MML#4: Deed Restrictions & Dark Stores Impacting Local Budgets
(Crystal A. Proxmire, March 30, 2016)
Lansing, MI – Cities and school districts depend on property taxes to provide services that residents rely on. One might think that having large companies in the community would help because of the large size of the “big box” stores and the tax revenue they would bring. However, in recent years the Michigan Tax Tribunal has been granting these companies tax bill reductions based on the “dark store” theory. Essentially the state is forcing local governments to give long-term tax breaks to corporate chain retailers.
The “dark store” theory originated in Michigan, and Michigan is the only state that actively uses it. It is the idea that taxes should not be based on traditional calculations of property value, but by comparing the worth to vacant buildings of similar size or purpose. Adding to the devaluation is the trend of buying commercial buildings or closing stores but putting restrictions on the deed that effectively keep the building vacant so as to prevent competitors from moving in.
The Michigan Municipal League, a group that provides resources and support for local governments, has been a vocal opponent of the dark store theory, even testifying in Lansing about the issue.
According to MML, “Retailers such as Meijer, Lowe’s, Target, Kohl’s, Menards, IKEA, Wal-Mart and Home Depot across Michigan are arguing that the market value of their operating store should be based on the sales of similar size “comparable” properties that are vacant and abandoned and may not even be located in Michigan”
At the March 23 Capital Conference, a panel spoke about “dark stores” and what communities can do to fight in cases where the theory is being used. Sault Sainte Marie City Manager Oliver Turner and Lenawee County Administrator Martin Marshall shared their recommendations.
Turner said the issue is particularly hard in communities that can’t afford to fight back. “To go through the Tax Tribunal is $40,000- $50,000 in legal costs,” he said. “Sometimes you’ve got all these stores in a strip. One appeals and wins, then they all do.”
Marshall said it’s important to hire an independent appraiser and to be careful about what attorney to use. “If you rely on your appraiser, it looks like they may have a stake in the game,” he said. “You also need an attorney that’s familiar with the Tax Tribunal and their procedures. Not every municipal attorney has experience with this.”
One caveat about a tax appeal is that the burden is on the petitioner to prove why their tax assessment is too high. That doesn’t mean that cities and counties have it easy though. Marshall said “You have to be prepared. If the petitioner presents a lot of information, even if this information is wrong, and your assessor does not have much information, they may still lose.”
Turner said that assessors need to “back up the assessment” and make sure that the assessment and communications are neutral as to who the occupant or owner is. “We’re not valuing any occupant of the building, we’re valuing the building,” he said.
Another suggestion Turner gave was to join forces with interested parties to cost-share the expenses of fighting an appeal. He said to look at “state, county, school district and city “ to “get each group to contribute to the legal fee.”
The importance of fighting is not limited to just a year of tax breaks. Once a property has been assessed at a low value, the taxable value may not increase more than inflation or 5 percent, whichever is less.
Meridian Township Treasurer Julie Brixie was in the audience for the presentation. She shared that her community has lost over $1.4 million in tax revenue since 2011 because of “dark store” appeals, specifically noting how she and her staff had helped Home Depot find a good location to move into, and then they appealed their tax bill to have it lower than when the building was empty for two years.”
Brixie urged more education and collaboration. “Our job– and it’s a really boring boring topic – we have to explain this in a simple way,” she said. “One of the thing that was really shocking tome was one of our local school districts didn’t think this impacts them.”
The impact is being felt by school districts, cities and other municipalities across Michigan. An MML FAQ about dark stores says, “For example, an appeal involving a Lowe’s store in Marquette Township left the community on the hook to repay the company more than $755,000 in property taxes it was found to have overcharged the retailer. The state Court of Appeals in 2014 upheld the Tax Tribunal’s ruling that the Marquette Lowe’s store had a taxable value (half of true cash value) of $1.5 million in 2012, rejecting the township’s assessment of $5.2 million. The store was built in 2008 at a cost of $10 million. As a result of Lowe’s successful appeal, the community has been forced to cut numerous services, such as public library hours, to its residents. These unfair tax reductions are having a ripple effect throughout communities around the state as schools, libraries, community colleges, local governments and public safety are all forced to refund money to these retailers and reduce the services they offer or increase taxes and fees on every other taxpayer in that community.”
Marquette appealed the Tribunal’s decision. The Court of Appeals upheld the decision and the State Supreme Court refused to hear the case. (The decision can be read here.)
The Detroit Free Press reported that Ottawa County has lost $14.8 million in assessments, and $745,000 in tax revenue since 2010, through big box store appeals.
And at the presentation, Turner talked about a case in Escanaba that is currently in court where Menards is suing for a reduction from Escanaba. Of the eight comparable sales Menards is using as evidence, six of them were vacant due to deed restrictions. In addition to the legal fight with Menards, the community is facing a wave of appeals, with nearly every store in Escanaba asking to pay less.
According to MML research, Menard’s stores in Michigan are assessed at an average of $24.97 per square foot. In Wisconsin, Menard’s home state, the stores are assessed at an average of $61.23 per square foot.
For Lowe’s the story is similar. In Michigan Lowe’s stores are assessed at an average of $22.10 per square foot. In their home state of North Carolina, the average taxable value is $79.08 per square foot.
Other states have seen “dark store” theory attempts, but not with much success. In Indiana, for example, a Meijer store was able to get their assessment reduced from about $60 per square foot down to about $30 per square foot. Subsequently in May 2015 Indiana passed a bill barring the “dark store” theory.
Turner suggested one solution might be to prevent the use of deed restrictions, or to give a 90 day time limit to deed restrictions. He said Chicago had to examine deed restrictions because “in Chicago Walgreens would close locations and deed restrict the property to keep CVS out. This kept residents from getting prescriptions,” he said.
Something similar has happened in Hazel Park, where CVS closed two locations in order to open a new one at 9 Mile and John R. Rather than sell or lease to another pharmacy or retailer, CVS has allowed the buildings to sit vacant, contributing to blight and preventing prosperity in the struggling small city.
Another recommendation is to pass legislation that would make the “cost approach” to assessment the required method, thus eliminating the ability to use vacant properties as comparisons for occupied ones.
“All we’re asking for is proper assessing methods,” Turner said.
For more information/resources on “dark stores” check out the MML page at http://www.mml.org/advocacy/dark-stores/.
This story is part of a series on the MML Capital Conference that took place March 22-23 in Lansing. For other MML-related stories see: http://oaklandcounty115.com/?s=mml
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MML#4: Deed Restrictions & Dark Stores Impacting Local Budgets