Dark Store theory
May 13, 2019 11:08 AM Subscribe
'What if no one can agree about what any type of property is worth? That way lies serious fiscal havoc. For local government to successfully operate police departments, school districts, and other public services, “the tax depends on an agreement about what the basis for market value is,” said Joan Youngman, a senior fellow and chair of the Department of Valuation and Taxation at the Lincoln Institute of Land Policy, told me. “A new theory has come along that challenges the usual practice, and it needs to be answered.” '
I would love to have a city government reply by inventing "closed road theory". If a store thinks it's comparable to a closed, boarded up building for tax assessment purposes, they surely only need that level of road access, and the city can just drop some jersey barriers across the driveways, perhaps at midnight before a big holiday weekend. Perhaps the store will reevaluate their position and decide it's actually a going concern, capable and deserving of paying appropriate taxes after all.
posted by Homeboy Trouble at 11:24 AM on May 13, 2019 [49 favorites]
posted by Homeboy Trouble at 11:24 AM on May 13, 2019 [49 favorites]
In case TFA disappears, here's the crux of the issue:
What the cities would prefer is to take the purchase price of the land, add in the various improvements, and then factor in depreciation. Which contains the implicit assumption that whatever the company paid for the land (and possibly the building) is still representative, or really in any way linked, to its current market value.
But nobody cares what you paid for your house in 2001 when you go to sell it; the price, and the assessed value the buyer is going to use to get a loan and for other purposes, is going to be based on comparable properties that have recently sold in the same or similar markets. That's certainly a more valid methodology for determining fair market value.
It seems like city governments have essentially been depending on their methodology to provide a brake on revenues in the face of falling commercial real estate prices. And while that's understandable, it's... not really how property taxes are supposed to work. If the tax base shrinks, you either cut the public budget or you raise the tax rate to maintain revenue. Chicanery with assessments is the wrong way to go about it.
posted by Kadin2048 at 11:26 AM on May 13, 2019 [19 favorites]
Big-box retailers such as Walmart, Target, Meijer, Menards, and others are trimming their expenses in a forum where few residents are looking: the property tax assessment process. With one property tax appeal after another, they are compelling small-town assessors and high-court judges to accept the novel argument that their bustling big boxes should be valued like vacant “dark” stores—i.e., the near-worthless properties now peppering America’s shopping plazas.Personally, I think that's a melodramatic way of describing it. It's not that they are arguing for the store to be valued at what it would be worth if it were empty, exactly—what they are saying is that, due to the glut of empty storefronts, the building isn't worth what it used to be worth and has lost value. In other words, the building should be valued at what they could go out and buy a similar one for, not some amount based on what they paid in the past. This seems pretty reasonable.
What the cities would prefer is to take the purchase price of the land, add in the various improvements, and then factor in depreciation. Which contains the implicit assumption that whatever the company paid for the land (and possibly the building) is still representative, or really in any way linked, to its current market value.
As of 2017, the city had valued [the Sam's Club in West Allis] at $11 million, a number based on what the property had cost the owner to buy back in 2001, plus the added value of renovations over the years, adjusted at the going rate of depreciation. These are the methods he uses for every type of property, Williams told me, following those rules in his handbooks. [...] But a tax agent from Chicago filed an appeal on behalf of Sam’s Club, arguing that the store was worth just $7.2 million, based on the low sales costs of a handful of second-generation big box locations scattered around the state. The comparables that the agent provided included three former locations of the now-defunct electronics retailer American TV, an old Lowe’s, a former Target, and a former Walmart (actually, the same property in Greenfield Williams and I were standing in front of now). All of them sold for between $2 million and $4.5 million between 2012 and 2014: much lower sales prices than what their original owners had purchased them for years before.It looks to me like the assessment rules (the "handbook") that cities are using totally fails to take into account price decreases. They only work if prices are going up—and are probably a bit helpful during periods of steadily rising prices, since they don't take comps into effect, but just use the purchase price and improvements less depreciation. (So you are shielded from paying tax on the fair market value and thus being forced to sell.) One can imagine that this might have arisen during the 90s and pre-Crunch 2000s and was probably reasonably popular when applied to residential real estate when prices were booming.
But nobody cares what you paid for your house in 2001 when you go to sell it; the price, and the assessed value the buyer is going to use to get a loan and for other purposes, is going to be based on comparable properties that have recently sold in the same or similar markets. That's certainly a more valid methodology for determining fair market value.
It seems like city governments have essentially been depending on their methodology to provide a brake on revenues in the face of falling commercial real estate prices. And while that's understandable, it's... not really how property taxes are supposed to work. If the tax base shrinks, you either cut the public budget or you raise the tax rate to maintain revenue. Chicanery with assessments is the wrong way to go about it.
posted by Kadin2048 at 11:26 AM on May 13, 2019 [19 favorites]
Also, if cities persist in using the last-sale-price methodology rather than comps to determine FMV, there's a fairly straightforward solution for the building owner: they can just do a sale-and-leaseback to a holding company, or execute some other type of sale, such that they 'reset' the assessment. They'd probably end up paying some real estate transfer taxes, but if a store has gone from being worth $11M to $7M, that might be worthwhile and save them money in only a year or two.
I also wonder what the assessor would do if the property was sold at some amount that's clearly below market value, like $1 or something. If they're going to assess values purely based on the last purchase price on record and not on actual market price as reflected by comps, that's gonna be pretty awkward.
posted by Kadin2048 at 11:32 AM on May 13, 2019 [11 favorites]
I also wonder what the assessor would do if the property was sold at some amount that's clearly below market value, like $1 or something. If they're going to assess values purely based on the last purchase price on record and not on actual market price as reflected by comps, that's gonna be pretty awkward.
posted by Kadin2048 at 11:32 AM on May 13, 2019 [11 favorites]
If it's equivalent to a closed store, then I guess you won't be needing your business license?
posted by notsnot at 11:38 AM on May 13, 2019 [4 favorites]
posted by notsnot at 11:38 AM on May 13, 2019 [4 favorites]
Thank you, showbiz_liz and whoever fixed the link. Plus I found the previously.
I wonder if there are two stable states in the assessment competition, both entirely dependent on mutual belief and both self-fulfilling: either our built environment is worth a lot or that it's all junk. Usually corporate power is arguing for the first.
posted by clew at 11:39 AM on May 13, 2019
I wonder if there are two stable states in the assessment competition, both entirely dependent on mutual belief and both self-fulfilling: either our built environment is worth a lot or that it's all junk. Usually corporate power is arguing for the first.
posted by clew at 11:39 AM on May 13, 2019
People with lots of money are arguing that their money/wealth isn't worth as much for purposes of assessing taxes on that money? I'm shocked.
posted by runcibleshaw at 11:41 AM on May 13, 2019 [7 favorites]
posted by runcibleshaw at 11:41 AM on May 13, 2019 [7 favorites]
I also wonder what the assessor would do if the property was sold at some amount that's clearly below market value, like $1 or something.
I don't believe you can sell property for too much below market value, or you can but it has to be an open 'auction' type sale between arms-length parties. IOW, to lower your own property taxes, you can't sell your house to your wife for $1.
posted by The_Vegetables at 11:43 AM on May 13, 2019 [3 favorites]
I don't believe you can sell property for too much below market value, or you can but it has to be an open 'auction' type sale between arms-length parties. IOW, to lower your own property taxes, you can't sell your house to your wife for $1.
posted by The_Vegetables at 11:43 AM on May 13, 2019 [3 favorites]
Texas stands to lose $2.6 billion per year if successful appeals become widespread, according to the Republican state comptroller Glenn Hegar. “No one likes paying taxes, including me,” Hegar wrote in the Austin American-Statesman in 2017. “But I have a significant problem when large corporations and their lobbyists try to manipulate the tax system to lower their property taxes … Dark store theory is corporate welfare of a particularly ugly kind.”
Ah, the mating call of the elusive Republican ratfucker: it's great when I (or anybody giving me kickbacks) don't have to pay taxes, but it's a civic crisis when Walmart tries to rules-lawyer their way out of paying up.
posted by Mayor West at 11:50 AM on May 13, 2019 [6 favorites]
Ah, the mating call of the elusive Republican ratfucker: it's great when I (or anybody giving me kickbacks) don't have to pay taxes, but it's a civic crisis when Walmart tries to rules-lawyer their way out of paying up.
posted by Mayor West at 11:50 AM on May 13, 2019 [6 favorites]
This sounds like an example of a bargaining in a thin market. In a liquid market, with many buyers and sellers, prices are well-defined. For example, the value of a corner store in NYC is relatively clear: If an owner decides to sell, a number of buyers will bid, and the buyers have the opportunity to bid on many other similar stores.
