It’s a trend that seems to be sweeping the nation — Indiana, Michigan, Wisconsin, Texas, Alabama and Florida are among the many states that have found themselves in a battle with the “big box stores” over property tax revenue — and until recently it’s been a losing battle.
However, with the success of Indiana changing its legislature to stop this attempt by chain stores to lower their assessments, dubbed the ‘dark store strategy’ by the appraising community, other states like Wisconsin and Michigan are following Indiana’s lead with the hopes of the same outcome.
The big-box retailers like Walgreens, CVS, Lowe’s, Target and Meijer have contested their assessments, arguing that the market value of their properties should not be assessed by its current status as an operating business or the cost to build new, but instead according to the sale of a similar sized vacant building — a “dark store.”
Laws regarding property tax values and assessments do vary from state to state, and generally speaking, appraisers look at several factors to determine the taxable value of a property, including the sale price of comparable properties, current cost to build minus depreciation and income generated by rent charged to tenants.
Reportedly, appraisers can apply a mix of those methods or rely on just one to arrive at a property value assessment.
Francis “Francee” Foster, a licensed real estate broker with At Home Realty who has operated for 32 years in Michigan and Indiana, said, “It can be very hard to find a comparable market for the big-box stores for appraisals. In the state of Michigan, we are supposed to be a Fair Market Value state.”
Foster explained that Fair Market Value is an appraisal based on the value of like land in a given area, and when that’s hard to do, the appraisers do use a variety of other means. Foster is not an appraiser but has worked with both residential and commercial properties.
She said, “Property taxes are complex” and nobody wants to pay more than they have to. “Big-box stores do keep our people employed, which to me is an asset to a community. They should pay their fair share, but I don’t think they should be over-assessed either.”
The big-box stores have argued successfully that using cost to build artificially inflates the value of the property and that method is called value-in-use versus value-in-exchange — what the value would be on the market.
For local governments the dark store strategy doesn’t stand up. Municipalities say when appraising a residential property, they look at currently occupied homes not at foreclosed homes because the value isn’t the same.
Still, big-box stores have been having success in appealing their property taxes ever since the recession, often to the woe of local governments’ coffers. According to a 2015 MLive article by Chastity Pratt Dawsey called “Lawmakers seek a halt to ‘dark stores’ tax-cutting strategy,” the city of Escanaba, Mich. — after Menards won a property tax appeal — has been required to refund the company $121,000. Dawsey noted, “That’s about the cost of what the Upper Peninsula community of 12,000 on Little Bay de Noc budgeted for major street repairs next year.”
Escanaba is not alone. Marquette Township, also in Michigan, is required to give Lowe’s a $755,000 tax refund, with the home improvement and appliance chain also successfully reducing its tax assessment from $5.2 million to less than $2 million in a 2012 challenge — even though it would cost $10 million to build just the store now. The township tried unsuccessfully to appeal. This has created a 22 percent fall in tax revenue in just a few years.
Marion County, Ind., had to pay Meijer $2.4 million in nine years back taxes after the store won an appeal in 2014, reducing its assessment from $83 per square foot to $30 per square foot. Meanwhile, the city of Oshkosh, Wis., also had to pay $69,549 back to Walgreens when it won its contested assessment.
These types of cases result in reduced services and increased burden to residential property owners. As these appeals move across a state by numerous chains, the revenue loss can be devastating. A tax tribunal judge said there is no bias on the tribunal’s part and the reason the property owners are winning is because they have a better legal team. Light at the end of the dark store
Based on the success of an albeit watered-down law passed by the Indiana General Assembly recently, other states are following suit. Alabama passed a law giving counties more legal resources, and Michigan has written, although hasn’t yet passed, House Bill 5578 authored by Rep. David Maturen, which addresses how the Michigan Tax Tribunal hears assessment challenges.
Curt Witynski, assistant director of the League of Municipalities in Wisconsin and self-proclaimed “white hat lobbyist”, said of the dark store strategy, “I’m excited that we laid the groundwork at our last legislative meeting. We’ll resume in January, and we’re making it a special point. We’re introducing a bill after what Indiana got passed in 2016. We anticipate introducing it at our first session.”
Witynski said in 2015 Indiana passed a law with technology that assessors couldn’t use so “the first version of the law didn’t work. But in 2016 the law was rewritten using the term ‘market segment’ — that’s the key.” Witynski explained, “Market segment is defined as same age, same or similar type of business, size and location. This would shut down the big-box attorneys who’ve said to only use the secondary market to value the properties.”
Witynski said the big-box stores have likely been successful to date in winning these contested cases because they are “using very sophisticated attorneys who have the resources and know how to present an argument to judges who don’t often deal with tax issues and they’ve been convinced by those arguments.”
The case in Oshkosh, Wis., with Walgreens was a little different in that big-box drug stores typically lease the property and because of a “weird twist in Wisconsin law, Oshkosh had to shoulder the full burden,” whereas ordinarily a town or city would be able to go to the school system and the library who share in the property tax revenue to help pay back its share.
“It puts communities in a difficult situation if it hasn’t budgeted for that expense. Wisconsin has a very strict levy,” he said, adding later that there are no local taxes as in other states so all the municipalities’ revenue comes from property taxes and the state does have a property tax cap.
Over time if this goes unchecked, according to Witynski, the main effect of this strategy will result in commercial property owners paying less, which means somebody else has to pay more and that’s homeowners. Homeowners in Wisconsin already pay 70 percent of property taxes, he said.
“Because manufacturing, industry, agricultures and now retailers have all been able to reduce taxes, the responsibility falls way more on the shoulders of the homeowners,” Witynski said.
“Our No. 1 reason as an association in shutting this down is to avoid having even more of the tax burden shifted from the commercial to the residential,” he said.
Some businesses in Michigan are employing a bright store strategy, publicly stating that they are willing to pay their fair share of taxes to support their local communities. But many of these same business owners and some local officials say they don’t blame the big-box stores — they’re not doing anything illegal and that the fault lies in the legislature.
If your state or county hasn’t experienced this dark store strategy yet, it very likely may be coming as more chain stores are successfully contesting their cases and are even admitting to using test cases in certain areas.