Retailers seek tax cuts with 'dark store' theory

To Menard Inc., the store it opened in the Village of Howard in 2012 is worth $5.8 million — roughly the amount the Eau Claire-based home improvement retailer believes it would fetch if it were closed and sold off as an empty shell like, say, the former Home Depot in Beaver Dam.

To the Village of Howard, just outside Green Bay, the Menards is worth more than twice that amount, precisely because it’s not vacant, like the Home Depot was for five years, before a sheet-metal fabricator bought it.

The Menards building houses an operating store, and in real estate, the village argues, that matters.

Who’s right? Courts across Wisconsin are dealing with that question, and the answer will determine whether big-box retailers like Menards, Lowe’s, ShopKo and others get to cut their collective tax bills by millions — potentially shifting those taxes to homeowners and other property owners.

At issue: the increasing use by the retailers of what critics call “dark store theory” to challenge tax assessments. It’s a trend that has municipal officials across Wisconsin pressing for legislation they hope will rein in the growing practice.

But big-box operators argue that their approach to appraising their huge stores is market-based and correct. They’ve been overtaxed, they say, and they’re been pushing their point in court.

A wave of litigation that first swelled in Michigan, where retailers have succeeded in slicing assessments in half, has swept into other states. Among them is Wisconsin, where court decisions already have led to lower assessments on leased retail properties like those typically used by drugstore chains Walgreens and CVS.

“Michigan and Indiana were kind of on the forefront of it, but now it’s coming here pretty heavy too,” said Dan McHugh, assessor for the Village of Mount Pleasant in Racine County.

Menards alone has filed more than a dozen lawsuits against Wisconsin municipalities since May. Lowe’s has filed another seven. ShopKo has filed two.

Whether the retailers’ argument for significantly lower assessments — and tax bills — will gain as much traction here as it has in Michigan isn’t yet clear.

But the prospect has municipal officials sounding alarms. They say that if the big box retailers succeed, the money they save will come out of the pockets of residents whose tax bills will rise.

“That’s the direction we fear the state will be going if the commercial property tax base is cut by 50% over the next five, six years,” said Curt Witynski, assistant director of the League of Wisconsin Municipalities, “because everyone in retail’s going to take this strategy. Who wouldn’t if it’s successful?”

Here’s the strategy in a nutshell:

Big box retailers argue that the fact that a store is operating, maybe even thriving, has nothing to do with the value of the underlying real estate. The best way to judge that value, they say, is to look at “comparable sales” — the prices that vacant big boxes command when they are sold.

Those prices typically fall well short of the assessments on operating stores. The vacant buildings, often 100,000 square feet or more, have limited appeal, said Don Millis, an attorney in Madison who has represented Target and other retailers in assessment challenges.

“First, there are very few people who are interested in buying a store that big, and two, if they wanted a store like that, chances are it’s not going to be built to their dimensions. They’re just not worth that much on the market.”

Basically, the retailers contend, the business inside the box — be it Lowe’s, Target, Menards or whatever — has nothing to do with the value of the box itself.

And that, Millis said, has long been the standard in Wisconsin.

But he said it is “the very rare circumstance” that an assessment challenge using those standards leads to a 50% reduction. Most reductions, Millis said, run about 10% to 20%.

“We’re not valuing the tenant or the creditworthiness of the tenant,” he said. “We’re valuing the property — the physical attributes of the real property.

“What we’ve been arguing, and what the courts have found, has been the law for decades,” he said. “It’s the assessors and the municipalities that want to change the law.”

Crying foul

Municipal assessors, though, cry foul.

Comparable sales are a foundation for assessing property in Wisconsin. If there is such sales data, it must be used before any assessment method besides a recent sale of the specific property itself.

But the assessors argue that the “comparable sales” advanced by retailers aren’t truly comparable. Not only have the stores for the most part gone vacant, they’re also often shackled by lease restrictions barring uses that might compete with the business of the departed tenant.

That was the case with the former Walmart store at 4500 S. 108th St. in Greenfield. Walmart’s restrictions prevented other national big-box retailers from purchasing the property, according to a judge’s order in a Dane County assessment case.

A church bought the building, occupying part of it and leasing part to the St. Vincent de Paul Society for a thrift store.