But in a small town that can support only a few large stores, and with a few large dominant chains (like Walmart), prices are not well defined. The presence of the store benefits both the company and the town, but without a clear market price, it's hard to define how much of the benefit is created by the company opening a store, and how much is created by the city allowing the store to open. (In jargon, without a market price, you can't split up consumer and producer surplus.)
posted by Mr.Know-it-some at 11:59 AM on May 13, 2019 [10 favorites]
But in a small town that can support only a few large stores, and with a few large dominant chains (like Walmart), prices are not well defined. The presence of the store benefits both the company and the town, but without a clear market price, it's hard to define how much of the benefit is created by the company opening a store, and how much is created by the city allowing the store to open. (In jargon, without a market price, you can't split up consumer and producer surplus.)
posted by Mr.Know-it-some at 11:59 AM on May 13, 2019 [10 favorites]
In my municipality's jurisdiction, you can sell your property to whomever you want for whatever amount you wish (there are various income tax implications on the receiver, but that's a different issue)... however the tax assessor's office can decline to take a sale price into account, both when determining that property's value and also for the purpose of establishing comps on similar properties, if they deem the price to be significantly below market value. I would be pretty surprised if most jurisdictions don't have some similar rule.
But of course, adjudicating that requires that you have some other basis for FMV other than the most recent sale price of that particular property.
My guess is that's the trap some of these cities are getting into. They're saying the basis for the (high) valuation is the most recent purchase price. But they really don't want to make that argument too strongly, because then it might invalidate the methodology they use for throwing out wash sales and stuff, which would otherwise negatively impact assessments. But if they admit they have a way of estimating FMV for the purpose of ignoring a too-low sale price, then... they have an alternate methodology besides the most recent sale price, likely one that results in a lower assessed value because it takes into account comps. They're jammed up—and it's doubtful the courts are okay with letting them pick and choose their methodology when it happens to be convenient.
That the companies involved are not particularly well-loved is a red herring, IMO. The same problem could apply to residential properties if prices were to collapse again. And taxing someone who made a bad purchase and bought a house for $300k that's now only worth $150k (and they're probably underwater on and can't easily walk away from) on the full $300k indefinitely, just because it results in more tax revenue, would strike many people as obviously unfair.
posted by Kadin2048 at 12:01 PM on May 13, 2019 [11 favorites]
But of course, adjudicating that requires that you have some other basis for FMV other than the most recent sale price of that particular property.
My guess is that's the trap some of these cities are getting into. They're saying the basis for the (high) valuation is the most recent purchase price. But they really don't want to make that argument too strongly, because then it might invalidate the methodology they use for throwing out wash sales and stuff, which would otherwise negatively impact assessments. But if they admit they have a way of estimating FMV for the purpose of ignoring a too-low sale price, then... they have an alternate methodology besides the most recent sale price, likely one that results in a lower assessed value because it takes into account comps. They're jammed up—and it's doubtful the courts are okay with letting them pick and choose their methodology when it happens to be convenient.
That the companies involved are not particularly well-loved is a red herring, IMO. The same problem could apply to residential properties if prices were to collapse again. And taxing someone who made a bad purchase and bought a house for $300k that's now only worth $150k (and they're probably underwater on and can't easily walk away from) on the full $300k indefinitely, just because it results in more tax revenue, would strike many people as obviously unfair.
posted by Kadin2048 at 12:01 PM on May 13, 2019 [11 favorites]
I don't know how it works in other parts of the country, but in my city, landlords are actively incentivized to let their commercial property sit vacant. They're allowed to deduct some portion of lost rental income from the property taxes on vacant storefronts, so of course landlords are more than happy to sit on vacant properties for years, paying next to nothing in taxes and watching the property value appreciate, rather than reduce the asking rent. Eventually someone will pay the asking price, because it's a great location for a business.
So we end up with a Main Street spotted with unoccupied properties, while the storefronts next to the vacant ones are struggling to keep up with the rent increases. But god forbid the property owner just reduce the asking price to whatever the market will support at 100% occupancy--that would dilute the value of the property.
All of which is to say, I wonder how much of the devaluation of the big retail outlets, which this particular tax attorney is arguing is fair because there are so many vacant stores nearby, is due to the exact same phenomenon.
posted by Mayor West at 12:08 PM on May 13, 2019 [20 favorites]
So we end up with a Main Street spotted with unoccupied properties, while the storefronts next to the vacant ones are struggling to keep up with the rent increases. But god forbid the property owner just reduce the asking price to whatever the market will support at 100% occupancy--that would dilute the value of the property.
All of which is to say, I wonder how much of the devaluation of the big retail outlets, which this particular tax attorney is arguing is fair because there are so many vacant stores nearby, is due to the exact same phenomenon.
posted by Mayor West at 12:08 PM on May 13, 2019 [20 favorites]
For example, the value of a corner store in NYC is relatively clear: If an owner decides to sell, a number of buyers will bid, and the buyers have the opportunity to bid on many other similar stores.
I don't think the NYC retail market is a super good example of a liquid market. Manhattan has a 20% storefront vacancy rate because owners are content to jack up the asking rent beyond what the current market will tolerate, banking on the notion that a future market will be different.
posted by showbiz_liz at 12:12 PM on May 13, 2019 [2 favorites]
I don't think the NYC retail market is a super good example of a liquid market. Manhattan has a 20% storefront vacancy rate because owners are content to jack up the asking rent beyond what the current market will tolerate, banking on the notion that a future market will be different.
posted by showbiz_liz at 12:12 PM on May 13, 2019 [2 favorites]
Manhattan has a 20% storefront vacancy rate because owners are content to jack up the asking rent beyond what the current market will tolerate, banking on the notion that a future market will be different.
No. Manhattan has a 4% commercial vacancy rate. A single street or retail area might have 20% on that street, but there is no way Manhattan has 20% retail vacancy. There are cities with 20% vacancy - you know them for their failed state - Detroit, Flint, and some places in Ohio - and there are two 'non failed cities' that have close to 20% retail vacancy - Cupertino CA and Oakland CA. No other major US city has a retail vacancy rate above 10%.
posted by The_Vegetables at 12:24 PM on May 13, 2019 [1 favorite]
No. Manhattan has a 4% commercial vacancy rate. A single street or retail area might have 20% on that street, but there is no way Manhattan has 20% retail vacancy. There are cities with 20% vacancy - you know them for their failed state - Detroit, Flint, and some places in Ohio - and there are two 'non failed cities' that have close to 20% retail vacancy - Cupertino CA and Oakland CA. No other major US city has a retail vacancy rate above 10%.
posted by The_Vegetables at 12:24 PM on May 13, 2019 [1 favorite]
I believe Cupertino is at 20% because there is some empty failed mall that makes up a huge percent of the retail for the entire city and was still on the books as 'commerical property' at the time of the last reports.
posted by The_Vegetables at 12:27 PM on May 13, 2019 [1 favorite]
posted by The_Vegetables at 12:27 PM on May 13, 2019 [1 favorite]
The Dark Store Theory and Other Lies the Government Told, Bloomberg BNA
The State of the Dark Store Theory
There's two complicating factors: big boxes, usually block, prefab sections, or tilt-up, are not well suited to shifting between tenants and have a short lifespan compared to more traditional construction. And because of the locations and types of locations - mostly car-centric development -cases of adaptive reuse are more notable for when they do happen. In one sense, it's appropriate for companies to argue for accelerated depreciation or treat the store as if it won't find another buyer. On the other hand, it's a lot like the old joke of spending the year dead for tax purposes.
posted by the man of twists and turns at 12:37 PM on May 13, 2019 [3 favorites]
For many years, these basic tenets of real estate valuation were undisputed. However, a number of opportunistic assessors recently began to attack these core valuation principles in an effort to increase their local tax bases. They have largely focused on big box retail properties, which are commonly purchased subject to long term above-market rate leases entered into as part of the financing structure for their original construction. These properties generally sell at values significantly higher than their fee simple counterparts because the leased fee sales include the value of the contractual income stream associated with the long term above-market rate leases.I don't know enough about real estate to evaluate this.
