Lowes.JPG

Lowe's Home Center in Daphne, Ala. Lowe's is challenging its property tax assessments throughout Alabama including the store at Ala. 181 and U.S. 90 in Daphne. (John Sharp/jsharp@al.com).

Lowe's is a home-improvement center behemoth with more than 1,800 stores registering $59.1 billion in annual retail sales in 2015, a nearly 18-percent leap in five years.

But the North Carolina-based chain, in a sweeping effort throughout the U.S., including Alabama, to slash its taxes, wants courts to re-evaluate the market value of its stores, basically assigning them the same value as an empty building.

In Alabama, Lowe's attorneys have filed lawsuits seeking value reductions for 27 home centers. The lawsuits include stores in smaller cities such as Muscle Shoals and Hartselle and those in metropolitan cities such as Birmingham and Mobile.

The state's revenue department and others are ringing alarm bells. They say that if Lowe's prevails, other retail chains will pursue the same course, potentially crippling revenues needed for police and fire services, roads, sewers, teacher salaries and other basic government services.

"The loss of money would just be astronomical," said Sonny Brasfield, executive director of the Association of County Commissions of Alabama.

Brasfield said the state could lose roughly $1.5 million annually in revenues based on the number of Lowe's challenging their assessments.

"We certainly believe that other similar retailers will follow suit and that the loss of revenue would snow ball," Brasfield said.

The issue could be magnified in Alabama. Only Hawaii has a lower property tax rate in the U.S. than Alabama, and many school systems here are already on wobbly financial footing.

"The effort to lower that rate even more is unconscionable," said Sally Smith, executive director of the Alabama Association of School Boards. "While these efforts may ease the tax burden for large corporations, ultimately local counties and school systems suffer due to decreased revenues, and this loss will directly impact our ability to serve students."

Said Carol Gundlach, policy analyst on tax and budgets with Alabama Arise: "Goodness knows our schools don't need any more reductions in their tax base than we have already."

'Dark store'

Karen Cobb, a spokeswoman with Lowe's, said the company is simply exercising its rights, like homeowners, to fight for fair taxation.

"Lowe's goes through a process every year to review property tax values for all its properties across the country," she said. "Determining market value can be a complicated process, but in general, we look at information about comparable property in the area to help determine an appropriate value."

Critics of what Lowe's is doing, though, claim the company - through independent advisers - is equating its operational stores with stores that have long since closed.

In Alabama and other states, the issue boils down to whether the value of Lowe's stores should be reduced to reflect the so-called "dark store" theory of appraisal, which means that its properties should be valued as if the buildings sat empty.

The argument, in a nutshell, is that no other store can occupy a Lowe's because the building was specifically designed to accommodate Lowe's business model. Thus, it's a specialized structure that's less valuable on the real estate market than a structure that's more adaptable.

The theory runs counter to current appraisal methods that include determining a property's value based on the income derived from the business on the property.

"Lowe's is coming back and saying that it should be worth less using the dark store theory of valuation," said Joe Garrett, deputy commissioner with the Department of Revenue.

If the argument holds up in court, he warned, the property tax base for commercial real estate could be cut in half. "It's hundreds of millions of dollars," Garrett said.

Legislative fights

Typically, big-box chains like Lowe's pay to construct a store that fits their particular needs, then sell it to an investor who, in turn, leases the property back to the company for its use.

David Lennhoff, a Virginia-based expert on the dark store theory, said the issue comes down to a simple question: If the property had been on the market for sale, what could be derived from a reasonable transaction between a buyer and seller? "A dark store is what you get," he said.

Already, the dark store theory has registered victories in reducing property values for Lowe's and other giant retailers in Michigan.

In a township near Detroit, officials appraised a Lowe's store - which had just been built for $10 million - at a value of $5.2 million for tax purposes. Lowe's, with the support of state tax officials, was able to lower the value to $1.5 million in 2012.

A ripple effect occurred, as chains like Meijer and Home Depot also successfully argued for reduced values. At least one estimate pegs a three-year loss of property taxes to local governments in Michigan at around $47 million.

One professor blames lawmakers for failing to rein in the practice. "Michigan is, unfortunately, the poster child on how not to do it by having your Legislature drag its feet," said Dwight Brady, a communications professor at Northern Michigan University.

Brady and his students released a documentary last month entitled, "Boxed In" that chronicled the state's battle over the issue.

"The precedent has already been set (in Michigan)," said Brady. "The main problem is that most (local governments) don't have the resources to fight these big corporations and settled for whatever they could get. We're talking tens of millions of dollars going out of local governments."

