Big Box Theory FAQs

1. Assessor says that vacant stores should not be compared to occupied stores.

Answer: “Vacant and available” is the premise behind fee simple property value. “What will the open market pay to own or lease a property” is the only relevant question, and sales of similar big box properties are the best way to measure the market value of the real estate to a generic buyer. Home values are done this way—as is commercial property. Would anyone think that vacating their home reduces the value of it? Of course not; we must leave our houses to sell them, right? If the sale is in an inferior location, then appraisers adjust for that. If the property is in inferior condition, appraisers make an adjustment for that too.  But “tax it at its sale value” is the law and should not be subject to attempts to game the system by allowing assessors to ignore valid sales to prop up a tax base by ignoring market participants’ actual behavior as reflected in the sale prices achieved for this property type.

2. Assessors say that the best way to determine value is via occupied store sales.

Answer: Courts across the land have not fallen for this and for good reason. Most big box stores are built-to-suit, which means they are custom-built to the standards and desires of the user. These stores are often leased by the user, but the lease is not a standard market-based lease; rather, it’s an encumbrance on the fee simple estate and is often used as a financing tool. The owner builds the custom property and the user pays the owner back for the construction costs over a 20+ year mortgage (which they call a lease). The construction costs are not only being paid back, but so is the interest and entrepreneurial profit and, for all we know, a house in Palm Springs. The rent is nothing more than a loan payment. These leases were never exposed to the open market. There was never a listing or “for sale or lease” sign telling the “open market” this property is available for lease or sale. The market never could bid on the property. If it had, the resulting sale price or rent would be a measure of what the open market would pay for that property. Therefore, when these properties sell, the investor/buyer is buying the lease (a.k.a. the income stream which could not be reproduced if the original user leaves). The market doesn’t care what it cost or who will lose money over the low price. The lease being purchased is generally at rates far above what the actual market would pay. Only market rents may determine the value and the market would not be willing to pay for custom construction for another user, which is why activist assessors and their experts are attempting to do an end run around market theory by changing the definition of “fee simple” to include tangible and intangible contract rights of market participants (instead of confining the analysis to what the real estate would sell for vacant and available for sale as the law requires).

3. Assessors say that the use restrictions bring the value down.

Answer: This is a very sound theory. It only makes sense that if a property is limited in its possible uses, the value should be less than if there were no restrictions. However, the restrictions placed on this property type are standard restrictions which are designed to disallow competition from taking the vacant property. While it is widely known that big box retailers almost always want to move into their own prototype (Home Depot won’t go into a Menards, Walmart will not go into a Target, Lowes won’t move into a Home Depot, etc.) the restrictions are placed as a matter of certainty, if the use as a home improvement store didn’t work well for one brand, it probably won’t work for another, which is another reason competitors don’t buy each other’s stores.  In any event, appraisers routinely adjust for this aspect of a sale and deed restrictions rarely affect actual purchase prices by more than 10%, as a national study sales of big box stores demonstrates.

4. Assessors say that once a big box closes, the highest and best use changes too.

Answer: Highest and best use may change, but not “usually.” If a Walmart sells to a furniture store, the highest and best use is still the same: Big Box Retail. The assessor wants you to believe that the Highest and Best Use is “big box home improvement store”, but that is not the case. I have read many appraisals by appraisers for taxing districts that conclude the highest and best use to be either “a drugstore building net leased to a national pharmacy tenant” or “a large retail building net leased to a national big box retailer”.  What’s happening here is that the appraiser/assessor is confusing highest and best use (real estate concept) with highest and best user (an occupancy/economic concept).  So when assessors think that HBU has changed because the net lease tenant has gone away, actually the HBU remains for retail uses, just without that juicy build-to-suit net lease that makes the property valuable in the net lease investment marketplace.  Again, “tax it at its sale value” is the law which must be applied to all forms of real estate to achieve uniformity in spreading the property tax burden.  Manipulating the actual data for one property type to distort the truth regarding actual sales prices defeats this constitutional purpose and is therefore void ab initio.

5. If a big box user leaves a location then the location must be bad.

Answer: This could not be further from the truth. Maybe there is too much competition in the immediate area and the user relocates. This doesn’t mean that the area is bad; it could mean exactly the opposite: The area is so good that the competition is too great. OR maybe the user wants to add space but can’t in the current location. Walmart for instance has built several stores down the block or across the street from an original location so they can add grocery (Blaine, MN). This location is not bad, Walmart simply needed something different.

6. The assessors say, “Why would they build something if they knew they couldn’t sell it for at least what they paid to build it?”, if it costs a lot, it MUST be worth a lot.

Answer: This is elementary in the appraisal/assessment world and is proof that either the assessors are trying to trick the public/media, or that they are not competent. If they are referring to the builder, they would be right. The builder must make a profit so if they build something that they can’t sell for more than the cost to construct it, they will close fast. National retailers don’t care what the value of the real estate is because they aren’t in the real estate business. They build knowing that if they must sell the building, they will take a heavy loss. Again, they are not building the property to sell it, they are building it so they can sell their product. McDonalds, Target, Jiffy Lube, they all do this. They build stores the same everywhere so that when the customer walks in, they know where things are or they can see it from the road and even if the sun is in their eyes. The user knows this and they want to make it easy for the customer. Building custom buildings costs far more than buying a standard one fits most property types; not just big box stores in decline.

Example:  I live in Green Bay, WI, but I am a Vikings fan. I want to build a house that is Vikings themed. I order custom colored tile, inlaid carpet, special fixtures, etc. I must spend a fortune to do it, but it’s what I want and I plan on living there for a long time, so I can justify the cost because I will enjoy it and that makes it worth it. IF, however I must sell the house, I will take a huge hit because of the lack of potential buyers in the market. Same with big box, there are so few users who want/need that much space built as another brand that the simple laws of supply and demand take over. The demand is not there so the value is greatly depreciated.  And taxing it “at its sale price” is required statutorily and constitutionally in most states; and must remain so to avoid the constitutional infirmities embedded in legislation designed to allow assessors to discriminate against a property type becoming rapidly obsolete (therefore worth less in the open market) by the rapid morphing from a “sticks-and-bricks” to a “click-and-ship” retail economy.