In order to capture and tax the increased value of these leased fee estates, a number of inventive assessors began peddling the “Dark Store Theory.” They allege that national big box retailers are trying to avoid paying their fair share of local taxes by seeking to exclude leased fee sales and include only sales of “failed” or “dark” stores.
The argument, as with most populist arguments, has broad appeal. It pits the large corporate outsider against the small local underdog, creating an “us verses them” dichotomy that tends to sell more newspapers and get more votes. The problem is that the theory directly contradicts long standing generally accepted appraisal practices as espoused for many years by preeminent professional appraisal organizations such as the Appraisal Institute. Adding the value of an intangible asset into real property taxation will ultimately lead to non-uniformity in taxation in violation of most states' constitutions and will create the “unfairness” in taxation which most assessors are statutorily required to avoid.
The State of the Dark Store Theory
The debate over valuationDark Store Theory: Pros, Cons of a New Tax Strategy
To determine the true cash value of a retail establishment, a property must be assessed at its highest and best use. The three valuation methodologies that are common appraisal practices are the income approach, the sales comparison approach, and the cost approach (appraisers will often use a combination thereof). Dark store litigation arises when the parties disagree on the methodology and data to use in calculating the highest and best use of a property. For example, big box retailers are not fans of relying solely on the cost approach because this approach allegedly fails to recognize the role of functional obsolescence in reducing the value of a big box store. Instead these retailers place more emphasis on the sales comparison approach, especially when they can use dark stores as comparable properties. Municipalities reject the use of dark stores as comparables and generally give more weight to the cost approach. The outcome of a case often depends on which approach the court believes to be more accurate in calculating the highest and best use.
There's two complicating factors: big boxes, usually block, prefab sections, or tilt-up, are not well suited to shifting between tenants and have a short lifespan compared to more traditional construction. And because of the locations and types of locations - mostly car-centric development -cases of adaptive reuse are more notable for when they do happen. In one sense, it's appropriate for companies to argue for accelerated depreciation or treat the store as if it won't find another buyer. On the other hand, it's a lot like the old joke of spending the year dead for tax purposes.
posted by the man of twists and turns at 12:37 PM on May 13, 2019 [3 favorites]
Vallco mall, which has been in a semi-zombie state since before I moved here nearly 20 years ago. It staggered along as a movie theater with a few random stores in the mall attached to it for years, but is apparently finally scheduled for demolition.
posted by tavella at 12:39 PM on May 13, 2019
posted by tavella at 12:39 PM on May 13, 2019
No. Manhattan has a 4% commercial vacancy rate. A single street or retail area might have 20% on that street, but there is no way Manhattan has 20% retail vacancy.
OK, so I looked into this more and that number probably isn't accurate - it did appear in a NYT article but was later corrected - but, apparently, no one knows what the actual number is.
posted by showbiz_liz at 12:48 PM on May 13, 2019
OK, so I looked into this more and that number probably isn't accurate - it did appear in a NYT article but was later corrected - but, apparently, no one knows what the actual number is.
posted by showbiz_liz at 12:48 PM on May 13, 2019
The property owners are within their rights to argue that their properties have gone down in value and if there is a glut of similar buildings out there that are vacant then the value probably has gone down. The two things that stand out to me is the retroactive nature of it and that the cities/counties have to fight this on their own. If the timelines for appeals were tightened then cities could factor the appeal into whatever rate they set for the year so that their budget still works. Ideally I'd think some kind of state-wide assessor with the resources to match would be the way to go but I don't know if it actually would be adequately funded.
posted by any portmanteau in a storm at 12:50 PM on May 13, 2019 [1 favorite]
posted by any portmanteau in a storm at 12:50 PM on May 13, 2019 [1 favorite]
The more I think about it, it's like the cities are trying to tax the use-value of the stores, and the companies are trying to argue they should be taxed on the exchange-value instead.
posted by the man of twists and turns at 12:51 PM on May 13, 2019 [3 favorites]
posted by the man of twists and turns at 12:51 PM on May 13, 2019 [3 favorites]
I think the only solution might be Sound Dues sort of system where if they want to put forward a price that's too low, the city/county/state has the right to just buy the land at that price and charge them rent to recoup their purchase price over a set number of years (15 or so) or sell the land to the highest bidder with the suggested price as a the reserve price.
If the city thinks they're lowballing them, they can just execute the purchase and make a profit. If it's too high the store will pay more tax than they should. Might be the easiest and most elegant way to get true values for the land in question, while limiting the hanky-panky on pricing basically unknown things. If the store doesn't want to go through the risk of the process they're free to just use the purchase price, improvement, depreciation method that's currently used.
posted by jmauro at 1:04 PM on May 13, 2019 [5 favorites]
If the city thinks they're lowballing them, they can just execute the purchase and make a profit. If it's too high the store will pay more tax than they should. Might be the easiest and most elegant way to get true values for the land in question, while limiting the hanky-panky on pricing basically unknown things. If the store doesn't want to go through the risk of the process they're free to just use the purchase price, improvement, depreciation method that's currently used.
posted by jmauro at 1:04 PM on May 13, 2019 [5 favorites]
The lack of downstream uses for big-box stores seems like a valid, but separate issue. IMO that's more of a zoning and permitting issue: maybe we should look more skeptically at construction proposals that are just going to be so many loads of debris as soon as the original tenant decides to move out.
There are some places where the laws are written so narrowly that zoning boards basically can't help but approve basically any project, no matter how dumb it is, as long as it's in the right zone—but there are places where P&Z boards have wide latitude, including considering existing vacant buildings when someone proposes building a new one. It's been my (admittedly low n) experience that the places with empowered zoning boards tend to have fewer derelict buildings, and are generally nicer places to live. Of course, it's hard to say if the latter result is causative.
The more I think about it, it's like the cities are trying to tax the use-value of the stores, and the companies are trying to argue they should be taxed on the exchange-value instead.
Maybe there's an argument the cities can make that will fly in court, but it seems like including the income stream of the business in the property's valuation starts to look like a de facto income tax, not a real property tax. I mean, it's like saying "well, this property is worth X, but you could use it for a business that makes Y/year, so we'll value it as X plus the net present value of the infinite-horizon income stream Y" ... which is a valid way to valuate the business, but it's a weird way to determine the value of the building. In a tight enough market, maybe the building really would sell for that price, but as soon as supply catches up with demand you'd expect to see prices fall—it's not a normal steady-state pricing mechanism, at least it sure doesn't look like it.
IMO, what's really going on here is the municipalities really don't want to raise taxes, because they have voters that think tax increases are one of the signs of the Apocalypse right up there with the Seventh Seal and the Four Horsemen, and so they're fighting to keep assessed values up even though the justification for not lowering them in the face of a supply glut is thin at best. I don't think it's accidental that the mayor interviewed in the Citylab article is a Republican. He's probably looking at a long walk off a short pier if he can't keep tax rates where they are.
posted by Kadin2048 at 1:08 PM on May 13, 2019 [9 favorites]
There are some places where the laws are written so narrowly that zoning boards basically can't help but approve basically any project, no matter how dumb it is, as long as it's in the right zone—but there are places where P&Z boards have wide latitude, including considering existing vacant buildings when someone proposes building a new one. It's been my (admittedly low n) experience that the places with empowered zoning boards tend to have fewer derelict buildings, and are generally nicer places to live. Of course, it's hard to say if the latter result is causative.
The more I think about it, it's like the cities are trying to tax the use-value of the stores, and the companies are trying to argue they should be taxed on the exchange-value instead.
Maybe there's an argument the cities can make that will fly in court, but it seems like including the income stream of the business in the property's valuation starts to look like a de facto income tax, not a real property tax. I mean, it's like saying "well, this property is worth X, but you could use it for a business that makes Y/year, so we'll value it as X plus the net present value of the infinite-horizon income stream Y" ... which is a valid way to valuate the business, but it's a weird way to determine the value of the building. In a tight enough market, maybe the building really would sell for that price, but as soon as supply catches up with demand you'd expect to see prices fall—it's not a normal steady-state pricing mechanism, at least it sure doesn't look like it.