Alabama action

Alabama has already made some pre-emptive strikes to shore up its position.

The Legislature, during the 2016 spring session, approved allowing county commissions to hire outside counsel to handle commercial property tax appeals. Before that, Alabama law tasked individual district attorneys with defending the cases.

Brasfield said the legislation allows the 58 counties that are part of ACCA's self-insured liability fund to pool together resources and hire outside experts who can litigate the cases.

"One of the shortcomings is we didn't have any real expertise fighting a team from New York that was challenging these across the country," Brasfield said.

But the law, which takes effect Oct. 1, won't affect the Lowe's cases currently filed in counties such as Mobile, Jefferson, Morgan, Limestone, Tuscaloosa and Baldwin. Instead, the law will be in effect if Lowe's is successful with its appeals, prompting other big box retailers and even fast-food chains to mimic its maneuvers.

"I think we're in a lot better situation because from what I understand in Michigan, they were taking it on as a county, versus a group of counties coming together to do battle," said Baldwin County Revenue Commission Teddy Faust Jr. Lowe's is challenging values at two Baldwin County properties in Foley and Daphne.

Brady said that other states have done more to crackdown on dark store appraisals. Indiana, for instance, enacted laws limiting the types of comparable sales that could be used in determining the value of commercial non-income-producing properties.

There is no indication that the Alabama Legislature will introduce additional legislation.

Brasfield said that establishing a "different set of rules" for big-box retailers "plays into their argument."

"We hope this defense bill law that takes effect Oct. 1 solves (the matter) going forward," he said.

Gundlach said the Alabama Legislature should consider more.

"The Legislature needs to look at this issue and do some of what other states have done and see how we value retail property," she said.

Loss revenues

For local government officials, the lawsuits are creating concern about an unknown future when large commercial stores might be ponying up considerably less in taxes.

"Our government operates on tax revenues derived from property and sales taxes," Mobile County Commissioner Connie Hudson said. "When you take a serious hit to that, the government is unable to provide the services we are able to provide them."

It's also creating second-guessing about awarding incentives to lure retailers.

In 2008, the Hartselle City Council approved $1.2 million in incentives to develop a Lowe's Home Center at U.S. 31. The deal allowed for Lowe's to use future sales tax revenue to recoup its investment on utilities and to make road improvements into the store.

Now Lowe's is fighting Morgan County in court.

Dennis Tankersley, a Hartselle council member who was the city's mayor in 2008, said he was unaware of Lowe's property tax challenges around Alabama. "But like any citizen, if their property is overvalued, then they should have the right to challenge the value with local authorities," he said.

But in Mobile County, where Lowe's is challenging assessed values on three of its properties, city and county leaders have pledged sales tax incentives for several mall-related projects in recent years. None of the incentives, though, went directly to Lowe's.

"If they, in my opinion, start challenging their property taxes to this point, I think we are going to think long and hard on some of these projects that we put money up for," said County Commission President Jerry Carl.

School struggles

In Baldwin County, which is Alabama's fastest-growing county, the Lowe's challenge -- if successful and mirrored by others - could affect how the county maintains its heavily traveled roads.

It could also impact how much revenue filters into an overcrowded school system that is struggling to find ways to construct new buildings and replace a host of portable trailer classrooms.

Baldwin property owners pay some of the lowest property taxes in the U.S. when considering average home values. A 2010 analysis by the Tax Foundation found that only Maui County in Hawaii has higher-valued properties coupled with such low tax rates.

Overall, Baldwin County ranks 776 of 806 U.S. counties when analyzing property taxes as a percent of income. Most of the counties ranking at or near the bottom are in Alabama and Louisiana.

The lack of property tax revenue has confounded school officials, who have unsuccessfully pushed for tax referendums to help pay for new schools and classroom wings.

"It's time for serious reconsideration of property tax reform in Alabama anyway," said Gundlach. "But this may actually accelerate that. There is not much of anywhere else that local government can go."

Lennhoff, the dark store expert, suggested that responsibility for the problem also falls on government shoulders: "They can raise taxes. But they don't want to do that because they will look bad."

Among the Lowe's in Baldwin County is a store at heavily traveled Ala. 181 and U.S. 90. It was valued in 2015 by the county at $9.5 million.

"If they feel that a Lowe's is worth $1.5 million, we can offer that to them and transform the Lowe's into a school," Baldwin County Commissioner Tucker Dorsey said, with a somewhat serious tone. "We can't build a structure for that price so we'll go ahead and buy them at that price."