to the public,” he said. “At the conclusion of the lease, the public gets the benefit of whatever money they put into this property.”