IMO, what's really going on here is the municipalities really don't want to raise taxes, because they have voters that think tax increases are one of the signs of the Apocalypse right up there with the Seventh Seal and the Four Horsemen, and so they're fighting to keep assessed values up even though the justification for not lowering them in the face of a supply glut is thin at best. I don't think it's accidental that the mayor interviewed in the Citylab article is a Republican. He's probably looking at a long walk off a short pier if he can't keep tax rates where they are.
posted by Kadin2048 at 1:08 PM on May 13, 2019 [9 favorites]
The same problem could apply to residential properties if prices were to collapse again. And taxing someone who made a bad purchase and bought a house for $300k that's now only worth $150k (and they're probably underwater on and can't easily walk away from) on the full $300k indefinitely, just because it results in more tax revenue, would strike many people as obviously unfair.
It's not quite the same thing though. If there's a recession and residential properties drop, yes, there will be comps at lower sale prices and people will rightfully argue that their homes are worth less and should be taxed based on the lower valuation. But that's not entirely what these stores are doing. They're arguing that you can value a thriving big big store in the center of town by looking at the value of failed ones somewhere else. Essentially, Lowe's says their property is worth way less than what they paid for it because a Macy's closed down somewhere else and is sitting vacant and nobody wants that failed husk of a store. That's like if someone builds a brand new hospital for $800 million in construction costs, then argues it's worth basically nothing because nobody wants to buy the old abandoned hospital property across town. But that can't be right either: no rational business spends $800 million on a worthless building.
But these stores do kind of have a point. We don't value a building with a 7-11 by saying its highest and best use is an Apple Store (or, in California, a marijuana dispensary, which do insane revenue/square foot) and tax it based on how many iPhones it can hold. If the valuation is really supposed to be based on comparable sales, the only comparable sales are going to involve distressed properties, because approximately nobody sells successful big box stores in fair market transactions. But that rather cuts to the core of the problem: we shouldn't be building disposable big box monstrosities that are only ever going to have one tenant. If the owners of the property are prepared to argue with a straight face that the highest and best use of the place is blighted decaying cinder blocks, perhaps the building shouldn't exist in the first place.
The more I think about it, it's like the cities are trying to tax the use-value of the stores, and the companies are trying to argue they should be taxed on the exchange-value instead.
Yep. The article I linked has a nice little analogy to someone who replaces their living room with a racquetball court. That costs a whole bunch, but it lowers the actual property value, because almost nobody wants a house like that and buyers are going to discount their offers to cover the cost of turning the thing back into a living room. Which is kind of the stores telling on themselves: they're arguing that their own properties are stupid and useless. It all feels like reshuffling the deck chairs before people decide to go shop online instead (I say, knowing that my toilet paper is due to be delivered later today).
posted by zachlipton at 1:14 PM on May 13, 2019 [3 favorites]
It's not quite the same thing though. If there's a recession and residential properties drop, yes, there will be comps at lower sale prices and people will rightfully argue that their homes are worth less and should be taxed based on the lower valuation. But that's not entirely what these stores are doing. They're arguing that you can value a thriving big big store in the center of town by looking at the value of failed ones somewhere else. Essentially, Lowe's says their property is worth way less than what they paid for it because a Macy's closed down somewhere else and is sitting vacant and nobody wants that failed husk of a store. That's like if someone builds a brand new hospital for $800 million in construction costs, then argues it's worth basically nothing because nobody wants to buy the old abandoned hospital property across town. But that can't be right either: no rational business spends $800 million on a worthless building.
But these stores do kind of have a point. We don't value a building with a 7-11 by saying its highest and best use is an Apple Store (or, in California, a marijuana dispensary, which do insane revenue/square foot) and tax it based on how many iPhones it can hold. If the valuation is really supposed to be based on comparable sales, the only comparable sales are going to involve distressed properties, because approximately nobody sells successful big box stores in fair market transactions. But that rather cuts to the core of the problem: we shouldn't be building disposable big box monstrosities that are only ever going to have one tenant. If the owners of the property are prepared to argue with a straight face that the highest and best use of the place is blighted decaying cinder blocks, perhaps the building shouldn't exist in the first place.
The more I think about it, it's like the cities are trying to tax the use-value of the stores, and the companies are trying to argue they should be taxed on the exchange-value instead.
Yep. The article I linked has a nice little analogy to someone who replaces their living room with a racquetball court. That costs a whole bunch, but it lowers the actual property value, because almost nobody wants a house like that and buyers are going to discount their offers to cover the cost of turning the thing back into a living room. Which is kind of the stores telling on themselves: they're arguing that their own properties are stupid and useless. It all feels like reshuffling the deck chairs before people decide to go shop online instead (I say, knowing that my toilet paper is due to be delivered later today).
posted by zachlipton at 1:14 PM on May 13, 2019 [3 favorites]
The property owners are within their rights to argue that their properties have gone down in value and if there is a glut of similar buildings out there that are vacant then the value probably has gone down.
The reason there are a bunch of empty Walmarts and Targets around is that Walmart and Target have abandoned older stores and built new ones, often right up the street from the old ones. That is their own damn fault.
posted by hydropsyche at 1:47 PM on May 13, 2019 [11 favorites]
The reason there are a bunch of empty Walmarts and Targets around is that Walmart and Target have abandoned older stores and built new ones, often right up the street from the old ones. That is their own damn fault.
posted by hydropsyche at 1:47 PM on May 13, 2019 [11 favorites]
Pass a law that says that, for the purpose of eminent domain, the assessed price of a commercial property is the fair market value price, then assess all of these properties at $1, exercise eminent domain, and rent them back to the retailer for whatever price you want.
Also, towns needed to not put all their hopes into one or two big box stores, about 20 years ago.
posted by gauche at 2:00 PM on May 13, 2019
Also, towns needed to not put all their hopes into one or two big box stores, about 20 years ago.
posted by gauche at 2:00 PM on May 13, 2019
The market distinctly discounts big box stores that are unoccupied, and that the discount between occupied and unoccupied price per square foot should not be awarded to owner-occupants of operating stores. But neither should owner-occupants be assessed at more than "lit" stores are trading at. If municipalities want that, they should simply move away from ad valorem property tax in favor of a gross receipts tax or occupancy tax, each of which is common enough to be fully calculable.
posted by MattD at 2:05 PM on May 13, 2019 [3 favorites]
posted by MattD at 2:05 PM on May 13, 2019 [3 favorites]
Another nuance I don't see people discussing is that the building owners are making a case that their assessment is too high - they're not making anybody actually reduce their assessment - a court does that.
There are companies whose sole business is appealing tax assessments. They get something like 50% of the reduction they are able to achieve on behalf of business owners. But, they only argue the assessment - the city has to counter-argue and if things get really contentious, it goes to court and judge makes the decision. You can like or dislike Dark Store Theory, but it's just that - a theory. To become an actual movement, judges need to agree with it.
I guess part of the problem is that small towns with limited resources are often being targeted. It's tough for them to put together a case that rivals a sophisticated lawyer who does this for a living. I'm not sure how to solve that issue.
posted by Phreesh at 2:33 PM on May 13, 2019
There are companies whose sole business is appealing tax assessments. They get something like 50% of the reduction they are able to achieve on behalf of business owners. But, they only argue the assessment - the city has to counter-argue and if things get really contentious, it goes to court and judge makes the decision. You can like or dislike Dark Store Theory, but it's just that - a theory. To become an actual movement, judges need to agree with it.
I guess part of the problem is that small towns with limited resources are often being targeted. It's tough for them to put together a case that rivals a sophisticated lawyer who does this for a living. I'm not sure how to solve that issue.
posted by Phreesh at 2:33 PM on May 13, 2019
In the short term, the best bet for cities and counties may be assessors who are able to effectively resist dark store arguments by clearly explaining their methods. After his predecessor allowed a substantial reduction to a Target that appealed in 2016, Williams decided to defend his methodology against Sam’s Club and Menards. He pulled construction permits on the aging properties that the companies had presented as comparable sales, and found that they’d require millions of dollars in renovations.
Quite a critical point. The whole point of comps is that they do actually have to be comparable. For well built structures made to last, being unoccupied for a year or so doesn't matter, it's still a comparable. In % terms of the value you don't have to do much to bring it back into use and it lasts a long time. Well built brick and timber or steel structures last a long time as well so something being a few years older mostly has bearing on the condition of the HVAC etc. rather than the structure. Many big box stores though are not built to last. A big box store that is ten years older has to be adjusted massively in value to be comparable to a new one.
