Spread of ‘dark stores’ pits big-box retailers, local governments in fight for tax dollars

Kathy Briney was only vaguely aware of the issue when she became Wyandotte County’s appraiser in 2015. She had read several articles about the subject, along with hearing others speak about it throughout the country.

Little did she realize that a year later, she would come face-to-face with a situation that could leave her county forfeiting thousands of dollars in tax revenue to national retail chains — money that local governments need to fund public services.

For decades, corporate retailers and local governments have enjoyed a mutually beneficial relationship: Companies build stores near population bases with ready access to customers, while municipalities receive tax payments from those businesses.

The rise of so-called “dark store” valuations — or what some assessors and tax attorneys refer to as fee-simple assessments — threatens to undermine that balance. Big-box retailers are challenging assessors’ valuations of their properties, requesting they be valued as though they are vacant or “dark,” as opposed to as if they are operating.

Dark stores have spread across the country over the last decade. No one can pinpoint an exact starting point, but some mention a case in 2011 involving a Target store in Novi, Michigan.

In that instance, Target challenged the assessments of the prior three years, claiming they were higher than they should have been. Eventually, the Michigan Tax Tribunal agreed, reducing the assessments by an average of about 35% from 2008 to 2010. That decision reduced tax revenues for local jurisdictions by more than $260,000.

Fast-forward to 2019, and there are at least 20 states that have dealt with the matter. The impact stretches from as far south as Texas to as far north as Wisconsin and Michigan.

In those places, corporate retailers have managed to secure significant victories when challenging assessments, effectively reducing their corresponding tax liabilities.

That worries government officials, who wonder how they will continue to pay for public services. Meanwhile, retailers are looking to cut costs, including tax liabilities, at a time when the growing popularity of ecommerce is endangering the profitability of physical stores.

Other public officials have raised concerns regarding basic fairness because the benefits are directed toward businesses.

Mike Taylor, director of public relations for Wyandotte County, said many companies seek lower assessments after having received public subsidies and incentives.

“They have taken those, or industrial revenue bonds, and as those have fallen off and they come back on the tax rolls, then they appeal and say, ‘My building is worth nothing,’” he said

The issue has gotten so contentious that in some states, such as Wisconsin, lawmakers are proposing legislation to address it.

The Wyandotte County case

Briney’s problems began in 2016. One corporate retailer decided to challenge the assessment of a property in Wyandotte County, which is located in eastern Kansas, just across the state line from Kansas City, Missouri.

At the center of the controversy was a nondescript, 14,700-square-foot structure that was constructed in 2006 and situated on about 1.5 acres of land.

The building has a beige and brown exterior with green awnings and a name scrawled in big red letters on the side — Walgreens.

Briney’s office initially determined its market value was $2.6 million, but her counterparts believed it was worth less — much less.

Walgreens had an assessor present two possible market valuations for the property: $1.95 million by one valuation method and about $1.75 million using a second method, the dark store valuation.

A portrait of Wyandotte County Assessor Kathy Briney as she sits at a table in a conference room near her office during the summer of 2019. Behind her is a map that outlines several commercial parcels within her county. Briney has be made acutely aware of dark stores when Walgreens successfully challenged the assessment on of the properties within her jurisdiction.
Wyandotte County Appraiser Kathy Briney has squared off against big-box retailers in challenges over property assessments. She said some of those case have left her feeling defeated. | Ralph Chapoco/Missouri Business Alert

The company began the process by filing an informal appeal with the county. It was heard by the deputy county appraiser, who upheld the original estimate. With the judgment going against Walgreens, the company had two options: file a lawsuit or take the case to the Kansas Board of Tax Appeals for relief.

Walgreens elected the latter.

That triggered a review by Briney’s office, which contracted with a third-party appraiser to provide another valuation of the site.

“On these different cases that were going on, other counties were struggling at the board,” Briney said of her thinking at the time. “We probably need to make sure that our case is pretty solid when we go.”

The third-party appraisal came in at $2.4 million — meaning that even prior to appearing before the Board of Tax Appeals, Wyandotte County officials already accepted a $200,000 reduction on the site.

They would soon lose more.

The tax appeals board valued the facility at $2.175 million, a loss of about 16%. Given local tax rates, that amounts to slightly more than $18,000 in lost revenue for the taxing jurisdictions, according to a Missouri Business Alert analysis.

“I think we still felt defeated,” Briney said. “The biggest thing is the county has to show their burden of proof that the value going in is correct. For (the appeals board) to deviate from what we did, it is a disbelief. It is disappointing.”

The basics

There are three general methods that assessors use when gauging the value of a property, according to Larry Clark, director of strategic initiatives with the International Association of Assessing Officers.

One, known as the income approach, bases a property’s valuation on the amount of money it will generate. Another, the cost approach, estimates the expenses associated with the land and the construction costs of the building. The third, called the sales comparison approach, requires the assessor to review the prices of similar buildings that have sold nearby.

Selecting the appropriate valuation method is not universally standardized among taxing jurisdictions and is often a matter of personal judgment. States throughout the country use different valuation methods.

A property’s valuation may also differ based on the comparable properties used. How an assessor selects these when valuing a building has a significant impact in determining its worth — and the resulting taxes it will generate.

This subjectivity is posing a problem for assessors because corporate retailers are now challenging the system, saying it is unfair and lacks uniformity. In doing so, they have relied on a different method for valuing a property — one that dramatically reduces the taxes they owe.

Big-box retailers want their properties valued as if they are empty, or “dark.” The technique only accounts for the cost of the building materials and the land — not for the income generated at the property.

