Nothing New About the Old ‘Dark Store Theory’
Assessors and their minions frequently take the position that an occupied store is more valuable than an unoccupied store, a conclusion commonly referred to as the “dark store theory.” Owners of big-box retail properties and their tax advisers bristle at this erroneous contention because real property taxes are just that — a tax on the value of the real estate.
It is the assessor’s function to value the property’s real estate components, which consist primarily of land, bricks and mortar. In the case of most big boxes, the real estate components include land, concrete, pop-up concrete or metal slabs. It is a common but mistaken practice of assessors to place a greater taxable value on a big box occupied by a major retailer than on a vacant building of equal design, construction and utility.
This errant valuation methodology has given rise to controversy played out through expert testimony and sophisticated argument before administrative agencies and the courts. It is in this context that the term “dark store theory” has come into play.
A call to action
Owners of big-box real estate need to deliver a consistent response in the face of this increasingly pervasive and costly misconception. And because informal meetings between the owner’s representative and the assessor are limited in time and scope, providing little opportunity for sophisticated argument, these owners must take a position that can be expressed in layman’s terms and understood by the average taxpayer.
That message is that the “dark store theory” is not a theory at all. It is a reality. The real estate components of occupied buildings have the same value as the real estate components of vacant buildings.
The “dark store theory” has become part of the dialogue when valuing commercial properties for taxation. It’s vilified as though it were a new concept with dark connotations, like the revelation of a new and insidious scheme by Darth Vader, the infamous villain in “Star Wars.” In fact, its underlying concept is as old as the exercise of determining value for any purpose.
Unless a particular property has actually sold on a particular date, any opinion of its market value is hypothetical. Any such opinion is subject to informed disagreement within the boundaries of accepted valuation methodology.
The standards of that methodology, as expressed in the Uniform Standards of Appraisal Practices, require that the value of a property is based on the willing-buyer, willing-seller concept. The assumption is that a willing buyer wants to buy and use the property.
Logic, not to mention all standards of appraisal practice, dictates that the hypothetical buyer is buying the property for some purpose. Whatever that purpose, it precludes the seller continuing to use the property. This discussion is independent of a sale-leaseback transaction, which is a financing strategy.
The reality is that the buyer wants to use the property, as is the case across the spectrum of property purchases.
A residential parallel
The same concept applies to the sale of a suburban bungalow. When the Smiths buy a home from the Joneses, they expect the Jones family to vacate the property by the closing date. The Smith family bought the property expecting it to be available for occupancy on the closing date. Nothing about the selling family’s success or possible dysfunction affects the purchase price.
In valuing single-family homes, assessors do not discuss the resident families’ success (all the children became neurosurgeons, for example). Yet assessors effectively do so in valuing big boxes, which by all valuation standards must be deemed available for occupancy as of the closing date.
One does not hear the expression “dark house theory” because the assumption of availability of the property for use by the buyer at closing is intrinsic to the transaction. In appraisal parlance, the concept has been and remains that the exchanged property is “free and clear of all encumbrances,” ergo vacant, or in current usage, “dark.”
Many big boxes, typically measuring in the neighborhood of 100,000 square feet, have come on the market in recent years due in part to changing consumer buying patterns and reduced store counts by retailers.
There is a tendency among assessors to overvalue properties occupied by the surviving big-box retailers, in effect imposing a form of income tax that they justify by citing retailers’ overall company sales, while turning a blind eye to the availability of big boxes standing dark in the same market.
The sales volume and profits produced by a big-box store are as unrelated to the real estate’s value as apple pie is to a computer. Thus, two side-by-side buildings of the same size and specifications, with one housing a high-profit retailer and the other an empty or dark box, have the same real estate value.
Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at [email protected].