Also - if they're making this point that functional obsolescence is driving down the value of the stores which have closed, it also makes them bad comps for the newer ones which are still open - by definition those are not functionally obsolescent.
The way this should work is:
1) Local government sets its budget - it now knows how much has to be raised through property taxation
2) Houses and other property is valued, these relative values are used to apportion the property tax between different classes of property and different properties
3) Tax rates are set to match 1 and 2.
When overall property values go down, you would not expect property taxes to go down with them because 1 and 2 must still balance. It's only if the *relative* value goes down that you should get a reduction in the payable tax. (of course I know that politically it is not that simple and that the valuations, tax rate setting, and overall balancing are not real time processes).
What these big box stores are really doing here is claiming that the low value comparable properties are comps for them and for them alone - if they counted for other businesses then all the other stores would be valued downwards, the property tax rate would go up, and everyone would pay the same as before.
At the root of what seems like a puzzle - these stores are technically right but it seems wrong - is that the relative value of property is not a good measure of either a businesses ability to pay tax nor of the services they consume to stay operational.
Here in the UK we value commercial property in more or less the same way (although local business taxation is based on the assumed rental value of the property rather than the sale value - it ends up having the same effect but means that business taxes are slightly less linked to purely speculative gains in the value of property). Three ways:
1) Comparable transactions
2) Replacement cost
3) Turnover method (rare and only really used in hospitality trade for things like pubs)
Overwhelmingly, method 1 is used. The UK has fewer very sparse areas with super stores in them, so we're not as vulnerable to a small number of store closures dragging down all values through the comps.
posted by atrazine at 2:42 PM on May 13, 2019 [2 favorites]
Quite a critical point. The whole point of comps is that they do actually have to be comparable. For well built structures made to last, being unoccupied for a year or so doesn't matter, it's still a comparable. In % terms of the value you don't have to do much to bring it back into use and it lasts a long time. Well built brick and timber or steel structures last a long time as well so something being a few years older mostly has bearing on the condition of the HVAC etc. rather than the structure. Many big box stores though are not built to last. A big box store that is ten years older has to be adjusted massively in value to be comparable to a new one.
Also - if they're making this point that functional obsolescence is driving down the value of the stores which have closed, it also makes them bad comps for the newer ones which are still open - by definition those are not functionally obsolescent.
The way this should work is:
1) Local government sets its budget - it now knows how much has to be raised through property taxation
2) Houses and other property is valued, these relative values are used to apportion the property tax between different classes of property and different properties
3) Tax rates are set to match 1 and 2.
When overall property values go down, you would not expect property taxes to go down with them because 1 and 2 must still balance. It's only if the *relative* value goes down that you should get a reduction in the payable tax. (of course I know that politically it is not that simple and that the valuations, tax rate setting, and overall balancing are not real time processes).
What these big box stores are really doing here is claiming that the low value comparable properties are comps for them and for them alone - if they counted for other businesses then all the other stores would be valued downwards, the property tax rate would go up, and everyone would pay the same as before.
At the root of what seems like a puzzle - these stores are technically right but it seems wrong - is that the relative value of property is not a good measure of either a businesses ability to pay tax nor of the services they consume to stay operational.
Here in the UK we value commercial property in more or less the same way (although local business taxation is based on the assumed rental value of the property rather than the sale value - it ends up having the same effect but means that business taxes are slightly less linked to purely speculative gains in the value of property). Three ways:
1) Comparable transactions
2) Replacement cost
3) Turnover method (rare and only really used in hospitality trade for things like pubs)
Overwhelmingly, method 1 is used. The UK has fewer very sparse areas with super stores in them, so we're not as vulnerable to a small number of store closures dragging down all values through the comps.
posted by atrazine at 2:42 PM on May 13, 2019 [2 favorites]
The problem with these commercial properties is that comparable sales are hard to come by. For residential homes, there are dozens or hundreds of sales in nearby areas annually to allow current values to be estimated. That isn't true for large commercial properties. There may be similar sales only every five or ten years. So you have to create current values by forcing the property owner to participate in an auction.
One solution is as jmauro proposed Sound Dues.
This is the system they use in horse racing, most of which are called "claiming races." The idea is to have races where all the horses are of similar abilities and therefore worth the same price. You don't want someone taking a $10,000 horse and entering in a race with a bunch of $5000 horses just so they can run away and win the purse.
So before each race, the horse owner has to declare the claiming value of their horse. If someone tries to enter a $10,000 horse in a $5000 claiming race, anyone can claim and buy that horse for $5000. This discourages undervaluing horses and keeps the races fair.
Similarly, if Walmart wants to appeal their assessment and claim that their building is not worth $11 million but only $7.5 million, then anyone, including the city, can buy that property from Walmart for $7.5 million and rent it back to Walmart at a $7.5 million valuation.
posted by JackFlash at 4:38 PM on May 13, 2019 [2 favorites]
One solution is as jmauro proposed Sound Dues.
This is the system they use in horse racing, most of which are called "claiming races." The idea is to have races where all the horses are of similar abilities and therefore worth the same price. You don't want someone taking a $10,000 horse and entering in a race with a bunch of $5000 horses just so they can run away and win the purse.
So before each race, the horse owner has to declare the claiming value of their horse. If someone tries to enter a $10,000 horse in a $5000 claiming race, anyone can claim and buy that horse for $5000. This discourages undervaluing horses and keeps the races fair.
Similarly, if Walmart wants to appeal their assessment and claim that their building is not worth $11 million but only $7.5 million, then anyone, including the city, can buy that property from Walmart for $7.5 million and rent it back to Walmart at a $7.5 million valuation.
posted by JackFlash at 4:38 PM on May 13, 2019 [2 favorites]
Walmart is so much richer than any single town that I'm not sure the claiming/sound dues system works. Springfield buys a Walmart property, Walmart says neener neener and (re)opens one three towns away, Springfield's hosed. But that doesn't mean that the lit stores aren't valuable while lit. (An illustration of use-value vs exchange-value? Or just dumping?)
posted by clew at 6:49 PM on May 13, 2019
posted by clew at 6:49 PM on May 13, 2019
" I mean, it's like saying "well, this property is worth X, but you could use it for a business that makes Y/year, so we'll value it as X plus the net present value of the infinite-horizon income stream Y" ... which is a valid way to valuate the business, but it's a weird way to determine the value of the building."
That is more or less exactly how farmland is assessed -- using actual yield data and a soil productivity index (measured every five yards across the entire state), to determine what the yield OUGHT to be for underutilized farmland, and tax rates are set based on the productivity potential of the soil, not based on how much money your farm actually makes or what the farmland itself is worth (although in general farm value tracks soil productivity pretty closely, but not perfectly -- farmland in Kendall County is dramatically overpriced compared to its soil productivity due to how close it is to Chicago. (Farmland uses that are undervalued by traditional productivity measures but are socially or environmentally valuable are protected by state or federal law and granted lower tax rates if they meet various criteria for those uses, like creating wetlands or letting certain lands lie fallow in some conditions or preserving habitats, etc.)
So it's not outside current property tax practices to say "the yield on this property is currently $X, but based on your soil you could be farming it to produce a yield of $Y, so we are going to value it as if you had a yield of $Y to discourage underutilization of extremely valuable land resources."
No reason you can't say to a big box "You've made this property worth $X by building a shitty disposable building on it (and a shitload of impermeable parking that we are going to make you pay for by the square foot as that should by now be a part of all property tax codes although it isn't yet), but a comparable parcel more densely developed would be worth $Y, so we're going to tax it as if you weren't underutilizing it to discourage that kind of underutilization of valuable land resources."
