Property taxes should reflect the value of the real estate being taxed, not the needs of governmental entities that share in the tax. However, assessors are under increasing pressure to maintain or enhance property tax revenue. The result is a growing and improper tendency by assessors to use the success of the enterprise occurring in the real estate as an indicator of taxable property value.
Value is the amount a willing and knowledgeable buyer would pay a willing and knowledgeable seller to acquire a property as of a certain date. This simple concept has engendered volumes of appraisal books, hours of testimony and endless discussion of how to segregate the real estate component from the whole of an enterprise.
The willing buyer, willing seller standard mandates the property is available for a buyer's use on the date of sale. For value purposes, any enterprise carried on within the property is absent on the date of sale. The buyer is not buying the business or any part of the business, only the place where the business operates.
The success of the business is independent from the property in which it operates; to approach valuation otherwise leads to invalid and inequitable results. An example would be a building designed and used as a single-screen cinema. One week it features a popular and highly promoted movie, and during that week the ticket sales are great. The theater is full and ticket lines extend outside for each showing. The following week the movie house runs a bad film, and ticket sales are low or non-existent.
To include enterprise value as a component of the value of the real property is to say the theater building is worth more the week it shows a popular movie than when it screens a flop. Meanwhile, a retail building is no more than a structure in which goods enter from the loading dock and exit the front in customers' hands, leaving money or credit behind. Effectively, the building is a conduit for an activity which could occur anywhere in that submarket.
There is little doubt that successful operations will garner higher property taxes than weaker businesses, which is unfair. To some extent, the assessor punishes the taxpayer for a successful enterprise, all too frequently raising the concept of sales per square foot as justification. This rationale also applies to big box national retailers as well as your local mom-and-pop barbeque joint.
Some businesses require government licenses, which may be site-specific and limited to certain people or entities. They do business in properties of specific design that are not easily modified to other uses. Bank charters and licenses for liquor sales or casino gambling are limited to specific facilities at a specific location. What value do these properties hold after the business leaves? Pull the license off the walls, now determine the value of a building that once was one of these enterprises. So, when the old home-town bank building no longer houses a bank, what is it worth?
By law, the former bank building is worth no more or no less than when a bank operated there.
To value it in use is to value the banking activity that occurred there. Taxing business activity isn't an element of property tax at all; it is an enterprise tax, impermissible and unauthorized by law.
Brick-and- mortar retailers are under attack from ecommerce, and the public is subjected daily to photos of dying malls and struggling shopping centers. It is widely accepted that the value of a shopping center drops when the anchor tenant vacates. But the taxable value should be unchanged, because the hypothetical buyer is purchasing a property ready for occupancy.
The prosperous business should not be punished for its success by the improper valuation of the place where the success happens. Dealing with the assessor, the owner must argue that taxable valuation is based on the property being vacant. That means the current occupant is presumed gone on the date of sale.
Any other approach values the enterprise occurring there.
