CHICAGO—So-called “big box” retail stores are a source of constant controversy for those who work in the area of real estate tax because there is little in the way of consensus among law makers, assessors and lawyers as to how to approach valuing, assessing and taxing. This article offers a brief overview of the current trends in valuing big boxes for real estate tax purposes.

In most jurisdictions, property taxes are based on the assessed value of the fee simple estate. “Fee simple” is defined in the Dictionary of Appraisal of Real Estate as the “Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the government powers of taxation, eminent domain, police power or escheat.”

Under generally accepted real estate appraisal practices, this definition requires that the property be valued, if unencumbered by any other interest or estate, on the basis of its market value, or its “value-in-exchange.”

Pressures on taxing bodies since the Great Recession and the plummet in property values in 2008 have prompted many assessing officials and legislators to redefine traditionally accepted valuation methodologies when assessing and valuing big box stores. Specifically, some officials now insist that valuation cannot be predicated on the sale of comparably-sized but vacant stores.

The “Dark Store Theory” is now the practice in some jurisdictions when valuing big box properties still in operation. This prohibition improperly converts the methodology of a “value-in-exchange” to a method focusing on “value-in-use”—an analysis that is not a proper method of valuing a fee simple estate as it does not limit value to the property itself but includes valuing the business operating on the property.

A recent article in the Institute for Professionals in Taxation criticized the practice and said trained assessors “should know better” because they are legally required to value only the property itself and the land. Most states tax the business activity on a property through income and sales taxes. Using the “value-in-use” methodology, critics argue, would unlawfully tax properties based on both tangible assets and intangible factors, and would also result in a non-uniform taxation of similar properties. This “non-uniform” method of assessment would violate most states' constitutions which require uniformity in taxation.

In addition to the Dark Store Theory, taxing officials and legislatures have proposed legislation that would restrict valuation of big box stores to the Cost Approach. This proposed restriction would violate generally accepted real estate appraisal practices because it cannot provide a reliable valuation without considering sales and income approaches to value. These attempts by taxing officials to use anything other than proper valuation methodologies in assessment practices have caused no small amount of grief for big box retailers and their tax representatives.

Recently, Fair and Equitable Magazine published an article written by two assessing officials discussing the current tax appeals with big box stores and the challenges facing valuing these types of properties. In the article, “Thinking Outside the Big Box,” the authors detail the evolution of the big box store and provide statistics demonstrating that certain retailers are flourishing at a record pace. The authors claim that online venders, such as Amazon, are not affecting big box stores as these retailers have joined the internet race and have been counteracting internet shopping by price-matching and free shipping. The authors state that these strategies have alleviated any worries by the big box retailers regarding strictly “online” competitors. The authors even go on to claim that the demise of brick-and-mortar stores is exaggerated and that online sales only represent a fraction of total retail sales nationwide. Both authors recommend that assessing officials should first determine the current “highest and best use” of the big box store. If the store is occupied and appears successful, determine that the highest and best use of the big box is a first-generation user.

This determination is similar to a “value-in-use” and not a “value in exchange” analysis. With this determination in mind, the authors suggest that assessors can review all three approaches to value and make proper adjustments. These adjustments, would include sale-leasebacks and dark store sales. The authors conclude that all three approaches to value are possible for big box stores with the cost approach being the most reliable.

While it is commendable that both the authors in “Thinking Outside the Big Box” do not prohibit the use of vacant stores as comparable properties or the use of the Sales and Income Approaches to value in their recommendations, notably absent from the discussion is how both parties can work together to address both the needs of the assessing officials to fairly value the property and, in turn, helping the big box retail facility thrive in the community. While their article maintains that big box stores are flourishing in the United States, many recent reports state otherwise. More than 2,500 stores have closed throughout the United States since 2015, most of them big box stores. These closings result in vacant stores, lost jobs and lost sales tax revenues.

In her article “Big Box Retailers Have Two Options If They Want To Survive,” Denise Lee Yohn states that big box retail stores are “losing relevance, while e-commerce and specialty stores grow in appeal.” One of these e-commerce behemoths, Amazon, has opened an estimated 180 distribution centers in the United States alone and is forecasted to open more in the future. Amazon's two-hour delivery promise on many items, Yohn says, results in millennials spending less time in the big box stores and more time on “experiences” such as travel and entertainment. The retail landscape has been disrupted, she argues, and big box stores must rethink their reasons for being.

Assessing officials and big box tax representatives must work together before any litigation transpires in the tax appeal process. Addressing these issues before or at the beginning of the tax appeal process can help to avoid dire consequences for municipalities after a tax appeal judgement. Finding a solution by working together to properly value the property for assessment purposes will be beneficial to both the municipalities and retailers. Keeping big box facilities thriving is good for both the community where they are located and the families they employ.

Mary T. Nicolau is a Chicago-based partner with Fox Rothschild LLP. A former Supervisor of the Real Estate Tax Unit in the Cook County State's Attorney's Office, Nicolau advises real estate companies, developers, banks, investors and other business clients on a variety of real estate tax matters. She may be contacted at [email protected]. The views expressed here are the author's own. 

