Recently, Fair and Equitable Magazine published an article on the topic of the valuation and assessment appeals of big box stores, which make up a large volume of cases before the Property Tax Appeal Board and valuation objections filed in the Circuit Court. Specifically, the article titled “Thinking Outside the Big Box,” discusses what makes big box the subject to so much litigation, the arguments that are usually raised in these appeals, and the challenges of using the three traditional approaches to valuing property.

The article depicts the origin of the big box store, which stems from “the store’s most defining characteristics: its large size and windowless, box-like appearance.” Big box stores include discount department stores (Kohl’s, Wal-Mart), specialty stores (Best Buy, Dick’s Sporting Goods), and warehouse stores (Home Depot, Lowes). The authors posit that what makes these stores so difficult to assess is the lack of comparable sales that may be used in determining the fair market value. For instance, the authors highlight that the nature of how big box stores are bought and sold impacts their assessment. Sale lease-backs (where the original owner sells the property and remains in the property as a tenant) often increase the value as investors may pay a premium above the market value to secure a credit-worthy tenant. On the other hand, vacant big box stores (or dark stores) usually are encumbered with restrictive covenants that prevent competitors from being buyers. Such restrictions limit who can purchase the property and depress the price.

Among other arguments that are usually raised in assessment appeals of big box stores, the authors note that an emphasis on online shopping is exaggerated as online shopping is only seven percent of total retail sales and companies continue to expand the number of brick-and-mortar stores they operate.

The authors also touch on the sales comparison, income capitalization and replacement cost approaches to value. While they suggest that all three approaches should be considered, they argue that the cost approach is the most reliable and straightforward because there is little debate about construction costs associated with big box stores. The major challenge with the cost approach is determining appropriate depreciation and obsolescence. They believe that the sales comparison and income capitalization approaches are challenging based on the difficulty in determining the highest and best use of the property which in turn affects what is considered an appropriate comparable property.

There is often at least one big box store located in every community. These retailers typically pay a significant amount of property taxes due to their size and prominent locations. They are also prone to challenge their assessments and seek significant property tax refunds. A bill (SB2367) was even introduced in the General Assembly this year that would have precluded the use of comparable sales in assessment appeals. However, this bill failed to pass out of the Senate. As a result, school districts and other taxing agencies should take every opportunity to educate themselves about the economic dynamics of these properties. To read the full article, click here.