Although honestly if I were going to be attacking property tax problems, I'd be requiring nonprofit hospitals and nonprofit private universities to pay property taxes, since they are EXTREMELY disproportionate users of city services (police, fire, sewer) that provide almost nothing in direct charitable services to the local community. (Yes, they provide jobs, but so do for-profit businesses that pay property taxes.) In Peoria, for example, fully 50% of the blocks in the downtown area (by far the most valuable in the city) are owned by two non-profit hospitals -- one of which turns over a BILLION DOLLARS A YEAR and pays several top execs over $1 million -- a private university, or churches, and ALMOST HALF of those blocks are surface parking lots, producing JACK SHIT but pollution and runoff, but sitting there untaxed and untaxable. Peoria is struggling with its EAV (total taxable value of city property) and can barely afford police, fire, and schools, and these big non-profits constantly complain bitterly about the low quality of city services but they are sucking up mass quantities of them without paying for a bit of it. It's very frustrating.
posted by Eyebrows McGee at 7:12 PM on May 13, 2019 [12 favorites]
That is more or less exactly how farmland is assessed -- using actual yield data and a soil productivity index (measured every five yards across the entire state), to determine what the yield OUGHT to be for underutilized farmland, and tax rates are set based on the productivity potential of the soil, not based on how much money your farm actually makes or what the farmland itself is worth (although in general farm value tracks soil productivity pretty closely, but not perfectly -- farmland in Kendall County is dramatically overpriced compared to its soil productivity due to how close it is to Chicago. (Farmland uses that are undervalued by traditional productivity measures but are socially or environmentally valuable are protected by state or federal law and granted lower tax rates if they meet various criteria for those uses, like creating wetlands or letting certain lands lie fallow in some conditions or preserving habitats, etc.)
So it's not outside current property tax practices to say "the yield on this property is currently $X, but based on your soil you could be farming it to produce a yield of $Y, so we are going to value it as if you had a yield of $Y to discourage underutilization of extremely valuable land resources."
No reason you can't say to a big box "You've made this property worth $X by building a shitty disposable building on it (and a shitload of impermeable parking that we are going to make you pay for by the square foot as that should by now be a part of all property tax codes although it isn't yet), but a comparable parcel more densely developed would be worth $Y, so we're going to tax it as if you weren't underutilizing it to discourage that kind of underutilization of valuable land resources."
Although honestly if I were going to be attacking property tax problems, I'd be requiring nonprofit hospitals and nonprofit private universities to pay property taxes, since they are EXTREMELY disproportionate users of city services (police, fire, sewer) that provide almost nothing in direct charitable services to the local community. (Yes, they provide jobs, but so do for-profit businesses that pay property taxes.) In Peoria, for example, fully 50% of the blocks in the downtown area (by far the most valuable in the city) are owned by two non-profit hospitals -- one of which turns over a BILLION DOLLARS A YEAR and pays several top execs over $1 million -- a private university, or churches, and ALMOST HALF of those blocks are surface parking lots, producing JACK SHIT but pollution and runoff, but sitting there untaxed and untaxable. Peoria is struggling with its EAV (total taxable value of city property) and can barely afford police, fire, and schools, and these big non-profits constantly complain bitterly about the low quality of city services but they are sucking up mass quantities of them without paying for a bit of it. It's very frustrating.
posted by Eyebrows McGee at 7:12 PM on May 13, 2019 [12 favorites]
The article mentions appeals and supreme court cases but doesn't link them, anyone have links to those? I'd like to see the discussion in the opinions.
It seems on the one hand like the stores have a point: property tax should be about the property, not about how much money they're able to make. If you want to tax that, make a new tax.
My city's tax code has 3 methods of evaluation:
In the code, it says
posted by ctmf at 7:23 PM on May 13, 2019
It seems on the one hand like the stores have a point: property tax should be about the property, not about how much money they're able to make. If you want to tax that, make a new tax.
My city's tax code has 3 methods of evaluation:
Cost Approach: This method applies the principle of substitution. A knowledgeable individual would not pay more than the cost of a comparable property with similar location and utility. The appraiser estimates the cost new to replace or reproduce the improvements deducts from cost new, physical, functional and economic conditions that affect its value, adds the estimated land value to determine the total assessed value of the property.So I think the stores wouldn't mind either the cost or the market approach, they just hate the income approach. Which my city says "is used primarily for commercial properties."
Market Approach: This method is a process of analyzing sales of similar properties that have recently sold. Adjustments are made for certain differences between the properties such as age, condition, area and amenities to determine the total assessed value.
Income Approach: The income capitalization approach to value is used primarily for commercial properties. Value is based on the property's income generating potential. An analysis of income, vacancy, credit loss and operating expenses with an appropriate capitalization rate is necessary to properly determine a valuation by this method.
In the code, it says
In the case of property of a complex nature, or being used under terms of a franchise from a public agency, or operating as a public utility, or property not having a record of sale within five years and not having a significant number of sales of similar property in the general area, the provisions of this subsection must be the dominant factors in valuation.[emphasis added, "this subsection" including the capitalization of income part.] So if they're trying to comp dark stores that have been that way for a long time, they're accidentally justifying why the income approach is the right one, it seems like.
posted by ctmf at 7:23 PM on May 13, 2019
If the argument is that they are being taxed too much because of the leaseback arrangement through which the store was built it strikes me as a consequence of their own choice to employ a tax avoidance strategy in the first place. In an attempt to avoid income tax they accidentally subjected themselves to higher property tax. Oops. They made their bed, maybe they should lie in it.
Besides, it's simply true that a commercial building is usually (some tax shenanigans aside) going to sell for a higher price if it has existing successful tenants. Given that fact, it seems perfectly reasonable to take that into consideration when assessing a property's value, the same as any other feature of the property that enhances its value.
posted by wierdo at 7:49 PM on May 13, 2019 [3 favorites]
Besides, it's simply true that a commercial building is usually (some tax shenanigans aside) going to sell for a higher price if it has existing successful tenants. Given that fact, it seems perfectly reasonable to take that into consideration when assessing a property's value, the same as any other feature of the property that enhances its value.
posted by wierdo at 7:49 PM on May 13, 2019 [3 favorites]
If the argument is that they are being taxed too much because of the leaseback arrangement through which the store was built it strikes me as a consequence of their own choice to employ a tax avoidance strategy in the first place. In an attempt to avoid income tax they accidentally subjected themselves to higher property tax. Oops. They made their bed, maybe they should lie in it.
In many US states property taxes are required (in some cases by the state constitution) on freehold value of the land. So any impacts of the leaseback arrangement have to be removed from the assessment.
posted by atrazine at 8:41 AM on May 14, 2019
In many US states property taxes are required (in some cases by the state constitution) on freehold value of the land. So any impacts of the leaseback arrangement have to be removed from the assessment.
posted by atrazine at 8:41 AM on May 14, 2019
I'm confused how this actually reduces tax revenue. The way that I am taxed locally (in the Chicago area), is that the locality (in this case, both the county and the municipality) figure out their budget for the year. Then, they figure out the assessed value of ALL REAL ESTATE within their jurisdiction. Then, they divide.
All of the budget is raised, it's just that my personal percentage of the budget is based on the assessed value of my real estate. The locality can't get less than the amount of their budget, but the way that the tax is divided up changes.
So, if I got my house re-assessed at a lower rate, it actually doesn't affect the government, it affects MY NEIGHBORS. They will end up paying a higher amount of money, because I am paying less. The total amount of taxes are the same.
(In a practical way, the real estate tax is done twice a year, and the first one is something like 55% of last year's assessment, and the second one is the rest of this year's assessment.)
So, assuming these states do their taxes the same way, this is less of an effect on the government, and more on everyone else who lives there.
Which is Walmart's approach to everything.
posted by MythMaker at 8:59 AM on May 14, 2019
All of the budget is raised, it's just that my personal percentage of the budget is based on the assessed value of my real estate. The locality can't get less than the amount of their budget, but the way that the tax is divided up changes.
So, if I got my house re-assessed at a lower rate, it actually doesn't affect the government, it affects MY NEIGHBORS. They will end up paying a higher amount of money, because I am paying less. The total amount of taxes are the same.
(In a practical way, the real estate tax is done twice a year, and the first one is something like 55% of last year's assessment, and the second one is the rest of this year's assessment.)
So, assuming these states do their taxes the same way, this is less of an effect on the government, and more on everyone else who lives there.
Which is Walmart's approach to everything.
posted by MythMaker at 8:59 AM on May 14, 2019
One weakness I see in the big-box argument is they don’t purchase used stores. They build new. Always. At least for a certain class of retailer (Walmart, Target, Kohl’s, Menards, Home Depot). There is a secondary class of retailer who buys/rents 2nd gen big box stores, such as Hobby Lobby or Harbor Freight (although they build new, as well).
So, the argument that their new (or newer) building should be valued the same as an empty building that they wouldn’t ever use strikes me as specious.
