Property Tax Post: Is There Light at the End of the Tunnel for the “Dark Store Theory”?



In April, Bloomberg BNA brought you a three-part Property Tax Post series with in-depth coverage of the “dark store theory” featuring experts on both sides of the controversial topic. Since then, the controversy has intensified, and legislatures are now on a path to mend the disconnect between appraisal principals and ad valorem taxing schemes that has fueled the hotly-debated issue. Here are some highlights from the June 29 Bloomberg BNA Dark Store Theory webinar with Michael Allen and Brad Wallace of Ryan, LLC presenting the taxpayers’ perspectives and Amy Seibel of the Seibel Law Offices presenting taxing authorities’ position. 

“Go-Dark” Valuation

Taxpayers and taxing authorities agree on this—the starting point for real property valuation is always to determine the property’s highest and best use, generally defined as use that is maximally productive and results in the highest return to the owner. However, the concept of highest and best use is nebulous, leading taxing authorities and taxpayers to different conclusions on what a property’s highest and best use may be and what factors should be considered to arrive at that conclusion as Wallace pointed out in the webinar. That is where the Dark Store Theory and “Go-Dark” valuation come in.

Dark Store theory is the moniker that national retailers’ appeals against state property valuations has taken on. For those who have only recently heard about dark store theory, it is a valuation approach that has been supported by national retailers some often referred to as “big box” stores who seek to have their property valued as if dark or vacant. But “go-dark valuation” itself is not a new concept.

Go-dark valuations have been used to value bank properties that “lost their historic utility” when market conditions changed, as Allen explained during the webinar. He said bank branches had to be repositioned in the market and a new use for those buildings had to be found—it was unreasonable to assume that the next buyer would be a bank. Opponents of the dark store theory want to assume that the next buyer of a big-box property will be the same as the current user, ignoring whether the property’s current use is negated by external factors, Allen continued. With respect to big-box retail property, proponents believe the recent surge in e-commerce is a significant external negative force affecting brick and mortar retail establishments, he explained. In fact, Allen believes the lack of attention to the “incurable nature of external obsolescence” is fueling the debate over go-dark valuation.

Although Seibel agreed that at some point property “may not have the same functionality that it had on the date it was built,” she explained that a property’s highest and best use is “measured at a point in time.” In Wisconsin, for example, properties are valued annually. Assuming property may not have the same utility to another buyer down the road is an improper and speculative hypothetical condition that should not be assumed, if on its valuation date, there is no reason to believe that the property will be closed or converted to another use, she stated. In other words, Seibel countered that there should not be a current valuation of property based on a future anticipation that the property will not be of value to a future buyer.

The International Association of Assessors Organization (IAAO) has initiated measures to guide appraisers valuing big-box retail properties by issuing a draft white paper that was recently published for comment on the IAAO website.

Some initial comments suggest that the IAAO may have missed the mark in its attempt to guide appraisers tasked with valuing such property. For example, the Council on State Taxation (COST) commented that, among other things, the white paper could cause confusion because it “indicates its scope is limited to ‘big-box’ retail stores . . .,” yet also indicates “it could be applied to any size retail store and to other property types.” In its letter to the IAAO,  COST states that the white paper’s characterization of highest and best use is misstated because it disregards obsolescence issues, such as  “what market participants would purchase a property for on the open market” and shouldn’t be determined by the manner in which it is used by its current occupant. COST also expressed concern over the IAAO’s proposal for a limitation on the use of deed-restricted properties when determining comparable properties, and suggests that instead, the white paper should indicate that appraisers need to “address the impact a deed-restricted comparable sale may have had on the property’s sales price.”

Legislative Solutions: Texas and Wisconsin

From a legislative perspective, several states are considering legislative fixes that may put dark store theory to rest with respect to big-box retail properties.  

In Texas, legislators are looking to limit the use of comparable properties to value an occupied big-box store, as discussed by Wallace during the webinar. Specifically, the proposed bill[1] indicates that if the property being valued has a deed restriction “that prohibits the continuation of the current use of the property, or prohibits a competitive use of the property” by another owner or tenant, the restriction can’t be considered when determining the property’s highest and best use. 

Wisconsin is also considering a pair of senate bills[2] that would limit the valuation of occupied retail property as if vacant it were vacant (referred to as the as-if-vacant valuation) and address the use of deed-restricted properties as comparable for functional occupied retail properties, which Seibel discussed during the webinar. If passed, Senate Bill 291 will reverse the Wisconsin Supreme Court’s 2008 decision in Supreme Court, Walgreen Co. v. City of Madison, which prevented assessors from valuing income-producing property using actual contract rent rather than market rent. 

Both Allen and Seibel agree that states will use legislative action to address dark store theory issues, as reported by Bloomberg BNA’s Michael Bologna. “States will likely ‘try and legislate it out’ to avoid the negative fiscal impact it could have on states,” said Allen. “Legislatures are also likely to act so that assessors will have a ‘finite set of rules’ to follow when carrying out their duties,” according to Seibel.  

After several years of intense debate, the dark store theory is still a force to be reckoned with. As the experts pointed out, despite efforts to remedy the issues, achieving uniformity among states and local jurisdictions will be a challenge in and of itself. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is the “dark store theory” going to be snuffed out by state legislatures?

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[1] See H.B. 27.

[2] See S.B. 291 and S.B. 292.