Retail property owners' pursuit of fair treatment in real estate taxation seems to generate a river of appeals and counter-appeals each year. What makes this ongoing melee especially perplexing and frustrating for property owners is a sense that taxing entities will often ignore market realities and established valuation practices to insist upon inequitable, inflated assessments. This tendency to forsake industry norms is rampant, and calls for a dose of reality. This article uses the term "real value" to describe that often ignored element of true property value or genuine value of the real estate only, meaning the market value that buyers and sellers recognize as a product of an asset's attributes and the real-world conditions affecting it. Real value in this usage is not a legal term, but encompasses issues that real estate brokers, property owners, appraisers, lawyers and tax managers regularly discuss in retail valuation. The array of issues that affect real value or market value range from the influence of ecommerce on in-store sales to build-to-suit leases, sales of vacant space, capitalization rates for malls of varying quality, proper accounting for economic or functional obsolesce and more.
All of these important and timely issues find their way into an age-old discussion of how to properly value the real estate, and only the real estate, in retail properties for property tax purposes. Although these topics may involve complex calculations or judgments, buyers and sellers regularly use these concepts to arrive at mutually agreeable transaction prices, which is exactly the sort of real value that assessors should recognize for taxation. Some taxpayers may be surprised to learn that the arms-length sale of a property on the open market isn't universally accepted among taxing entities as representing that property's real or taxable value. The path to remedying assessors' tendency to avoid finding the real value of the real estate only is to educate tax authorities and their assessors by appealing unjust assessments, and by sharing the details of beneficial case law that continues to shape tax practices across the country.
Cases in Point
Tax laws vary from state to state so that the applicable principle that comes from the case decision in one region may not fit neatly in another region. Nevertheless, trends and concepts are always important guideposts that need to be recognized. Taxpayers who present case law from other regions to their local courts can begin the process of introducing the truth of real value in their market. A number of new retail property tax cases have come from the Midwest. These cases deal with issues that tax payers coast to coast have argued and continue to argue in the struggle to establish real value in court for retail property. ln 2016, the Indiana Tax Court heard an appeal from the Marion County tax assessor, who was unhappy with an Indiana Board of Tax Review decision that granted lowered assessments on Lafayette Square Mall for the 2006 and 2007 tax years. The assessor had originally valued the property at $56.3 million for 2006, but the county's Property Tax Assessment Board of Appeal reduced that amount by more than half. Simon Property Group, which owned the mall during the years in question, appealed to the Board of Tax Review, which further reduced the property's taxable value to $15.3 million for 2006 and $18.6 million for 2007. During the appeal, taxpayer, Simon Property Group, presented evidence of the mall's $18 million sale in late 2007. It stated it had begun to market the property for sale because it was suffering from vacancy and leasing issues and the property no longer fit its investment mission. The taxpayer's appraiser independently verified the sale and concluded it to be arms-length, having been adequately marketed and there being no relationship between buyer and seller and no special concessions for financing.This scenario seems like what most of us in the tax assessment community would consider a textbook example of market-defined value. Yet the county assessor appealed the review board's conclusion to the tax court.
What is noteworthy here is that the court affirmed the tax board's conclusions, which were also in line with the taxpayer's evidence from a real-world transaction. The sad part about this event is that it required years of review and expense to prove that a sale in the open market reflected value. In Michigan in 2014, the Court of Appeals heard a case presented at the Michigan Tax Tribunal which concluded in favor of the taxpayer, Lowe's Home Centers. The case is significant because the court accepted a market based value as true taxable value. The taxpayer's expert testified regarding its appraisals and indicated that they were appraising fee simple interest or the value of the property to an owner, and at the highest and best use as a retail store, valued as vacant. They distinguished between existing facilities and build-to-suit facilities, explaining that the subject property is an existing facility and that the build-to suit market rent or sale price is based upon cost of construction, whereas the existing market sale price or rent is a function of supply and demand in the marketplace. Basing his analysis on the above fundamental premise, the taxpayer's appraiser valued the property in detail. Again, what makes this case significant is that the tribunal accepted the taxpayer's argument, and the court affirmed that decision.
While these principles seem universal, they have been rejected in many regions of our country. Tax-assessing communities wage battles to impose excessive values based on a rejection of the actual market. As most tax systems are based in the market value concept, the only resource for these taxing jurisdictions is to distort the concept. These issues are as old as dirt, but resolution remains elusive. The lesson here for the retail property owner appealing an assessment is to advance arguments that reflect real-world conditions supported by evidence. The decisions in these cases and others tell us that someone is listening to those arguments, and taking heed.