Lease restrictions or not, a big-box store may close because the value of its location declines, making it an inappropriate comparison with a new, operating store, said Rocco Vita, assessor in Pleasant Prairie.

“A dark store is empty because its highest and best use is not as a retail store or a big-box retail store anymore. It’s reached the end of its useful life,” McHugh said. “So to compare that to an operating store that is still being put to its highest and best use is improper.”

Retailers, though, argue that such comparisons are entirely proper, and show the true market value of the big boxes.

So while municipalities may rely on the original land-acquisition and construction expenses, retailers contend that their stores are worth much less than they cost to build, even when they’re only a few years old.

The Howard case

Take that Menards in Howard. It opened in 2012, on an 18-acre site Menard Inc. bought in July 2011 for $5 million. The firm spent another $5.6 million to erect one of its huge retail buildings, according to village records.

That’s $10.6 million total.

But in its legal challenge, Menards argues that as of last January, less than four years after the store opened, it was worth $5.8 million — or about $800,000 more than the company paid for the land alone.

Menards calculated the $5.8 million value for its operating, open-for-business store in Howard based on the prices commanded by several vacant stores: a former Cub Foods in Green Bay, a former Sears in Sheboygan, the former Home Depot in Beaver Dam, and others.

The result: a value less than half the $12.5 million the Village of Howard says the Menards store is worth.

“By the same logic,” village administrator Paul Evert said, “shouldn’t we all compare our home (values) to foreclosed homes, or abandoned home sales?”

Minnesota attorney Robert A. Hill — who represents Menards, and who bristles at the “dark store” label with its “Star Wars” overtones — said municipalities “just want to pretend that what’s black is white, and that real estate somehow should not be the only thing that gets assessed.”

Michigan has been ground zero for “dark store” challenges, thanks in part to how hard the Rust Belt state got hit by the Great Recession.

With large numbers of big-box locations closing and coming on the market as the economy soured, retailers suddenly had many examples of sales of buildings that were much like theirs, only vacant, said Jack Van Coevering, a Grand Rapids lawyer who represents municipalities.

Michigan's response

They found a receptive ear at the Michigan Tax Tribunal, which rules on property tax disputes. After precedent-setting decisions, upheld by an appellate court in 2014, assessments on big-box stores tumbled sharply statewide, as did the tax bills that resulted, Van Coevering said.

Before the decisions, assessments on big-box stores statewide averaged $55 a square foot, according to Van Coevering. Now, he said, they’re under $25.

And new appeals are seeking values as low as $10 a square foot, sometimes on new buildings, he said.

“There’s wave after wave after wave,” Van Coevering said. “Whether we’ve reached the end of the storm, I don’t know.”

A legislative “fix” backed by Michigan municipalities passed the state’s House last year by a large majority, but died in the Senate.

In Wisconsin, the legislation being prepared is expected to take an approach similar to Indiana's. Last year, the legislature there passed a law that is intended to ban using sales of vacant stores to determine the assessed value of an operating store.

Indiana acted after the state’s Board of Tax Review, in December 2014, ruled that the assessment on a Meijer store in Indianapolis should be reduced by more than half.

“That’s when we realized there may not be a bottom to how low they could go,” said David Bottorff, executive director of the Association of Indiana Counties.

Also helping spur action by the counties was a Board of Tax Review ruling that cut the assessments on a Kohl’s Department Store in Kokomo by more than a third.

In both cases, the board allowed use of the sales of vacant big boxes to help determine the appropriate assessments for the operating stores.

If that approach were widely used to value commercial and industrial properties across Indiana, it could boost the annual bill for other taxpayers by about $50 million, an increase of 0.8%, an analysis commissioned by the counties’ association says.

The League of Wisconsin Municipalities says the impact could be more dramatic on communities here with extensive retail development. Homeowners in places such as Wauwatosa, Oconomowoc and West Bend could see tax hikes of 7% or 8% — more than $250 a year on average, the League says.

The League’s figures assume a 50% reduction in value not just on national retailers but on a broader range of commercial property, along with warehousing and some manufacturing.

Millis disputed the assumptions. He said 50% reductions in assessed value are very rare, and that the League greatly overstates the universe of properties that could be susceptible to “dark store” theory.

Rick Romell can be reached at rromell@jrn.com.