Also, the fact that West Bend, WI spent $16 million on new infrastructure without getting building valuations guaranteed as part of a development agreement is, quite frankly, a rookie-level mistake.
posted by Big Al 8000 at 9:00 AM on May 14, 2019 [3 favorites]
So, the argument that their new (or newer) building should be valued the same as an empty building that they wouldn’t ever use strikes me as specious.
Also, the fact that West Bend, WI spent $16 million on new infrastructure without getting building valuations guaranteed as part of a development agreement is, quite frankly, a rookie-level mistake.
posted by Big Al 8000 at 9:00 AM on May 14, 2019 [3 favorites]
The locality can't get less than the amount of their budget, but the way that the tax is divided up changes
In many cases, the retailer is looking for a rebate on taxes paid. So the county is having to reduce income after the budget is set.
Also, business interests are also lobbying state legislators to limit how much localities can raise property tax rates (typically shown as X dollars per thousand of valuation). This way, when they successfully get the valuation dropped 30%, the county can’t turn around and raise the taxable rate by a corresponding amount. The really anti-tax legislators are even trying to limit how much localities can raise assessments. This is what Iowa is going through at the moment (gotta love single-party control of the government).
posted by Big Al 8000 at 9:11 AM on May 14, 2019
In many cases, the retailer is looking for a rebate on taxes paid. So the county is having to reduce income after the budget is set.
Also, business interests are also lobbying state legislators to limit how much localities can raise property tax rates (typically shown as X dollars per thousand of valuation). This way, when they successfully get the valuation dropped 30%, the county can’t turn around and raise the taxable rate by a corresponding amount. The really anti-tax legislators are even trying to limit how much localities can raise assessments. This is what Iowa is going through at the moment (gotta love single-party control of the government).
posted by Big Al 8000 at 9:11 AM on May 14, 2019
The reason there are a bunch of empty Walmarts and Targets around is that Walmart and Target have abandoned older stores and built new ones, often right up the street from the old ones. That is their own damn fault.
This isn't going to change because they've found it's cheaper to build than renovate the existing stores, because big boxes are built cheaply so they degrade fast and they don't want to shutdown during the re-model.
At least in rural areas, they also usually trying to move further outside the encroaching city limits. When you drive through Ft. Scott, KS on US69, you can see the 4 Walmarts buildings lined up in like a 1/2 mile as they've been moving outside the city limits to avoid the city property taxes. The city keeps moving the city limit and then they go to the county for tax breaks to build a new one just outside the line. It's kind of sickening honestly.
Walmart is so much richer than any single town that I'm not sure the claiming/sound dues system works. Springfield buys a Walmart property, Walmart says neener neener and (re)opens one three towns away, Springfield's hosed. But that doesn't mean that the lit stores aren't valuable while lit. (An illustration of use-value vs exchange-value? Or just dumping?)
Odds are that they're already there three-towns over, and depending on the jurisdiction, they likely cannot get far enough away (county or state) to avoid them and still make a profit. At some point people just won't travel that far for groceries.
posted by jmauro at 9:27 AM on May 14, 2019 [1 favorite]
This isn't going to change because they've found it's cheaper to build than renovate the existing stores, because big boxes are built cheaply so they degrade fast and they don't want to shutdown during the re-model.
At least in rural areas, they also usually trying to move further outside the encroaching city limits. When you drive through Ft. Scott, KS on US69, you can see the 4 Walmarts buildings lined up in like a 1/2 mile as they've been moving outside the city limits to avoid the city property taxes. The city keeps moving the city limit and then they go to the county for tax breaks to build a new one just outside the line. It's kind of sickening honestly.
Walmart is so much richer than any single town that I'm not sure the claiming/sound dues system works. Springfield buys a Walmart property, Walmart says neener neener and (re)opens one three towns away, Springfield's hosed. But that doesn't mean that the lit stores aren't valuable while lit. (An illustration of use-value vs exchange-value? Or just dumping?)
Odds are that they're already there three-towns over, and depending on the jurisdiction, they likely cannot get far enough away (county or state) to avoid them and still make a profit. At some point people just won't travel that far for groceries.
posted by jmauro at 9:27 AM on May 14, 2019 [1 favorite]
The locality can't get less than the amount of their budget, but the way that the tax is divided up changes.
Well, that's exactly the whole point. Walmart lowers their share and all the rest of the taxpayers have to make up the difference. Walmart doesn't vote, but all the other taxpayers do. They are going to be angry about their property taxes going up while Walmart's goes down. Elected city officials have an incentive to fight for the voters.
posted by JackFlash at 9:39 AM on May 14, 2019
Well, that's exactly the whole point. Walmart lowers their share and all the rest of the taxpayers have to make up the difference. Walmart doesn't vote, but all the other taxpayers do. They are going to be angry about their property taxes going up while Walmart's goes down. Elected city officials have an incentive to fight for the voters.
posted by JackFlash at 9:39 AM on May 14, 2019
Big Al - it is true that the leading big boxes like to build rather than buy (although they certainly do buy and remodel in already built-up areas), that operating preference doesn't affect the fair market value of the real estate. If the tax is to be levied on what a building is worth, you have to look to what that building would sell for if it attached to a fair market lease (in other words, a hypothetical sale and leaseback if the building is presently owner-occupied).
In recent years, at least, the only adjustments made for use were downward, and that was designed to avoid property tax systems causing farms close to suburbs, or large open-space uses (like country clubs), from all being condemned and converted to tract housing or retail.
Implicitly, the municipalities are seeking an upward use-based adjustment to fair value ... but it would be a lot simpler and more predictable actually to tax the uses; a commercial square footage occupancy tax, and incremental sales tax, etc.
posted by MattD at 10:30 AM on May 14, 2019 [1 favorite]
In recent years, at least, the only adjustments made for use were downward, and that was designed to avoid property tax systems causing farms close to suburbs, or large open-space uses (like country clubs), from all being condemned and converted to tract housing or retail.
Implicitly, the municipalities are seeking an upward use-based adjustment to fair value ... but it would be a lot simpler and more predictable actually to tax the uses; a commercial square footage occupancy tax, and incremental sales tax, etc.
posted by MattD at 10:30 AM on May 14, 2019 [1 favorite]
A large reason the market for old big-box stores is depressed is because Walmart isn’t interested in an old Target and vice versa. They are so specific in their retail layouts and building requirements, that they really are bespoke structures. Also, many retailers put restrictions on who they will resell to, again limiting the potential market.
The retailers are essentially arguing that limited resale value is a bug when it is actually a feature.
posted by Big Al 8000 at 2:41 PM on May 14, 2019
The retailers are essentially arguing that limited resale value is a bug when it is actually a feature.
posted by Big Al 8000 at 2:41 PM on May 14, 2019
When you drive through Ft. Scott, KS on US69, you can see the 4 Walmarts buildings lined up in like a 1/2 mile as they've been moving outside the city limits to avoid the city property taxes. The city keeps moving the city limit and then they go to the county for tax breaks to build a new one just outside the line. It's kind of sickening honestly.
The same thing happens between Riley and Pottawatamie counties. K-State is located on one side of the river that's used as the county dividing line. So there's a large commercial bulwark across the river on Hwy 24. It's full of industrial equipment, auto dealers and furniture stores. Even a Sears.
And a similar thing occurs at Oregon State University -- the city is situated on one side of a river used as a boundary for Benton County. And all kinds of industrial suppliers deliberately situate themselves where land is cheaper and not taxed by the city. No auto dealers tho -- free public transit and no meaningful military presence nearby moderates demand. There's also a northern highway commercial spot, complete with a 'City Limits' convenience store.
I don't think this is a phenomenon the Waltons invented.
posted by pwnguin at 2:41 PM on May 14, 2019
The same thing happens between Riley and Pottawatamie counties. K-State is located on one side of the river that's used as the county dividing line. So there's a large commercial bulwark across the river on Hwy 24. It's full of industrial equipment, auto dealers and furniture stores. Even a Sears.
And a similar thing occurs at Oregon State University -- the city is situated on one side of a river used as a boundary for Benton County. And all kinds of industrial suppliers deliberately situate themselves where land is cheaper and not taxed by the city. No auto dealers tho -- free public transit and no meaningful military presence nearby moderates demand. There's also a northern highway commercial spot, complete with a 'City Limits' convenience store.
I don't think this is a phenomenon the Waltons invented.
posted by pwnguin at 2:41 PM on May 14, 2019
it would be a lot simpler and more predictable actually to tax the uses; a commercial square footage occupancy tax, and incremental sales tax, etc.
