Having Your Cake and Eating It
By Albert B Kelly
At first glance, having a big box store chain like a Walmart
or a Lowe’s decide to come into town would seem to be mostly a beneficial
thing. With the new jobs such stores promise and the anticipated boost to the
tax base, it seems like a no lose proposition.
But there’s another aspect to having these big box store
chains that many small and mid-size communities don’t often have a chance to
consider and it has to do with tax assessments. You would think that the issue
of tax assessments would be fairly straight forward.
When one of these big box chains builds a multi-million dollar
store in a community, you just assume that the property taxes they will pay would
be what you’d expect with a new multi-million dollar facility which factors in
everything from construction costs, to land value, to the value of a lease.
But it’s not nearly as straight forward as that. These days,
many big box chains lower their tax obligation using a “dark store” tactic to drastically
drive down assessments. A glaring example of the “dark store” at work comes out
of Michigan courtesy of the Institute for Local Self-Reliance.
Several years ago, Lowe’s built a $10 million store in Marquette
and the taxable value was assessed at $5.2 million. After a series of appeals
using the “dark store” argument, Lowe’s drove the assessed value down to $1.5
million a few short years later. The dark store argument comes down to
“comparable value”.
In the case of the big box chains, they argue that each
store is designed to be “functionally obsolete” and that each is a special use
structure, custom built, and not intended for reselling or leasing in the
market. So when it comes to comparable value, the only thing they claim you can
compare it to is a vacant empty “dark store”.
Now you might think that if one big box chain decided to
leave a specific location, another similar retailer might want to fill the
space.
You would think that, but the other things at play here are
non-compete clauses and deed restrictions. These big box chains place deed
restrictions on their new properties limiting how the building can be used by a
future occupant.
These restrictions pretty much kill most other potential
retail at the site, a site generally zoned for retail, so it either remains
empty or gets used for something like indoor batting cages. Either way, it
drastically lowers the value of the property and perhaps impacts those nearby.
These tactics are not confined to places like Michigan. The
trend is spreading around the country and if it’s not happening here in NJ in
any sizable way at present, it’s likely only a matter of time; whether a casino
or a Walmart or a Lowe’s.
These are important considerations because if communities
are expending serious resources expanding roads and building out infrastructure
to accommodate big box chains earning tens of millions in annual sales, then
the community is entitled to have an assessment reflective of this size and
heft.
This is especially true in light of how the big box chains
tend to impact the independent stores and the mom and pops that usually get
crushed when the big guys roll into town.
What the big box chains should not be able to do is
proactively place deed restrictions on a property and then turn around argue
that these very same deed restrictions they’ve insisted on should now result in
the store being “functionally obsolete” and assessed that way- having your cake
and eating it to.
Communities can’t be left in a position where they anticipate
revenues only to have that number reduced by 50%, 60% or more. Nor can
communities be in a position where an appeal by a mega-chain results in them
having to return huge chunks of revenue in a given year.
When it comes to the big box chains, it may be necessary for
the Division of Taxation to provide more clarity on valuation. At the very
least, these deed restrictions and “non-compete” clauses should not factor into
determining comparable value since it was the chain that insisted on it in the
first place.
Whatever may come, communities need to carefully consider
all of the implications of hosting one of these big box chains beyond just the
number of jobs and the initial hit to the ratable base- future budgets may well
depend on it.