Transcript Conference-12.3.15-Ken-Webbx

Association of County Commissions
of Alabama
HOLDING ON TO AD VALOREM
REVENUE
12/3/15
Kendrick E. Webb
Webb & Eley, P.C.
Post Office Box 240909
Montgomery, Alabama 36124
Telephone: (334) 262-1850
[email protected]
Ad Valorem Revenue Under Attack:
Dark Store Theory

Nationally, retailers such as Lowe’s, CVS, Target,
and others are attempting to lower the amount of
property taxes they pay by challenging the
valuations of their stores based on what is known as
the Dark Store Theory.


The Dark Store Theory gets its name because it essentially
promotes valuing a store as if it were completely empty.
Taxpayer’s expert: David Lennhoff – the nation’s leading
proponent of the Dark Store Theory.
 Mr. Lennhoff has been employed by Lowe’s as an
expert witness in its Dark Store appraisal challenges in
Alabama, and is very influential in pushing this theory
in the appraisal community.
Lowe’s Tax Cases

Lowe’s Home Improvement has filed close to
forty Notices of Appeal in roughly twenty
counties regarding their property tax
valuations.


The earliest cases are set for trial at the
beginning of next year.
The valuations are appealed from decisions of
the County Boards of Equalization and are set to
be considered in each county’s respective circuit
courts.
Dark Store Theory



The Dark Store Theory asserts that big-box retail stores
are specially built for the merchants who occupy them.
A Lowe’s store is built and designed specifically to be a
Lowe’s; a Best Buy is built and designed specifically to
be a Best Buy; a Circuit City is built and designed
specifically to be a Circuit City, etc.
This specificity means that the stores contain features
that limit or reduce their value on the resale market
because the next owner will have to spend money on
major redesigns to make the store fit their needs and
brand.
Dark Store Theory

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These supposed valueless features are categorized
as functional obsolescence because they are
characteristics of the property that, allegedly, no
one but the current owner will pay for.
Dark Store Theory proponents contend that a store’s
value should only be measured by what it is worth
on the secondary market to the merchant who buys
the store after the first user moves out.

However, big box stores often insert deed restrictions that
prohibit the property’s sale to competing big box
merchants.
A Serious Threat to County
Budgets

The real danger of the Dark Store Theory is
that when one store is successful at having
their property taxes reduced, other stores will
follow in the same action.


The domino effect will greatly reduce funding for
county services and schools.
If it is used successfully by businesses
currently operating, it will mean millions of
dollars in losses to a county budget.
A Serious Threat to County
Budgets


Michigan communities have lost $74
million in the last two years because of
Dark Store litigation according to the
Michigan Association of County
Treasurers.
Indiana ad valorem revenue losses were
estimated recently to be $120 million if
Dark Store appraisal became the norm.
A Tale of Two Counties

The Dark Store Theory has already had
success in other states and is becoming
more accepted at The Appraisal Institute
and in appraisal circles.


Florida, Indiana, Michigan, Ohio, and Oregon are
among the states that have litigated these suits.
Their cases show that counties prepared with
their own experts and explanations of appraisal
theory are much more likely to see their
valuations upheld.
A Tale of Two Counties
(Ohio)

Target v. Green County Board of Revision


Target challenged the valuation of one of its
stores using Dark Store Theory arguments of
sales comparison approach and functional
obsolescence.
The county failed to provide the Board of Tax
Appeals with any evidence or rationale to
support its valuation, instead relying on its
initial assessment as a prima facia case.
A Tale of Two Counties
(Ohio)

Target v. Greene County Bd. of Revision


The Ohio Supreme Court noted that, without
any controverting evidence from the county, it
was left to solely decide the case with
Target’s data regarding values of second
generation stores and functional
obsolescence.
Therefore, the court ruled against the county.
A Tale of Two Counties
(Ohio)

Meijer Stores v. Franklin County Board of
Revision


Approximately one month later, another
retailer challenged its tax appraisal in another
Ohio county using the same expert appraiser
and the same methodology as Target did in
Greene County.
The Ohio Supreme Court heard this case as
well.
A Tale of Two Counties
(Ohio)

Meijer Stores v. Franklin County Board of
Revision

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This time, however, the county was prepared
with its own expert appraiser and methodology.
The Board of Tax Appeals found that there was
substantial evidence against heavily reducing the
valuation for obsolescence.

