The Kentucky Court of Appeals upheld an assessment of $5,086,000 for tax years 2012 and 2013 on property serving as the location for a Walgreens retail store.[1] The property is situated on Nicholasville Road in Lexington, Kentucky, in a high traffic area surrounded by a residential community and high-end retail. In 2005, the petitioners, Wilgreens, LLC and Walgreen Co. (collectively “Walgreens”) entered into an agreement with the owner of the property to construct the building according to Walgreens’ specifications. That same year, the owner entered into a triple net lease with Walgreens, wherein Walgreens agreed to pay all real estate taxes on the property. The owner later placed the property for sale and in 2007, the land and building subject to the lease sold for $6,275,000. The property also was listed for sale in 2013 at a price of $6,900,000.

The Fayette County PVA used the income approach to in arriving at his $5,086,000 value for tax years 2012 and 2013. Walgreens argued the property was worth only $2,600,000, and appealed the PVA’s assessments. At the Kentucky Board of Tax Appeals (the “Board”), both parties presented testimony from three witnesses. Walgreens’ certified appraiser valued the property at $2,600,000 by comparing sales of two properties outside of Fayette County and five properties within Fayette County. The properties within Fayette County, however, were in a small strip shopping center and were not located on Nicholasville Road. The Board upheld the PVA’s value of $5,086,000, noting that the existence of a long-term, build-to-suit lease on commercial property adds measurable value to that property which must be taken into consideration by the PVA when assessing the property. The Board found that Walgreens’ witnesses either provided no valuation evidence or failed to provide an analysis quantifying the difference in value between the PVA’s assessment and Walgreens’ proposed value.

The Fayette Circuit Court and the Kentucky Court of Appeals affirmed. The Court of Appeals rejected Walgreens’ argument that the PVA overvalued the property by taking into consideration the income generated under Walgreens’ triple net lease, which Walgreens asserted was above-the-market. The court found the PVA’s inclusion of this income was consistent with KRS 132.191(2)(b), which provides the PVA may value property using the income approach by estimating the present value of future benefits arising from ownership of the property. The court also noted that Walgreens attempted to show the property was overvalued by relying on sales of very different properties. Notably, none of the sales relied upon by Walgreens involved properties located on Nicholasville Road or anywhere similar. Indeed, the court reasoned that the property was capable of generating exactly the kind of income derived under the lease due to its highly desirable location.

Walgreens has thirty days to seek discretionary review from the Kentucky Supreme Court.