Big-Box Retailers Beware How Assessors 
Overvalue Your Property

By Michael B. Shapiro, as published in National Real Estate Investor, September 2000

One fundamental valuation principle requires no discussion;  The value of existing property must be based on the market for existing property.  It's so simple and clearly correct.

Yet, when valuing big-box stores, many assessors ignore the market for existing property available for sale or lease.  Instead, they wrongly substitute the market for "to-be-built" properties for the actual market of an existing property.  By doing so, they conclude to an irrelevant value-in-use to a future occupant. However, the market value of an existing facility (i.e. value-in-exchange as opposed to value-in-use) is based on open market interaction between buyers and sellers and tenants and landlords relating to other existing facilities, not pre-construction build-to-suit sales or leases.

For example, when valuing a new car, the appraiser must know the market for that new car. If the car is owned by a new car dealer, that new car would compete with other new cars owned by new car dealers. However, once that car is sold and taken from the dealer’s lot, the car would then compete in a secondary market. And, as we all know, the price that typically would be expected to be paid for the car (i.e. its market value) would be less in the secondary market than in the market for the new car owned by a new car dealer.

The same is true of a suit of clothing made to order. Its "pre-construction" selling price (value-in-use) is substantially greater than its market value as an existing property offered for sale.

In short, there is nothing unique about property having far different values (one being a value-in-use and the other market value) depending on the market in which it is valued. It should be no surprise that this phenomenon is also true for real property.

When big boxes are sold or leased before construction, the selling prices or contract rents for the to-be-built properties are based on cost of construction.

Notwithstanding, assessors frequently substitute the price for a big box built-to-suit for the market value of a big box in existence. Such valuations for property tax purposes ignore market reality and, therefore, should be held illegal. They fail to reflect the value of the existing property based on the market in which it competes.

The error made by assessors frequently involves the use of sales or leases of to-be-constructed property as a substitute for market sales or leases for existing big box properties. The fact that the valuation of existing property on the basis of build-to-suit sales or leases is erroneous cannot seriously be disputed. It is proven by an examination of sales and leases of existing properties compared to sales and leases of properties pursuant to build-to-suit agreements.

Further, in the valuation of big boxes, the error results in an even greater overstatement of market value than in many other situations. For example, people do make suits (without a prior contract for sale) and offer them for sale. They do so expecting a profit when sold in the market for existing property, although not as great a profit as would be made for suits sold before they are made. However, for big boxes, nobody has ever built, or would build, with that expectation.

Some assessors are simply blatant in making erroneous assessments on big box stores. They wrongly use build-to-suit sales and leases as evidence of market value and market rent for an existing building. However, others try to disguise the error. They use sales of property subject to build-to-suit leases. Properties sold with build-to-suit leases typically do not reflect the usual selling price or market value of property subject to a market rent lease. This is because sales of buildings subject to build-to-suit leases include the value of an artificially inflated leased fee interest that an owner of an existing building could not achieve without the transfer of a similar above market lease. The reality is that a big box store without a lease in place sells for significantly less than one with a lease in place.

Those paying property taxes on big boxes should consult their property tax attorneys and confirm that they are aggressively pursuing lawful assessments based on sound appraisal principles. The savings can be significant.

Michael B. Shapiro is a partner in the Detroit law firm of Honigman Miller Schwartz and Cohn. The firm is the Michigan member of American Property Tax Counsel, the National Affiliation of Property Tax Attorneys.