States Forced to Address ‘Dark Store’ Valuation Theory

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By Michael J. Bologna

A growing list of states will revise their property tax codes to help municipalities cope with revenue losses attributable to big box retailers’ widespread use of the “dark store” theory of valuation to cut their assessments, according to property tax attorneys.

Cities and counties in several states are under mounting fiscal pressure due in part to big box retailers’ aggressive property tax litigation under the dark store theory, which asserts large commercial properties should be valued as if vacant rather than as operating stores, practitioners said during a June 29 webinar. Major national chains including Lowes Cos. Inc., Home Depot Inc., Walgreen Co. and Wal-Mart Stores Inc. have found success cutting their local assessments by filing hundreds of property tax challenges, particularly in Midwestern states.

Michael Allen, a property tax principal in the Washington, D.C. office of Ryan LLC, said state legislators are finally listening to complaints from local elected officials and assessors. He pointed to Indiana, Michigan, Texas, and Wisconsin as the states most likely to respond in the near future.

“Although there is standing litigation around the country on this issue, it is far more likely than not that this theory will eventually be disposed of definitively by legislative action,” Allen said during the webinar entitled “Dark Store Theory: Is There Light at the End of the Tunnel?” The event was sponsored by Bloomberg BNA.

Patchwork of State Laws

Allen said that legislative action would result in a patchwork of state laws, but the strategies will focus on traditional understandings of commercial property valuation and limit retailers’ ability to apply the dark store theory.

“This is going to be a state-by-state solution and may wind up being inconsistent nationally,” he said. “If there is too much potential negative fiscal impact to the states from a general application of this theory, they are going to try and legislate it out.”

Amy Seibel, who represents municipalities through Seibel Law Offices LLC in Mequon, Wis., said dark store litigation has generated a great deal of confusion for taxpayers, assessors, judges, and elected officials. Aside from the financial considerations, she said the parties simply desire a consistent set of commercial property valuation rules.

“Property owners want to know what to expect,” Seibel said. “Assessors need to know what they need to do to carry out their statutory obligations, which is why I think you are going to see more and more states having the legislature act just so there is a finite set of rules everyone can look to and act accordingly.”

‘As If Vacant’

In a draft position paper, the International Association of Assessing Officers (IAAO) said dark story theory asserts that “fully occupied, functional and well maintained big-box properties built to suit the original occupant (first-generation user) should be valued ‘as-if-vacant and available’ for a fee simple absolute valuation.”

Retailers argue that their stores have been specially constructed to accommodate their particular needs, rendering them less valuable to second-generation users. In this regard, IAAO said retailers believe their stores are “inherently functionally obsolete” on opening day. Departing from this view, some retailers push local assessors to compare their operating stores to commercial properties that have gone dark.

Seibel said Wisconsin’s Legislature could take action on the dark store front before the end of the year through S.B. 291/A.B. 387 and S.B. 292/A.B. 386. Both bills were reviewed by lawmakers during a public hearing at the state capitol in Madison on June 29.

S.B. 291/A.B. 387 would roll back the Wisconsin Supreme Court’s 2008 precedent in Walgreens Co. v. City of Madison, which held that tax assessments of certain retail stores must be based on fair market rental rates rather than above-market rental contract values.

The precedent is important to the drug store industry, where properties are frequently constructed by development companies to the retailer’s specifications and then leased to the retailer at an above-market rate. Drug chains in Wisconsin often appeal their assessments, arguing that their underlying leases don’t reflect true value for property tax purposes.

Appraisal Methods

S.B. 292/A.B. 386 would limit retailers’ ability to apply the dark store theory by imposing adherence to generally accepted appraisal methods. In this regard, assessors must consider sales or rentals of properties exhibiting the same or a similar highest and best use with placement in the same real estate market segment, and sales or rentals of properties that are similar to the property being assessed with regard to age, condition, use and other factors.

In addition, the bill specifies that a property isn’t comparable to the property being assessed if the seller has placed restrictions on the highest and best use of the property, or if the property is dark property and the property being assessed is not dark property.

Brad Wallace, a property tax practitioner in the Atlanta office of Ryan LLC, said Texas is taking a stab at the dark store issue through H.B. 27. He said the bill creates new limits on the use of comparables in property tax appeals. The bill specifies that “a property must have the same highest and best use as the subject property to be considered a comparable property.”

Wallace noted that the bill didn’t come out of committee this spring, but will likely get traction at some point in the next two years.

To contact the reporter on this story: Michael J. Bologna in Chicago at

To contact the editor responsible for this story: Ryan C. Tuck at

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