By Robert A. Hill, property tax attorney and president, Robert Hill Law, Ltd.
For the past ten years, big box retail stores, national and regional alike, have suffered dramatically reduced sale prices for the real estate they leave behind when they decide – for whatever reason – to close a location. This decade-long shift in sale pricing for mega-warehouse retail property is, to a considerable degree, caused by today’s “click-and-ship-not-sticks-and-bricks” retail economy. This shift in consumer preference appears to have caused a market phenomenon negatively affecting the overall utility, and the transferability, of the mega-warehouse retail store: a phenomenon which has mutated traditional big box retail stores; (i.e., mega-warehouses with cash registers inside) into mega-warehouse stores with silent cash registers inside (i.e., warehouses with vast storage space).
Unlike traditional retail – which focuses on shopper convenience, customer service, and overall buyer experience – the function of a mega-warehouse store is to house products for sale. In a mega-warehouse store, it is the consumer who must wade through a bevy of options while browsing through the warehouse. Appealing to do-it-yourself consumers, this retail model works if the retailer’s costs can be kept to a minimum while providing maximum cost savings to the consumer.
Modern property assessment practices have not kept pace with ever-growing shopper fondness for the “click-and-ship” retail model. Cost per-square-foot assessment considerations are modeled after traditional retail models at $80-90 per-square-foot. Yet, since the warehouse and the retail space are the same for mega-warehouse stores, prices for this property type average $24-28 per square foot and the argument for fairness becomes apparent. To be sure, not every square foot of a mega-warehouse directly generates revenue; it behaves more like an industrial warehouse. Therefore, total square foot formulas – modeled after a singular (i.e., traditional) retail model – are short sighted. Moreover, they are unfair.
For the past twenty-five years, Robert Hill Law has been an unrelenting champion of “Sales Matter” when assessing mega-warehouse retail properties. Robert Hill Law’s primary motivation is rooted in substantial justice: we must not permit government’s self-serving inclination to consider the total sales volume (“value-in-use”) of a store owned and occupied by a national retailer to affect (inflate) its real property assessments. In plain terms, a retailer’s sales revenues are incidents of ownership, not measures of value inherent to the property itself. Property assessment must be based on “market value” of the subject property. By trying to use sales revenues as a surrogate to determine property value, government assessors are ignoring the relevant “market.” The relevant “market” is not the approximate success of a “going concern” in relation to other going concerns. Rather, the relevant market is the property at its highest and best use in relation to other comparable properties. Therefore, a retailer’s sales revenue is irrelevant to answering the market-driven question: “What will you pay me for my property that has a big box warehouse store on it?”
If uniformity is to be maintained – a big “if” in some states – assessors must come to accept the fact they are to determine the market value of the real estate and not simply establish a “pecking order” based on the occupant’s business profits. Assessors must adhere to the fundamental legal principle that requires government to “Tax it at its sale value” – An apt and sternly-worded admonition several state supreme courts have been forced to preach in unanimous opinions each time government assessors get greedy by taxing an occupant’s business instead of the real estate which houses the business.
With assessors conflating a property’s intrinsic value with its market value, one is left to wonder who will be next if we allow this type of tax discrimination to go on? Consider this hypothetical situation: Richie Cunningham’s family in Milwaukee generates $2.5 million dollars in a web-based business operated from their home. Their neighbor, Potsie Weber, sells his identical home across the street for $250,000.
The following year, the Milwaukee County Assessor raises the Cunningham family’s assessment from $250,000 to $2,500,000. When Richie Cunningham asks why his assessment is not based on the recent sale price of Potsie Weber’s identical home, the county assessor informs him that, unlike Potsie Weber’s assessment, the value of his real property is based on the sales generated in his home and not by what the home would sell for in the open market because the assessor claims the law gives him the “discretion” to choose which residential properties are governed by actual sales of real estate and which are not.
Allowing assessors to determine property tax assessments by different valuation methodologies undoubtedly will accomplish many things fiscally for county and city government. But the cost to the state comes in the form of tax discrimination against taxpayers already paying a disproportionate share of property taxes every year their national (or regional) retail stores remain open. And, as Richie Cunningham’s situation illustrates, maintaining any semblance of uniformity among taxpayers requires that real estate sales of the “sticks, bricks, and dirt” remain the sole measuring stick by which all valuation for property tax assessments are set.
“Tax it at its sale value” is the law in Wisconsin, and in most states, precisely because it is the only way to objectively determine what real estate sells for in the open market. National and regional retailers are often treated unfairly because they are not locally-based. Indeed, few local retailers deploy a mega-warehouse model, so cost-per-foot assessments are fair to them. But, their product inventories are managed differently and they are assessed based on actual sales of similarly used real estate, which results in a much lower price per-square-foot valuation for property tax assessment purposes than non-local retailers bear.
Robert Hill Law is centered on ensuring that property tax assessors throughout the Upper Midwest (and the U.S.) establish and deploy a uniform assessment model; one focused on a formula which respects, rather than attempts to undermine, the actual sale prices achieved by sellers in the overwhelming number of sales of this property type that have occurred nationally since 2005. Robert Hill’s mantra: “Assessed properties must be treated uniformly and you cannot do this if some are treated as real estate and others are treated as businesses who can afford to pay more than their competition, even though the buildings themselves are all-but-identical to the local retailer next door.”
To illustrate the point, the Minnesota Tax Court ruled in September of 2015 that a Menards store located in Moorhead Minnesota had been over-assessed by at least 4 million dollars for several years. Robert Hill Law, with Paradigm Tax Group, litigated a reduction of approximately $16 million on behalf of Menards. The Minnesota Tax Court and the Minnesota Supreme Court agreed these mega-warehouse retailers should be assessed based on the sale prices of comparable mega-warehouses as evidenced by sales of like property: Not by the value-in-use methodologies the county suggested as a ready substitute.
And in a case Robert Hill tried in late February of 2017; involving a Menard’s mega-warehouse in Cottage Grove, Minnesota; he introduced into evidence the comprehensive study done by Brett A. Harrington of International Appraisal Company. Harrington’s study, entitled “Big Box Retail Properties Sales Transaction Analysis,” marshals together an overwhelming number of market (sales) data to explain how and why mega-warehouse retailers should see assessed values closer to $30-40 per-square-foot (instead of the $80-90 per-square-foot used by value-in-use assessors).
As our economy gravitates more toward a “click-and-ship” retail future, which all-but-eliminates the need for mega-warehouses with cash registers, Robert Hill Law will remain dedicated to ensuring property tax assessments are uniform and fair to all taxpayers: big and small, locally based or not.
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Author Bio:
Robert “Bob” Hill has, for over twenty five years, successfully represented major companies in property tax appeals through both negotiations with tax assessors and litigation. His dedication to his clients has helped businesses throughout the United States save tens of millions in property taxes. Mr. Hill has earned Martindale-Hubbell’s highest peer review rating of AV-Preeminent for his legal knowledge, communication skills, high ethical standards, and his representation of clients in significant property tax cases.