The store had nearly-new improvements and was
in a flourishing area.
A Tale of Two Counties
(Ohio)

Meijer Stores v. Franklin County Board of
Revision


The Ohio Supreme Court on appeal held that the
fact-finding court below weighed two opposing
appraisals and chose the one it found more
convincing.
The court also noted that a retail store could fall
under the “Special Purpose Property Doctrine”
which recognizes the best use of a property
specially built is that unique, present use.
Dark Store Theory in Indiana

Meijer Stores v. Smith
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
Meijer Stores challenged the valuation of one
of its stores in Indiana in 2010.
Meijer’s used an expert with MAI designation
who compared the profitable Meijer store with
stores that were vacant and abandoned.
Dark Store Theory in Indiana

Meijer Stores . Smith
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The county, in turn, presented no evidence to
refute the expert’s testimony and solicited no
testimony on cross examination as to other
sales.
The county simply argued that a 65%
adjustment for obsolescence was improper on
its face.
Dark Store Theory in Indiana

Meijer Stores v. Smith
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The Tax Court on appeal held for the retailer
reasoning that the county “needed to present
some other market-based evidence that
impeached Meijer’s appraisal and supported
its own assessment.”
The court rejected the facial argument of the
county, finding that there was no per se
relationship between a store’s age and its
obsolescence.
Dark Store Theory in Oregon

Lowe’s v. Linn County Assessor


Lowe’s appealed the valuation of a
distribution warehouse.
Lowe’s expert relied on the sales comparison
approach but relied only on comparable sales
east of the Rocky Mountains.

Lennhoff has encouraged the use of a national
market for comparable sales.
Dark Store Theory in Oregon

Lowe’s v. Linn County Assessor
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The County used its own appraiser but also
brought in an expert appraiser to testify.
The second appraiser used both the cost
approach and sales comparison approach,
finding their resulting values very similar.
The county used similar buildings sold in
California on a leased fee basis as its
comparable.
Dark Store Theory in Oregon

Lowe’s v. Linn County Assessor

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The court found many problems with the
Lowe’s appraiser, some of which were
brought out by the county’s expert
The court took issue with Lowe’s appraiser
looking outside the region and failing to make
adjustments for location and age.
The court found the cost approach
appropriate since the property was in the first
tenth of its expected life.
Michigan – Fertile Ground for
Dark Store Theory

Lowe’s Home Center v. Township of
Marquette

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Both Lowe’s and Home Depot challenged the
valuations of two of their stores in the Upper
Peninsula of Michigan.
The court held for the stores, relying on
Michigan statutory language and case law
that is very unfavorable for counties.
Michigan – Fertile Ground for Dark
Store Theory

Lowe’s Home Center v. Township of
Marquette

The court found that the Michigan Supreme
Court had previously held that the state
constitution and the General Property Tax Act
require property be based on market value,
and could not consider value to the current
owner.
Michigan – Fertile Ground for
Dark Store Theory

Lowe’s Home Center v. Township of
Marquette
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The court also relied on previous case law in
finding that whether the owner actually
intends to sell is irrelevant in determining the
value of the store.
The usual selling price that would be accepted
by “a willing seller” does not assume that the
operating business would remain in business.
Highest and Best Use:
a pivotal question

Courts will first determine the highest and
best use of a property before determining its
market value.