Agreed, but in the current anti-tax environment, many municipalities don’t have those tools at their disposal and many legislatures are loathe to allow new tax structures for fear of appearing “anti-business”.
posted by Big Al 8000 at 2:45 PM on May 14, 2019
Agreed, but in the current anti-tax environment, many municipalities don’t have those tools at their disposal and many legislatures are loathe to allow new tax structures for fear of appearing “anti-business”.
posted by Big Al 8000 at 2:45 PM on May 14, 2019
CityLab link is (still/again?) up.
Bonus link: “Dark Store Theory” and Property Taxation, from the Texas Comptroller's website, with a clear recap of the Dark Store Theory:
Novel idea: tax the store at the full-capacity value, while it's operating and after they shut down. Only re-assess the taxes once the property is sold to a wholly separate entity.
posted by filthy light thief at 8:59 PM on May 15, 2019 [2 favorites]
Bonus link: “Dark Store Theory” and Property Taxation, from the Texas Comptroller's website, with a clear recap of the Dark Store Theory:
Dark store theory primarily concerns the property taxation of big-box stores, behemoth department stores, hardware sellers and other outlets often running to 50,000 square feet or more.And they're assuming that there will be no next occupant -- the idea that the store will simply be "dark," or vacant.*
The dark store theory of property valuation, championed aggressively by many big-box retailers, suggests that commercial properties should be appraised and valued the same whether they’re operating or shuttered. They favor appraising all big-box properties as if they were vacant or “dark” to calculate property value, arguing these locations will be difficult to sell because they have little appeal to subsequent buyers. In essence, they’re asking that these properties be appraised according to how the next occupant may use it.
Appraisal districts, by contrast, appraise such buildings according to their “highest and best use,” which in practice means appraising them as operating locations.* Part of the reason they're assuming the location will be vacant, is that they'll ensure they aren't replaced by a competitor
The difference between these perspectives, as you might imagine, can be significant. Dark store proponents often ask that the value of their property be reduced by more than half, in one instance from $82 to $20 per square foot. Big-box retailers have pushed dark store theory most vigorously, but the practice has spread to other commercial property types as a way to seek tax reductions. In Wisconsin, U.S. Bank used dark store arguments in an appraisal protest, while CVS has employed the theory in Michigan.
In Texas, the main proponent of the theory has been Lowe’s Home Improvement, which has 141 stores in the state.
Furthermore, big-box chains generally refuse to sell or lease closed locations to their rivals, answering a question that may occur to those driving by: Why did they build that new Lowe’s a quarter-mile away from a Home Depot that’s been sitting empty for six months? This business decision reduces the number of potential buyers in the market.Emphasis original.
Novel idea: tax the store at the full-capacity value, while it's operating and after they shut down. Only re-assess the taxes once the property is sold to a wholly separate entity.
posted by filthy light thief at 8:59 PM on May 15, 2019 [2 favorites]
While some chains still own a significant number of their stores or at least did at some point before doing a mass leaseback in the past 20 years, most large chains have moved to having the lessor buy the land and build the empty shell, keeping themselves well clear of ever actually owning anything but money, IP, and receivables.
A few still own some or all of their own REIT, but not many for whom it isn't a necessary part of the business model.
Basically, the store is not ever owned by the chain or its subsidiaries. The only reason the chain is the one arguing about property tax is that the lease makes them liable for any property tax payments during the term. Some chains lease from owners that own only one or a few of that chain's locations, sometimes from people who don't own any other CRE. It's kinda weird when you look up the records for a Walgreens or something and the property turns out to be owned by a company owned by a middle aged dentist who went to a seminar one time and thought it sounded like a safe place to park some money.
Those are the outliers, though. Most of them are owned in some way by the big REITs, hedge funds, or institutional investors, so don't think I'm trying to sell some sob story. I'm mainly just remarking on how weird things are getting as the financialization of the entire economy continues to its inevitable conclusion with the wealth of the powerful being divorced entirely from any real economic activity.
posted by wierdo at 12:06 AM on May 16, 2019
A few still own some or all of their own REIT, but not many for whom it isn't a necessary part of the business model.
Basically, the store is not ever owned by the chain or its subsidiaries. The only reason the chain is the one arguing about property tax is that the lease makes them liable for any property tax payments during the term. Some chains lease from owners that own only one or a few of that chain's locations, sometimes from people who don't own any other CRE. It's kinda weird when you look up the records for a Walgreens or something and the property turns out to be owned by a company owned by a middle aged dentist who went to a seminar one time and thought it sounded like a safe place to park some money.
Those are the outliers, though. Most of them are owned in some way by the big REITs, hedge funds, or institutional investors, so don't think I'm trying to sell some sob story. I'm mainly just remarking on how weird things are getting as the financialization of the entire economy continues to its inevitable conclusion with the wealth of the powerful being divorced entirely from any real economic activity.
posted by wierdo at 12:06 AM on May 16, 2019
If the argument is that they are being taxed too much because of the leaseback arrangement through which the store was built it strikes me as a consequence of their own choice to employ a tax avoidance strategy in the first place. In an attempt to avoid income tax they accidentally subjected themselves to higher property tax. Oops. They made their bed, maybe they should lie in it.
Exactly! Creative Financing bit them in the ass.
One weakness I see in the big-box argument is they don’t purchase used stores. They build new. Always. At least for a certain class of retailer (Walmart, Target, Kohl’s, Menards, Home Depot). There is a secondary class of retailer who buys/rents 2nd gen big box stores, such as Hobby Lobby or Harbor Freight (although they build new, as well).
Covenants requiring big box retailers to put up a bond to ensure the site can be demolished after they disappear would be a good start.
posted by mikelieman at 12:51 AM on May 16, 2019 [1 favorite]
Exactly! Creative Financing bit them in the ass.
One weakness I see in the big-box argument is they don’t purchase used stores. They build new. Always. At least for a certain class of retailer (Walmart, Target, Kohl’s, Menards, Home Depot). There is a secondary class of retailer who buys/rents 2nd gen big box stores, such as Hobby Lobby or Harbor Freight (although they build new, as well).
Covenants requiring big box retailers to put up a bond to ensure the site can be demolished after they disappear would be a good start.
posted by mikelieman at 12:51 AM on May 16, 2019 [1 favorite]
For those curious, one court's rationale:
Walgreen Co. v. City of Madison, 2008 WI 80 (Wis. 2008)
posted by ctmf at 6:21 PM on May 16, 2019
Walgreen Co. v. City of Madison, 2008 WI 80 (Wis. 2008)
posted by ctmf at 6:21 PM on May 16, 2019
One court uncritically accepting the ridiculous assertion that Walgreens has needs in excess of typical tenants and that improvements that supposedly only they would desire and therefore should not be counted as improvements for the purpose of property tax valuation.
Basically, they threw some shit at a wall and confused people as to what they were really saying and got away with it.
posted by wierdo at 4:49 AM on May 17, 2019
Basically, they threw some shit at a wall and confused people as to what they were really saying and got away with it.
posted by wierdo at 4:49 AM on May 17, 2019
To be more plain about it, not everybody wants a fenced front yard. In fact, many people where I live prefer their front yard unfenced. Nonetheless, that fence is an improvement whose value is added to my landlord's total assessment on which they pay property tax.
Hell, many people actively avoid properties with a swimming pool. Those who don't will pay somewhat more for a house with one, though, so the assessed value of a property with a swimming pool are higher despite a pool being of value only to a subset of potential buyers.
These things seem completely uncontroversial to me.
Also, since every appraisal of a commercial property I've ever seen takes into account the value of any potential lease, just like every appraisal of a residential property I've seen is based in part on what the property would make were it rented, I fail to understand why it ought to be different for Walgreens.
posted by wierdo at 5:43 AM on May 17, 2019 [1 favorite]
Hell, many people actively avoid properties with a swimming pool. Those who don't will pay somewhat more for a house with one, though, so the assessed value of a property with a swimming pool are higher despite a pool being of value only to a subset of potential buyers.
These things seem completely uncontroversial to me.
Also, since every appraisal of a commercial property I've ever seen takes into account the value of any potential lease, just like every appraisal of a residential property I've seen is based in part on what the property would make were it rented, I fail to understand why it ought to be different for Walgreens.
posted by wierdo at 5:43 AM on May 17, 2019 [1 favorite]
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