Property Taxpayers Beware: “Dark Store” Strategy Could Nail Homeowners Even More

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The next time you walk into Lowe’s and they ask if they can help you, you might say, “Yeah, pay your fair share.”

Big-box retailers are trying a new-fangled strategy to lower their property taxes, and in some states, it is working.

It’s called the “dark-store” strategy, borrowing a commercial real estate term that means a vacated building that has “gone dark”. This strategy has been used successfully used by some stores to cut local property taxes in Michigan and other states.

Now, it is being tested in at least four Texas counties. That’s where Lowe’s home improvement stores are challenging tax bills. Their arguments are that the property should be valued as if the buildings sat empty.

But they are not: the stores in Bexar, Harris, Hunt, and Taylor counties, are wide open.

Confusing? It’s a way to bully the tax authorities with the store’s sheer size. Hey, they argue: this building is big (and cheap) and it would be really hard to fill if we left. So if you want us to stay and pay something, then lower our taxes.

We haven’t seen this in North Texas thus far, but you know how good news travels fast in the business world.

If these stores are granted huge tax deductions, guess who would be forced to cough up the difference?

Homeowners.

“I do think that this is something that needs to be watched,” says our Tax Doctor Rob Wheelock.

Property taxes are going to be a big topic in Texas 2017.

“Next year the Texas lawmakers, lead by State Senator Paul Bettencourt, will be taking up property tax reform in hopes of closing some of the current loop holes,” says Rob. “I can’t blame any property owner, residential or commercial,  for keeping a watchful eye on their values and protesting if they believe that the valuations is too high.”

Especially if giants like Lowe’s and Home Depot start ditching their fair share.

At the start of each year, Texas counties appraise retailers based on their “highest and best use”.

But the dark-store strategy seeks to change that. The concept is attempting to change the way appraisals are calculated, letting courts dictate law. This isn’t the typical way commercial retailers are appraised in Texas:

A lawsuit pending in Harris County District Court in Houston filed by North Carolina-based Lowe’s Cos. against the Harris County Appraisal District is being closely watched by the rest of the state’s county appraisal districts. The lawsuit lists five stores that Lowe’s is attempting to have property values reduced.

Lowe’s has a separate action pending in San Antonio using the dark-store argument, but it’s not as far along. It’s still in arbitration, said Bexar County deputy chief appraiser Mary Kieki. Lowe’s is challenging assigned property values of 10 open stores in the county for each of the last three years.  The stores are currently valued at $82 a square foot. Lowe’s asked to reduce the valuation to $20 a square foot, she said.

“This could be enormous,” Kieki said. “It wouldn’t stop with the big boxes like Sam’s, Lowe’s and Home Depot. You could see it continue with Kohl’s and CVS. Where does it stop?

Good question: Lowe’s has 141 stores in Texas, it’s largest concentration. Ditto Wal-Marts,  600 stores here. What if they all paid taxes based on vacant buildings?

That’s what they are arguing.

Big box retailers say a store’s market value should be set at the sale price of a similar size building that’s vacant. Retailers argue the large buildings, often well over 100,000 square feet, would be difficult to sell if empty, plus deed restrictions limit future uses.

Appraisers say that’s an argument to make if a store is closed and the building stays empty without hopes of a new tenant coming in, but even then appraisers say that’s not a solid argument.

It sounds crazy. Collin County chief appraiser Bo Daffin says looking at an empty store would be a case by case basis. No retailer has tested the dark-store strategy yet, but Daffin said get ready: the strategy is coming north.

changing the way appraisals are calculated using a dark-store strategy is not the way Texas does it.

Still, Appraisal Districts don’t have small litigation budgets, so this is one way that big business is beating them up.

Nearby Hunt County settled with Lowe’s (lowered their taxes by $23,000 a year) over the 2014 valuation of a Lowe’s store in Greenville. “They used the dark-store strategy, but we didn’t go to trial,” said Brent South, Hunt County’s chief appraiser.

The legal costs associated with taking the case to court would have been too high for a county with an annual litigation budget of $50,000, he said. “We didn’t have the resources to go to trial.”

This really sucks: if a county loses in court, the it must pay the retailer’s attorney fees and 9.5 percent interest on the refunded taxes.

In the end, the burden will be shifted to homeowners, who have no unions or lobbyists watching out for their interests.

Lowes, of course, says they are simply protesting taxes just like homeowners do.

“Just like homeowners, we want to be taxed fairly on the value of our buildings and land,” said Lowe’s spokeswoman Karen Cobb. Lowe’s said its stores generate jobs, pay state and local income tax, sales tax and property tax, and every year it routinely reviews property values assigned by county tax assessors to all 1,725 Lowe’s stores across the nation, she said.

Interesting: Michigan has been hit very hard by the “Dark Store” practice, snagging tax cuts as major as 50%.

Counties stand to lose millions of dollars if the dark-store method of assessing big-box stores continues to spread, according to the National Association of Counties. The county group cited a report that said in Michigan alone, store assessments have been reduced by $75 million. The dark-store strategy has also been used in Indiana, Florida, North Carolina and Alabama.

Detroit, Michigan’s largest city, filed for Chapter 9 bankruptcy protection in 2013. You cannot help but wonder how many nail this big box store strategy put into that city’s financial coffin.

 

4 Comment

  • What about those communities who have a plethora of empty retail space already? Will existing stores then claim that “hey, we are at least conducting business in your community so be grateful for that. If we pull out, you’ve got another empty storefront. So, about our taxes….” It’s economic blackmail.

    This could really hit homeowners hard and have a domino effect of economic stagnation and diminished vibrancy at a time when distribution of the tax base is so important.

    We’ve got to have an advocate somewhere — whose cage can be rattled in the Lege or on a local level?

  • Maybe this theory worked in Michigan because the properties were located in MICHIGAN. In bad areas. Where nobody was willing to pay a lot of money for them.
    Ask yourself this – if you wanted to buy a 100,000 square foot retail space, why on earth would anyone you $80/square foot for it wheb there’s an identical one across the street available for $40/square foot?

  • What would happen if big box stores left? A bunch of little box stores would open with local ownership and local pride of place. You know…what was here before the big box ran them out of business.

    Again, call tax avoidance what it is, theft.

    Listen up builders…construct UGLY houses no one would ever want to buy so their owners can be taxed on lot value.