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Highest and Best Use (HBU) is the reasonably
probable use of property that results in the
highest value.
To be reasonably probable a use must be
physically possible, legally permissible, financially
feasible, and finally, economically productive.
Highest and Best Use:
a pivotal question

Determining the HBU of the subject property
determines what types of other properties
you can compare it to in order to determine
market value.
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Dark Store theorists want to define HBU broadly
(general commercial property) because it
broadens the pool of depreciated stores they can
use as comparables.
HBU also determines what in a store can be
considered functionally obsolete.
Dark Store’s Defeat in Florida

CVS v. Hillsborough County, FL
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CVS employed David Lennhoff as an expert
witness in its challenge to the valuation of
approximately 40 stores in Florida.
CVS sought to have the drug stores “highest
and best use” classified as general commercial
property arguing that the stores were
designed as drug stores and, thus, suffered
from functional obsolescence.
Dark Store’s Defeat in Florida

CVS v. Hillsborough County, FL

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The county’s expert argued that the highest
and best use of drug stores, was their present
use - drug stores.
The county’s expert also noted that the stores
contained restrictive covenants placed on
them by CVS preventing their future use as
drug stores.
Dark Store’s Defeat in Florida

CVS v. Hillsborough County, FL
 The court sided with the county finding that
general commercial property was too broad of
a category and led to comparisons with other
properties that were dissimilar in use and
market demand.
 The court also noted that CVS only advocated
the general commercial property classification
when it was financially advantageous.
Dark Store’s Defeat in Florida

CVS v. Hillsborough County, FL

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The court noted that Florida statutory law
required that the present use of the property be
considered in its determination of highest and
best use.
Florida case law discussed the importance of
considering present use because “it keeps the
highest and best use determination grounded in
reality, as opposed to conjecture of potential
future uses.” (emphasis added)
Solutions:
Legislative

Indiana passed legislation addressing, in
part, the Dark Store Theory.
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Legislation passed in May 2015 mandating the
cost approach for buildings less than ten years
old.
This legislation also requires comparable sales
include properties that have been on the market
for less than a year, that are used for similar
purposes, and must be absent substantial deed
restrictions.
Solutions:
Legislative

Florida already has a favorable statute
addressing Dark Store Theory.

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As mentioned, Florida law requires appraisers
consider “present use” of the property when
determining highest and best use.
This language was pivotal in a decision that
prevented counties from having to refund tax
revenue on approximately 40 stores.
Solutions:
Rulemaking Authority


The Department of Revenue may be able to
issue regulations/rules to require the cost
approach for certain types of properties or in
certain situations and to require commercial
property to be valued at its present use.
DOR is presently considering amending the
Appraisal Manual to provide stricter guidance
regarding how property is assessed.
Solutions:
Rulemaking Authority
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Iowa courts have rejected Dark Store
challenges after finding that Iowa regulations
require property to be valued based on its
present use.
Wisconsin courts have also rejected Dark
Store challenges based on language in their
appraisal manual that defines HBU as that
which produces the greatest net return to the
property owner.
Alabama Efforts Underway:
Coordination of Litigation
1.
2.
DOR and ACCA are organizing a state-wide
coordination of defenses of tax appeals.
Coordinating includes efforts to develop
legal issues to raise.

Issues include uniformity of assessments,
timeliness or prerequisites for appeal, related and
relevant Alabama case law, and appropriate
standard of review.
Alabama Efforts Underway:
Coordination of Litigation
3.
Coordination of Discovery.
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Preparing standardized discovery requests.
Sharing information obtained in the discovery
process: depositions, interrogatories,
documents.
Alabama Efforts Underway:
Coordination of Litigation
Retaining Expert Witnesses.
4.

To counter Lennhoff, the Department of Revenue
has contracted with Mark Kenney on behalf of the
Counties.

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Kenney is President of American Valuation Group, has
MAI and SRPA designations and has given expert
testimony, published articles, and given lectures on
property tax valuation.
Counties will also need an Alabama appraiser
with MAI designation to assess the subject
properties and provide testimony.
Conclusion

The domino effect that results from losing an ad
valorem tax appeal case has brought major
losses in other states.

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Counties that present thorough defenses utilizing
expert testimony are much more likely to have
their valuations upheld.
Therefore, coordination is continuing to present
comprehensive defenses to valuation challenges
brought under the Dark Store Theory.