“(Dark store) is a term that many of the taxpayer representatives do not like because they think it is prejudicial,” said Joan Youngman, senior fellow at the Lincoln Institute of Land Policy. “They feel what they are arguing for is just good assessment practice. But it is a term that has become associated with this particular argument about how to value big-box establishments.”

Nearly all of the challenges involve national retailers who occupy large spaces. And their success appealing valuations in one state begets a willingness to try it in others.

The argument

St. Louis-based attorney Jerome Wallach argued that valuing a building and valuing the business activity taking place inside it are two separate activities and should be considered differently.

“If you are talking about the value of the roof, and the walls, and the glass, whatever is bolted down in the kitchen, we will talk about that,” Wallach said. “But let’s not talk about how much business the location does. What’s that got to do with this?”

In other words, a property’s assessed value, and therefore its tax liability, should come only from its bricks and mortar, not from the business activity it houses. A mechanism already exists for taxing that, Wallach said: income tax.

He made a second argument.

“There is an observable tendency to see large, big-box retailers taxed near the upper end of the value if not at the upper end,” he said.

Linda Terrill | Via the Property Tax Law Group

Assessing property involves comparing the sales prices of similar buildings, and Wallach said that assessors are cherry-picking properties with the highest sale prices to determine values.

“Yes, there are stores that are worth a lot,” he said, “but there are also stores that are lower.”

Assessors should account for properties that are valued at the lower end as well, Wallach said, and that should reduce the valuation.

In cases that involve dark store valuations, attorneys for corporate retailers make the same argument as Wallach — that county assessors are improperly levying taxes not only on the property’s attributes, but also on the income that is generated in the building.

“Our constitution requires a uniform and equal way of valuation and taxation,” said Linda Terrill, a Kansas-based attorney who represents retailers challenging assessments. “The only way you can do that is if you value property as land and building, irrespective of who is in it or how much money they are making in it.”

The counter argument

Clark disagreed, claiming that most assessors value property using the income approach when they have enough data.

“It matches what happens in the market,” he said. “If I am a buyer looking for a commercial property to buy, I want to know what kind of (rental) income it produces and compare that to other properties to establish what I am going to pay for it.”

Clark said the argument that assessors are valuing business activity instead of real estate is invalid. Rather, it is market forces that are leading to increased property valuations, and with that increased tax liabilities.

A prime location can enhance business activity, attracting tenants willing to pay a rental premium. That increases potential profit for an investor and, along with it, the valuation of the property.

Larry Clark, director of strategic initiatives for International Association of Assessing Officers, works at his desk in his office this past summer. He has witnessed the proliferation of assessment challenges by corporate retailers in the past few years, especially in the Kansas. He said there is no reason why these challenges could not reach Missouri, if it has not happened already. | Ralph Chapoco/Missouri Business Alert
Larry Clark of the International Association of Assessing Officers has witnessed the proliferation of assessment challenges by corporate retailers in recent years. He said these appeals could spread to Missouri. | Ralph Chapoco/Missouri Business Alert

“The issue is the Kansas Board of Tax Appeals has basically agreed to (dark store) theories,” said Ed Eilert, chairman of the board of commissioners in Johnson County, Kansas. “Even though they are hypothetical. Hypothetical means they are fake, not real, but the Board of Tax Appeals has adopted those theories and used those theories as the basis for the property valuation.”

Target has successfully appealed assessments to the Board of Tax Appeals, as has Bass Pro Shops. Eilert also cited the example of an unnamed corporate retail property.

“The county had it appraised at $10 million,” he said. “It sold on the market for $20 million, double what the county had appraised it at. The following year, the county had appraised it at $16 million. The property owner said it’s worth some figure less than $10 million. Why would you pay $20 million for a property that is worth only $10 million?”


Thus far, many retailers have successfully managed to reduce their property valuations. Youngman attributed that partly to the resources available to big-box retailers.

“There is an inherent mismatch in the beginning of the legal representation,” Youngman said. “The resources available to nationwide retail chains and local tax jurisdictions can be uneven.”

Corporate retailers have garnered favorable decisions in their cases, and that is raising concerns among municipalities. At a time when local governments are already strapped for funding, some have had to relinquish tax revenues as a result of challenges.

“In (fiscal) 2020, we are still spending millions of dollars repairing and replacing infrastructure that should have been handled in the last decade,” said Peter Auger, the city manager of Novi, Michigan.

To date, big-box stores such as Target and Walmart are the ones appealing tax assessments using this justification, but the same concept could be applied to smaller retailers.

The short-term consequence, if this trend continues, could be a shift in the tax burden. Municipal revenue once generated by taxing corporate retailers would have to be made up through taxes on other classes of properties, including smaller establishments and even residential properties.

Jerome Wallach | Via the Wallach Law Firm

The longer-term concern is that the methodology could be applied to additional classes of properties, and that tax revenues would decline precipitously and permanently.

If this continues, national chain restaurants may use the argument to lower their assessments. From there, it could apply to residential spaces.

Schools are especially vulnerable if revenue is reduced, because they are primarily funded by property taxes, Eilert said.

Wallach presented a different perspective.

“I read all these stories about how we are taking money away from schools,” he said. “They are the ones who are taking money from us.”

Observers say the rise of dark stores should be a concern among officials in Missouri if it has not been already.

“They have Walmarts, they have the big chains, they are required to reevaluate properties every two years, and they are required to appraise at market value,” Clark said. “There is really no reason why they shouldn’t be susceptible.”

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