A recent trend toward assessing big-box retail’s taxable value based upon potential sales value, rather than value in use – dubbed the “dark-store” strategy – is causing substantial revenue falls in counties across the country.
Governing illustrates the problem by highlighting Michigan’s Marquette County, which has long benefited from prospering big-box retail and resulting property tax revenues. But after the Michigan Tax Tribunal ruled that local authorities must assess big-box retail based upon the sales price of comparable vacant retail buildings, Marquette County’s tax revenues plummeted. Governing reports:
Big-box retailers argue that the market value of their commercial property should be the sale price of similarly sized but vacant retail buildings. They point out that these buildings are extremely hard to sell as-is once the retailer moves out. They tend to sit empty for long periods. Thus, the assertion is, they aren’t worth nearly as much as local tax assessors have traditionally assumed in valuing the property.
Local governments, needless to say, aren’t buying this. “When you get your house appraised, they’re going to look at properties that are occupied,” says Steve Currie of the Michigan Association of Counties. “They’re not going to look at the foreclosed one because that’s not an equitable property. It’s the same case here.”
“Dark-store”assessments are not just hurting Marquette County, but also counties in Alabama, Florida, Indiana, Iowa, North Carolina, Ohio, Tennessee, Washington and Wisconsin. A few state legislatures have taken action to limit “dark-store” assessment mandates.
During a January 2016 meeting at MACo with county budget and finance professionals, leadership from the State Department of Assessments and Taxation discussed the “dark store” issue. They expressed confidence that Maryland’s laws regarding the process for property assessment were appropriately strong to ensure reasonable valuation. The state’s centralized system of assessments (as opposed to many states where the process is completely a local function) also insulates Maryland taxpayers from the potential unfairness of aggressive commercial property appeals.
Appraisals generally look to one or a combination of three factors: the sale price of comparable properties, costs to build less depreciation, and income generation potential. Assessments of big-box retail traditionally relied heavily on the construction costs method, partly because existing big-box retail real estate simply does not transfer between owners frequently enough to provide reliable sales data within most markets.
But big-box retailers say using the construction costs of a building to determine the assessment artificially inflates the value. And they insist it’s unfair to value their retail properties based on their worth to the current user (referred to as “value-in-use”) instead of the value the property would have on the open market (called “value-in-exchange”). The appropriate use of the competing valuation methods is a topic of seething debate in the appraisal world. Retail representatives fall decidedly on value-in-exchange. “It’s easy to be confused by the presence of a business,” says Florida real estate broker Sheila Anderson, whose firm Commercial Property Services has represented owners in scores of appeals. “But a business is not [what needs to be] assessed.” In her view, it’s only the resale value of the empty building that matters for taxation. And that is nearly always a much smaller amount.
A Marquette County Lowe’s, which cost $10 million to build, succeeded in reducing its assessment from $5.2 million to less than $2 million by arguing in favor of “dark-store” assessments. This case and the resulting precedent resulted in Marquette Township’s property tax revenues falling 22 percent. Litigating the flurry of tax appeals has also caused a budgetary strain. Marquette Township Manager Randy Girard told Governing,
The long and short of it is that we will not recover.