Property Tax Post: For Big-Box Retailers, a Tale of Two ‘Dark Stores’

In Indiana, far from the limelight now held by that state’s controversial “religious freedom” law, the tax community is abuzz about real estate valuation methods, proposed legislation, and the so-called “dark store theory.” At issue: how to value big-box retail stores and other large commercial properties for property tax purposes.

This post follows Michael Bologna’s recent Daily Tax Report coverage on the developing matter.

Property valuation is challenging work, and there is not a one-size-fits-all method for every assessment. Assessors typically value property after at least considering all three industry-recognized methods, and they employ their skill and judgment to determine which method would best reflect the property’s value. The three industry-recognized methods include the market value approach, which examines data from similar property sales nearby; the cost approach, which examines the cost an owner would incur to reconstruct the property if it did not exist already; and the income approach, which examines how much the owner could earn by renting the property.

Proposed bill S.B. 436 effectively eliminates the market value approach as an assessment option for first-generation, built-to-suit commercial big-box properties. It follows two recent taxpayer-friendly state agency decisions, Meijer Stores LP v. Marion County Assessor, Ind. Bd. Tax Rev., 12/1/14 and Kohl's Indiana LP v. Howard County Assessor, Ind. Bd. Tax Rev., 12/31/14, and the legislature is pushing it as a preemptive statutory remedy while those disputes navigate the appeals process.

Meijer Stores and Kohl’s were disagreements on the appropriate scope for valuing first-generation commercial properties. In each case, the assessor focused narrowly on the property’s use by the current owner only, whereas the taxpayer viewed the situation more broadly, considering not only its own use, but also the property’s retail use more generally. Under the taxpayer’s broad view—the so-called dark store theory”—an assessor determining the property’s market value should consider nearby commercial property sales of not only active sites, but also of vacant, sold sites. That expansive scope depressed the taxpayer’s property value from $83 to $30 per square foot in light of the vacant sites’ low values, reducing the taxpayer’s property tax burden significantly.

Third parties have weighed in on both sides of the proposed bill. A flood of reassessment requests, slashed assessments, and low state commercial property tax revenues would unfairly shift a tax burden on other taxpayer types, argues the Indiana Association of Cities and Towns. But the proposed bill is a “draconian measure” that would distort property values and is “against general appraisal standards,” argues the Council On State Taxation. Similarly, because market participants rarely use or consider the cost approach when valuing property for market transactions, the proposed bill “would . . . bring the state back to an approach that is more driven by the demands of local government budgets than a uniform and equal assessment system,” says tax services firm Ryan LLC.

This attention to property assessments is not confined to Indiana only. In Michigan, at least one State Representative has spoken publicly on the dark store theory, and a report indicates that it has been a concern as early as 2013. Likewise, the Alabama Department of Revenue addressed the matter at a 2014 conference. We will see if Indiana becomes the first state to pass legislation on this issue in the 2015 legislative session.

Continue the discussion on LinkedIn: How should a property tax assessor value first-generation big-box retail property? Should a state mandate using just one of three methods for an entire property class?

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by Ryan J. Voorhees