‘Dark store theory’ hurting towns relying on tax revenue
The store’s still open, but please tax it as if it were vacant
As brick-and-mortar stores come under increasing pressure due to waning traffic from shoppers, some big name retailers are trying a new, controversial tactic to cut their property tax bills even as they keep the stores open.
And the tactic could hurt towns that rely on the tax revenue.
Under the so-called “dark store theory,” big box stores — the large retailers often anchoring malls — argue that their operating stores should be valued for taxing purposes as if they were vacant.
“In states such as Michigan and Indiana, this argument has largely withstood judicial scrutiny, leading to hundreds of store devaluations and to hundreds of millions of dollars in estimated lost tax revenue to local governments,” according to a recent report by S&P Global Ratings.
While many communities across the country have seen the value of half-empty malls plunge, hitting the tax rolls, the “dark store” tactic applies to places where people are still buying their socks, sweatshirts and light bulbs.
Locally, shopping centers can represent a big portion of a municipality’s tax base. For example, Monroeville’s three largest real estate taxpayers, based on 2016 assessments, are shopping centers — including Monroeville Mall and Miracle Mile. Likewise, among Robinson’s top real estate revenue sources are retail-based properties, including the Mall at Robinson.
Typically, S&P noted, stores are valued based on the purchase price of the land plus construction costs, minus any depreciation.
The dark store theory argues that approach doesn’t consider the role of “functional obsolescence” in a big box store’s value.
That is, if Target or Kohl’s sells a store to, say, a gym, that gym owner would have to make significant investments to adapt the building to accommodate those weight rooms and eliptical machines, among other changes.
“Dark store theory proponents favor a ‘sales comparison’ approach, where a store’s value is determined by examining the selling price of comparable properties …” S&P said.
“The vast majority of big box [property] sales are vacant stores, which often sit unoccupied for years following the departure of the original tenants and are sold to secondgeneration users at a steep discount,” the
report continued. “Not surprisingly, the use of dark store sales comparables typically yields a substantially lower assessment than that arrived using the cost method.”
The tactic has been used successfully in several states — Michigan, Indiana, Texas and Florida — and it’s likely to spread to others, according to Geoffrey Buswick, sector leader for U.S. local governments at S&P Global Ratings, who co-authored the report.
For municipalities, the impact will depend on how diversified the tax base is.
“In many instances, retail is a relatively small part of the overall tax base that includes broader commercial, industrial and residential taxes,” Mr. Buswick said, but the hit could be harder for “smaller, concentrated communities that rely on a mall’s property taxes.”
In one recent case, Indiana’s Supreme Court in 2017 denied a review of an appeal of a lower court’s decision in favor of Kohl’s dark store appeal.
The Indiana Tax Court accepted Kohl’s argument that its property in Howard County was overvalued by about $2 million. The tax court’s decision meant the store’svalue was slashed by 40 percent and the county had to repay the taxes it collected over the three years it used the higher assessment.
In another case cited by S&P, Target Corp. in 2010 successfully argued down the value of one of its stores in a Detroit suburb, paving the way for other retailers to use the tactic in Michigan.
“In a statistic that gives some sense of the cumulative effects of years of widespread dark store appeals, the Michigan Municipal League reported that a typical Michigan Lowe’s store is now assessed at $22.10 per square foot, compared with $79.08 per square foot in North Carolina, where the store is headquartered,” the report stated.
The tactic is yet another factor at play in the shifting retail sector, where traditional stores are battling for market share as more shopping shifts online.
“We think that as competition from online retail continues to grow, brickand-mortar retailers will likely look to new and more creative ways of cutting costs, including appealing property assessments,” the report stated.