CHICAGO—So-called “big box” retail stores are a source of constant controversy for those who work in the area of real estate tax because there is little in the way of consensus among law makers, assessors and lawyers as to how to approach valuing, assessing and taxing. This article offers a brief overview of the current trends in valuing big boxes for real estate tax purposes.

In most jurisdictions, property taxes are based on the assessed value of the fee simple estate. “Fee simple” is defined in the Dictionary of Appraisal of Real Estate as the “Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the government powers of taxation, eminent domain, police power or escheat.”

Under generally accepted real estate appraisal practices, this definition requires that the property be valued, if unencumbered by any other interest or estate, on the basis of its market value, or its “value-in-exchange.”

Pressures on taxing bodies since the Great Recession and the plummet in property values in 2008 have prompted many assessing officials and legislators to redefine traditionally accepted valuation methodologies when assessing and valuing big box stores. Specifically, some officials now insist that valuation cannot be predicated on the sale of comparably-sized but vacant stores.

The “Dark Store Theory” is now the practice in some jurisdictions when valuing big box properties still in operation. This prohibition improperly converts the methodology of a “value-in-exchange” to a method focusing on “value-in-use”—an analysis that is not a proper method of valuing a fee simple estate as it does not limit value to the property itself but includes valuing the business operating on the property.

A recent article in the Institute for Professionals in Taxation criticized the practice and said trained assessors “should know better” because they are legally required to value only the property itself and the land. Most states tax the business activity on a property through income and sales taxes. Using the “value-in-use” methodology, critics argue, would unlawfully tax properties based on both tangible assets and intangible factors, and would also result in a non-uniform taxation of similar properties. This “non-uniform” method of assessment would violate most states' constitutions which require uniformity in taxation.

In addition to the Dark Store Theory, taxing officials and legislatures have proposed legislation that would restrict valuation of big box stores to the Cost Approach. This proposed restriction would violate generally accepted real estate appraisal practices because it cannot provide a reliable valuation without considering sales and income approaches to value. These attempts by taxing officials to use anything other than proper valuation methodologies in assessment practices have caused no small amount of grief for big box retailers and their tax representatives.

Recently, Fair and Equitable Magazine published an article written by two assessing officials discussing the current tax appeals with big box stores and the challenges facing valuing these types of properties. In the article, “Thinking Outside the Big Box,” the authors detail the evolution of the big box store and provide statistics demonstrating that certain retailers are flourishing at a record pace. The authors claim that online venders, such as Amazon, are not affecting big box stores as these retailers have joined the internet race and have been counteracting internet shopping by price-matching and free shipping. The authors state that these strategies have alleviated any worries by the big box retailers regarding strictly “online” competitors. The authors even go on to claim that the demise of brick-and-mortar stores is exaggerated and that online sales only represent a fraction of total retail sales nationwide. Both authors recommend that assessing officials should first determine the current “highest and best use” of the big box store. If the store is occupied and appears successful, determine that the highest and best use of the big box is a first-generation user.

This determination is similar to a “value-in-use” and not a “value in exchange” analysis. With this determination in mind, the authors suggest that assessors can review all three approaches to value and make proper adjustments. These adjustments, would include sale-leasebacks and dark store sales. The authors conclude that all three approaches to value are possible for big box stores with the cost approach being the most reliable.

While it is commendable that both the authors in “Thinking Outside the Big Box” do not prohibit the use of vacant stores as comparable properties or the use of the Sales and Income Approaches to value in their recommendations, notably absent from the discussion is how both parties can work together to address both the needs of the assessing officials to fairly value the property and, in turn, helping the big box retail facility thrive in the community. While their article maintains that big box stores are flourishing in the United States, many recent reports state otherwise. More than 2,500 stores have closed throughout the United States since 2015, most of them big box stores. These closings result in vacant stores, lost jobs and lost sales tax revenues.

In her article “Big Box Retailers Have Two Options If They Want To Survive,” Denise Lee Yohn states that big box retail stores are “losing relevance, while e-commerce and specialty stores grow in appeal.” One of these e-commerce behemoths, Amazon, has opened an estimated 180 distribution centers in the United States alone and is forecasted to open more in the future. Amazon's two-hour delivery promise on many items, Yohn says, results in millennials spending less time in the big box stores and more time on “experiences” such as travel and entertainment. The retail landscape has been disrupted, she argues, and big box stores must rethink their reasons for being.

Assessing officials and big box tax representatives must work together before any litigation transpires in the tax appeal process. Addressing these issues before or at the beginning of the tax appeal process can help to avoid dire consequences for municipalities after a tax appeal judgement. Finding a solution by working together to properly value the property for assessment purposes will be beneficial to both the municipalities and retailers. Keeping big box facilities thriving is good for both the community where they are located and the families they employ.

Mary T. Nicolau is a Chicago-based partner with Fox Rothschild LLP. A former Supervisor of the Real Estate Tax Unit in the Cook County State's Attorney's Office, Nicolau advises real estate companies, developers, banks, investors and other business clients on a variety of real estate tax matters. She may be contacted at [email protected]. The views expressed here are the author's own.