Big box stores ringing up property tax discounts

LANSING – Local governments in Michigan say they are losing millions of dollars in property taxes and facing cuts in services to residents because of a series of tax tribunal and state court decisions in which "big box" stores such as Lowe's and Home Depot are getting their assessments slashed, sometimes by 50% or more.

In Mason County, a Meijer, a Home Depot and a Lowe's have each successfully appealed their assessments and reduced their combined assessments from $12.6 million to $5.9 million, resulting in lost tax revenue of nearly $300,000, according to county records.

In Ottawa County, big box appeals have resulted in $14.8 million in lost assessment since 2010 and an additional $15.8 million in assessment is at risk, said Michael Galligan, director of the equalization department. So far, the revenue lost to all taxing authorities is about $745,000 and another $612,000 in tax revenue is at risk, Galligan said.

Such disputes — which are playing out not just in Michigan but across the country — center on how the owner-occupied stores are valued for tax purposes.

Michigan has three accepted methods of determining a property's "true cash value," or fair market value: comparable sales, the cost of construction less depreciation, and how much income a property produces.

Townships, cities and counties generally want to value big box stores based on construction costs.

The store owners generally want to use comparable sales. And since they wouldn't sell their stores to other retailers, they say assessors should look at sales of stores that have gone out of business and are vacant, since that's the only way they would ever come on the market. It's known as the "dark store" approach to valuing the stores.

"The problem with the situation is it feels like large retail stores are being assessed as if they're failures ... and it's not so," said Howard Feyen, assessor for Holland Township in western Michigan.

"A brand-new Walmart is worth the same as a boarded-up Kmart?" asked Deena Bosworth, director of governmental affairs for the Michigan Association of Counties. "I don't think so."

Successful big box stores, of which there are many, rarely, if ever, come on the market, so local assessors say they don't have comparable sales to use when pegging them with a "true cash value" for assessment purposes. That's why they say they've historically used the cost approach.

But attorney Michael Shapiro, a partner in the Honigman law firm in Detroit who has tried or argued dozens of such cases before the Michigan Tax Tribunal and the Michigan Court of Appeals and has settled hundreds of others on behalf of the property owners, said assessors shouldn't confuse the value of a business with the value of a building.

"The case law," right up to the U.S. Supreme Court, "says that the true cash value of a property is unaffected by who owns or who uses the property," Shapiro told the Free Press.

But in Marquette Township in the Upper Peninsula — which spent millions over several years extending services to a commercial area where several big box stores are located — officials feel blindsided by the decisions, which have severely reduced the property tax revenues that were going to pay for those services, said Randell Girard, the township manager.

The township has lost $205,000 a year in property taxes and paid $280,000 in legal fees fighting the decisions, Girard said. Reduced millage revenues have already forced the library to reduce its hours and more cuts can be expected in recreation, senior services, and other areas, he said.

"Residents won't see the large impact for probably two to three years when this all catches up and fund balances have been drained," Girard said.

The situation is complicated by deed restrictions often placed on big box stores when retailers close one outlet to open a larger one nearby, but restrict how the old store can be used so the buyer doesn't compete with its new, larger outlet.

That's what Target did in October 2012 when it closed one store on Baldwin Street in Grandville, the same day it opened a larger, 135,000-square-foot store in the same city, on 44th Street SW.

It also happened in Muskegon in 2007, when Target closed its outlet in the city and opened a larger, 127,000-square-foot outlet less than 4 miles away in suburban Norton Shores. The old Target, which has deed restrictions attached to its sale, "has been sitting vacant" ever since, said Donna VanderVries, an attorney and appraiser who is equalization director for Muskegon County.

In Madison Heights in 2005, Sam's Club closed its outlet on 14 Mile Road and moved to a larger store at 13 Mile and John R. The shuttered Sam's Club, which had deed restrictions, sat vacant for years and was the proposed site for a go-kart track before it went to industrial use — Shannon Precision Fastener opened there in 2012.

The deed restrictions placed on vacant big box stores reduce their value and those sales shouldn't be used as comparisons when determining the value of similar stores still in business, local officials say.

Shapiro said deed-restricted sales are sometimes included in the sales comparisons big box stores use to get their assessments reduced, but the deed restrictions in those cases did not adversely affect the selling price because they "were formulated to satisfy the buyer's use of the property."

There's no legal definition of a big box store. But it's generally agreed the term applies to owner-occupied retail stores that are about 76,000 square feet or bigger.

Jack Van Coevering, a Grand Rapids attorney who represents local governments, said both the tax tribunal and the Michigan Court of Appeals have historically upheld the cost approach to determining the stores' values. But he said that has been changing in recent years at the level of the Michigan Tax Tribunal — an administrative court made up of attorneys, accountants, assessors and appraisers, appointed by the governor to hear assessment appeals.

Last year, the Michigan Court of Appeals upheld a case in favor of retailers Lowe's and Home Depot after Marquette and Breitung townships appealed Michigan Tax Tribunal decisions in favor of the big box outlets. In December, the Michigan Supreme Court refused to hear an appeal from the local governments.

The tribunal had slashed the 2012 taxable value — which is calculated as half of the market value — of the Lowe's store by about 63%, to $1.9 million, from the $5.2 million assessed by Marquette Township.

The tribunal reduced the 2011 taxable value of the Home Depot by 59%, to $1.2 million, from the $2.9 million assessed by Breitung Township.

"Valuing the subject properties as vacant and available for sale, as opposed to occupied, constituted a proper valuation," said the Court of Appeals panel composed of Judges Donald Owens, Christopher Murray and Michael Riordan.

"Whether the businesses operating on the properties were successful and had no intention of closing their doors is not relevant to determining the TCV (true cash value) of the property."

Local governments say the financial impact of such decisions is enormous. Van Coevering said the appeals, and settlements local governments are making rather than fighting appeals, are easily costing local treasuries and school districts tens of millions of dollars a year statewide.

In Marquette County, administrator Scott Erbisch estimates a $1.1-million hit would be felt if all 20 "big box" stores in the county successfully took a similar approach, reducing taxable value from $39.3 million to $13.4 million.

The valuation of big box stores is also a live issue in other states. Van Coevering says some states are backing the cost approach to establishing values favored by local governments, but Shapiro said the relevant laws vary from state to state so what happens elsewhere isn't directly relevant to Michigan.

In neighboring Indiana, the Board of Tax Review, after hearing similar arguments, ruled that an Indianapolis Meijer store should have been assessed in 2012 at about $30 per square foot, less than half the value assigned to it by local officials.

Ft. Wayne attorney Mark GiaQuinta told the Associated Press that if the decision there is allowed to stand, other large operations "will be valued as a flea market."

Contact Paul Egan: 517-372-8660 or pegan@freepress.com. Follow him on Twitter @paulegan4.