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Sep
28

Big Box Stores Suffer Excessive Taxation

Careful preparation is the key to contesting these unfair property taxes.

It may be paradoxical that big-box retail has lost property value in real estate markets where commercial property values in general are climbing, but that is the message many owners must convey to achieve a lower property tax bill.

For decades, big-box properties generated significant tax revenue for schools and local governments, but that story is changing. Annual valuation gains of 2 percent to 10 percent annual increases may have become a simple rule of thumb at one time for assessed values, but are no longer expected or acceptable to most big-box owners. Instead, there is now a major struggle between the big-box owners and the local property tax assessor.

Many companies have changed their real estate and marketing strategy to adapt to declining big-box property values. Toys R Us, Kmart, Sears and other stores have either closed stores or no longer exist. Others, including Walmart and Target, have adapted to suit customers who are no longer happy shopping in a mega store, or having to walk to a distant corner of a mega store to pick up a toothbrush, a bottle of milk or a pair of shoes.

Many retailers have achieved positive results by reducing store sizes. Target moved away from the superstore format to stores of 25,000-45,000 square feet, emphasizing the "grab and go" concept rather than the full grocery store.

Some experiments have not worked so well. Walmart opened a number of smaller, "neighborhood" Walmarts, only to close many a few years later. Mega stores still exist, but while commercial real estate values in general may be soaring, the value of these mega stores generally is not.

Yet, the local assessors do not see it that way, applying either a simple, across-the-board increase based on the general market, or using the standard cost, income capitalization and market/sales approaches to perpetuate valuation increases that ignore changing retail dynamics.

Points of contention

The cost approach often results in an inflated and unrealistic value that no one would pay in an open-market transaction. The cost approach should only be used on a relatively new building with little depreciation or obsolescence to take into account. The original cost may also include single-purpose features which have little or no value to a second-generation user.

Finally, if the building is to be repurposed, there is enormous added cost to convert a mega store to multi-tenant occupancy or to a different use with a shallower usable depth; it may not be economically feasible.

The income approach is often unavailable since these stores are most often owner-occupied, and this approach should only be applied for a rental property. An owner-occupied property should never be required to produce income and expenses in the context of a valuation of the property for property tax purposes. Such information values the business that is being operated from the property, and not the bricks, mortar and land.

This leaves the third option, the market or sales approach, as the primary appraisal method. Here starts the war.

First, many assessors see a Walmart, Kohl's, Target or a Lowe's store differently than they do a local mom-and-pop store operated from a similar property. Yet this is wrong, because it violates basic principles of property tax valuations.

A taxing entity cannot collect property taxes on the value to the name as an ongoing business, but only on the bricks, mortar and land. Buildings with comparable size, location, age, quality and other real estate characteristics should have the same value, regardless of whether there is a national name on the building.

Second, most big boxes are owner-occupied. If sold, there would be no lease to transfer to the buyer; the building would be vacant and available to the buyer for its own use or subsequent leasing to a user-tenant. The way to apply this sales approach in such cases is to compare the big box to comparable sales of non-leased property that are, or soon will be, vacant and available.

Such sales in the relevant period are often hard to find. Many of these properties linger on the market for years before they are sold or repurposed. As a result of such few sales for comparison, the assessor will gravitate to using sales of leased properties.

A leased property is a totally different animal from an owner-occupied, big box store. The sale is based on the lease itself – the remaining term on the lease, the net income generated, the tenant's credit and the like. Often, the lease predates the sale by years and does not reflect current market rent. Sometimes the property was a build-to-suit project with rent based on the cost resulting from the user's specific requirements, which resulted in an initial inflated cost to build.

Case in point

This played out in one of my recent cases. The assessor valued a big box at $105 per square foot, based on recent sales of leased properties, with the rent in most of them being established 10-20 years earlier. Some were build-to-suit leases.

There was, however, a recent sale at $75 per square foot of a vacant big box store in a neighboring county. The Colorado Board rejected the assessor's valuation, finding that a vacant store represented the true market value, and reduced the taxable value to $10 million from the assessor's $15 million. This $5 million reduction resulted from digging into the assessor's analysis, pointing out the flaw in the cost and income approaches, and eliminating sales of leased properties.

The battle will soon start anew, and it is never too early to start accumulating the necessary data that will determine the victor.

Michael Miller is Of Counsel at Spencer Fane LLP in Denver, CO. The firm is the Colorado member of the American Property Tax Counsel, the national affiliation or property tax attorneys.
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Jan
01

Colorado Property Tax Updates

Updated March 2015

Colorado Begins Its 2015 Reassessment

Bi-annually, Colorado Assessors perform a revaluation/reappraisal for purposes of assessing the value of Colorado property using a “base period” method. In tax years 2013 and 2014, nonresidential property values were based on sales, income and cost data from a “base period” commencing on January 1, 2011 and ending on June 30, 2012. A new “base period” with its likely higher values now comes into play. 2015 is a revaluation year in which Colorado County Assessors will reappraise the value of real property. Under Colorado law, 2015 and 2016 nonresidential property values will be based on sales, income and cost data from a base period commencing January 1, 2013 and ending June 30, 2014.

Given the general upward trend in real estate values since the last base period ending June 30, 2012, many property owners may expect to see an increase in their property values and consequently, their property taxes for 2015 and 2016. The assessors are required by law, absent significant changes in the property after the base period, to use the same value for tax years 2015 and 2016. Even if an appraised value does not increase, budget demands will likely incentivize cities, counties and other taxing entities to maximize tax revenues by increasing the mil levies that determine the assessed value and the resulting tax, to the extent permissible by a Colorado Constitutional Amendment that limits tax increases called the "Tabor Amendment".

Beginning May 1, 2015, County Assessors will mail the 2015 Notices of Valuation for real property. The property owner will have a very short period of time to evaluate these notices and protest the value set on the property. Protests of valuation for most Colorado counties must be filed by May 31, 2015. Protests of valuation for Denver County properties must be filed no later than November 15, 2015. Our property tax attorneys know the critical legal and business factors that affect real property values and classifications. We are prepared to meet with property owners to assist in evaluating their property tax situation and, when appropriate, plan their strategies for their 2015 property tax protests.

Larry R. Martinez, Esq.
Berenbaum Weinshienk PC
American Property Tax Counsel (APTC)

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