The big-box concept changed the face of retail in the 1960s. It also skewed the way that assessors value retail property for tax purposes. To this day, taxpayers across the United States have been fighting back—and in Wisconsin, Kansas and Michigan, they are winning.

The problems arose out of financing arrangements such as prearranged sale-leasebacks or build-to-suit transactions to construct or develop a big box. Companies used these methods to keep cash available for core business purposes, and repaid the sale proceeds as rent.

These arrangements created financing rents that assessors mistakenly adopted as market rents. Further, once the above-market lease was in place, owners typically sold the lease and property to an investor at a sales price reflecting the value of the longterm, above-market lease in place to a high-credit tenant. The sales never reflected the fair market value of bricks and sticks alone, because the transaction transferred more than real estate.

Assessors then relied upon these sales without adjustment to calculate fee-simple value. Finally, assessors used the above-market rents and leased-fee sales to value owner-occupied retail stores, spreading the problem to all retail.

Guiding Principles

The concept of valuing property at its fair market value of the fee simple vanished in many locations as governmental assessors adopted this leased-fee concept, occasioning substantial valuation increases for property tax purposes. The user of the property and their contract rent trumped longstanding appraisal concepts of use and market rent. The trend eroded the requirement for a uniform and equal rate of assessment and taxation at fair market value. The same land and building could now have vastly different real property values, depending on the tenant.

For instance, a building leased to Walmart would have a higher value than if the same were leased to a local department store. How was it possible that the value of a building depended on the name of the tenant? Assessors could not distinguish between sales of properties with an income stream related to the property and sales of properties with an income stream related to the business value of the tenant.

Taxpayers successfully fought back in Wisconsin, Kansas and Michigan.

In 2008, the Wisconsin Supreme Court agreed with Walgreens that the assessor had not valued its properties in fee simple. The court focused on the issue of an above-market lease and the impact on valuation, and concluded that a “lease never increases the market value of the real property rights to the fee simple estate.”

The ruling directed assessors to use market rents, not the contract or financing rents. The court was not persuaded to move away from fee-simple valuation to a business valuation, as argued by the assessor. The assessor’s methodology could cause “extreme disparities and variations in assessments,” something the court was not willing to tolerate.

The Kansas Court of Appeals case followed in 2012, prosecuted by Best Buy, the single tenant in the building. The decision made three things clear for commercial property owners. First, Kansas is a fee-simple state. The court rejected the county appraiser’s argument for a leased-fee value. Second, build-to-suit rates are not market rents and cannot be used unless after review of the lease it can be adjusted to market rental information. Finally, market rents are those rents that a property could expect to pay in an open and competitive market. Market rent is not whatever financing arrangements a tenant can procure based on their costs and credit ratings.

Most recently, the Michigan Supreme Court addressed how these financing arrangements are impacting valuations of owner-occupied big-box retail. In 2014, the court ruled on cases brought by Lowe’s Home Improvement and Home Depot, both owner-occupants.

The court dismissed the township’s argument to consider the user of the property, rather than the use of the property. The county method would mistakenly arrive at a value in use, rather than a market value, the court found.

The court concurred with the taxpayers that the sales comparison approach to value was the most appropriate method to value owner-occupied properties, noting the approach must be developed using market sales of fee-simple interests. Leased fee sales may only be used if adjusted to reflect fee simple. The court was unimpressed by the township appraiser’s conclusion that no adjustments were necessary, with the court finding his report to be shockingly deceptive on this point.

Whether it was failing to understand basic appraisal theory or the desire to inflate values, assessors plugged bad information into market-based valuation models, and it has taken years to begin unwinding the damage and restoring basic appraisal concepts of fee simple, uniformity and equality. Taxpayers are taking the lead from Wisconsin, Kansas and Michigan, and have cases pending in many, if not all, jurisdictions.

Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..