Dark Store Theory or Value in Use - The Great Debate in Valuing Big Box Stores
The battle that is being fought across the country in property tax cases is the valuation of big box stores. These big box stores are generally in excess of 50,000 square feet. These cases have significant monetary consequences both in terms of tax dollars raised by taxing jurisdictions or paid by retailers. The reason that this is such an area of contention is because assessors and appraisers hired by big box retailers have very different approaches to the valuation of these properties. These different approaches lead to very different values for tax purposes.
One central difference between the approaches of assessors and the retailers’ appraisers is determining which use will bring the most probable sale price in a hypothetical sale to a third party. This is critical in the analysis because most jurisdictions use some form of a market value standard for determining value for purposes of taxation. Market value is “the most probable price, as of a specified date, in cash or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure to a fair sale, with the buyer and seller acting prudently, and for self-interest, and assuming that neither is under duress.” The Appraisal of Real Estate, 14th ed. (Chicago: Appraisal Institute, 2013), p.58.
Assessors tend to value big box stores according the current uses by the present owners. This leads assessors to rely more heavily, if not exclusively, upon the cost approach to valuation. This tends to produce what is known as a value in use. The definition of value in use is “the value of a property assuming a specific use, which may or may not be the property’s highest and best use on the effective date of the appraisal. Value in use may or may not be equal to market value but is different conceptually.” The Appraisal of Real Estate, 14th ed. (Chicago: Appraisal Institute, 2013), p.62. The value to the current owner may not be transmissible to the purchaser of the property, therefore, a value in use may or may not be the value a hypothetical buyer is willing to pay for the property.
Retailers’ appraisers tend to value these properties assuming as though vacant, unencumbered by any existing leases, and available for secondary uses. This has been called the “Dark Store Theory”. A secondary use, or second-generation use, is a use other than the use by the current owner or occupant of the property. If the owner or tenant did not occupy the building then there are very few potential buyers or tenants of the properties because the market does not have many buyers or tenants in need of such large spaces. Therefore, the most likely use of a big box store is a second-generation users who may only be interested in dividing up the property to lease sections of the property to different users. Additionally, a sale for a second-generation use takes into account that big box properties are built to suit a particular owner or tenant. If the owner or tenant did not occupy the building, the cost of certain improvements that were specifically built for the first user may not have any added value and may represent an additional cost that will have to be expended to remove the improvements. Consequently, retailers’ appraisers tend to rely more heavily upon the sales approach to valuation with support from the income approach to valuation for determining market value.
As retail is going through a period of change due to the rise of on-line sales and decline of malls, the debate over value in use or Dark Store Theory will continue. While some jurisdictions may seek to limit the use of Dark Story Theory through legislation because of the loss of tax revenue, the battle will mainly be fought in the context of property tax appeals on a case-by-case basis.
Allobar Strategies, a property tax consulting firm has ability to assist taxpayers with issues with their tax assessment and how to file a tax abatement. Allobar puts emphasis on client service excellence and achieving the best results possible for the circumstances of the case.
By: John F. Hayes, Esq., General Counsel/Senior Tax Representative to Allobar Strategies.
For more information on property tax abatement appeals in New Hampshire, please visit Allobar Strategies.