The "Dark Store" Issue: Property Taxation Of Big Box Stores

THE “DARK STORE” ISSUE:  PROPERTY TAXATION OF BIG BOX STORES

Michigan’s Supreme Court and legislature are weighing in on the clash between municipalities and big box stores across the State over the so-called “Dark Store” issue:  the taxation of large retail properties as though they are vacant, even though they are open for business.  The high court has said it will hear arguments in the case between Menard, Inc. and the City of Escanaba http://publicdocs.courts.mi.gov/‌SCT/PUBLIC/‌ORDERS/‌154062_69_01.pdf, in which the Michigan Court of Appeals issued an opinion last year overturning a decision by the Michigan Tax Tribunal http://‌publicdocs.courts.mi.gov/opinions/final/‌coa/20160526_‌‌c325718(46)_‌rptr_75o-‌325718-final.pdf.

The “Dark Store” issue first arose from a 2010 decision of the Michigan Tax Tribunal.  In the subsequent Menards case http://www.‌michigan.‌gov/documents‌/taxtrib/441600_476875_7.pdf, the Tribunal sided with Menards in holding that the valuation of the its property should be based on recent sales of comparable properties.  This approach resulted in valuations for the three tax years at issue that were less than half of those produced by the replacement-cost-less-depreciation approach advocated by the City.  For municipalities that are home to big box stores, lower tax valuations under the sales-comparison approach mean a huge loss of tax revenue.  In this case, the comps cited by Menards’ appraiser were former big box stores that were no longer operating and, due to deed restrictions commonly employed by such retailers to prohibit competitive uses, would be put to an entirely different use following sale.  As such, the Court of Appeals expressed doubt about whether these “dark stores” are truly comparable to the property at issue, which is still operating and not encumbered by deed restrictions that would limit possibilities for future re-use.

Citing previous caselaw, the Court of Appeals held that in determining the true cash value of property for tax valuation purposes, the property must be assessed at its “highest and best use,” or “HBU.”  In this case, it is undisputed that the property’s HBU is as an owner-occupied freestanding retail building.  The Court noted that “(1) when the HBU of the property is its existing use and (2) when, because the property was built-to-suit, there would be little to no secondary market for the property to be used at its HBU, then the strict application of the sales-comparison approach would undervalue the property, so the cost-less-depreciation approach is more appropriate.”  It remanded the case to the Michigan Tax Tribunal with the instruction that it take additional evidence on the market effect of the deed restrictions on Menards’ comps, as well as the application of the cost-less-depreciation approach.

In the meantime, Michigan State Rep. David Maturen, a real estate appraiser by trade, has introduced legislation in the Michigan House that would require the Michigan Tax Tribunal to apply standard appraisal procedures when reaching its findings of fact and conclusions of law in larger property tax cases.  Maturen says the bill would result in more equitable tax valuations by ensuring that when the Tax Tribunal employs the sales-comparison approach, it looks at properties that are truly comparable to the subject property.

 

 

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