Learn of tax problems and possible solutions your township may be facing with big box stores. Read how your township can protect itself and minimize the loss of property tax values from big box stores. Share this presentation with your township government officials. http://www.fsbrlaw.com/

1.
Michigan Townships Associa/on
2016 Annual Educa/onal Conference
January 21, 2016
Revisi/ng Big Boxes and
Shedding Light on Dark Stores
WILLIAM K. FAHEY, TOWNSHIP ATTORNEY
FAHEY SCHULTZ BURZYCH RHODES PLC
4151 OKEMOS ROAD, OKEMOS, MICHIGAN 48864
TEL: (517) 381-­‐3150
WEBSITE: WWW.FSBRLAW.COM

2. What
is
the
Problem?
• Michigan
Tax
Tribunal
decisions
and
se8lements
involving
big
box
stores.
• Since
2010,
MTT
has
applied
a
new
theory
that
slashes
values
by
50%
or
more.
• Hundreds
of
stores
devalued;
tens
of
millions
of
dollars
lost
in
tax
revenues.
• This
new
method
of
tax
valuaHon
may
spread
to
other
kinds
of
property.
• LegislaHon
is
introduced,
but
retail
interests
are
fighHng
hard.
• Proposal
A
prevents
significant
future
increases
to
restore
values.

3. How Did This Happen?
• Opinion
in
2010
in
Target
Corp
v
City
of
Novi
set
the
precedent.
• Since
2010,
MTT
has
issued
more
than
a
dozen
big
box
opinions.
• Based
on
these
opinions,
hundreds
more
cases
were
se8led.
• MTT
compares
operaHng
big
box
stores
with
“dark
stores”
-­‐-­‐
failed
stores
vacated
and
sold
for
some
lesser
use.
• Former
Sam’s
Club
that
became
first
an
indoor
go-­‐cart
track
and
then
a
warehouse;
former
big
box
store
sold
for
a
church.

4. Does That Make Sense?
• No.
Dark
stores
are
never
worth
as
much
as
an
operaHng
store.
Property
tax
laws
require
value
based
upon
the
“exisHng
use,”
not
secondary
use.
• When
a
big
box
retailer
abandons
a
store,
it
means
something
is
wrong
with
the
use
at
that
locaHon.
• In
addiHon,
the
seller
almost
always
places
a
deed
restricHon.
• MTT
rulings
also
ignore
the
“highest
and
best
use.”
A
dark
store
sold
for
a
church
or
a
warehouse
has
a
different
“highest
and
best
use.”

5. How Can The MTT Do That?
• Claims
that
valuing
the
exisHng
use
would
value
the
store
based
on
“who”
is
using
it.
• Rejects
construcHon
cost
of
big
box
stores
as
a
measure
of
their
value,
and
instead
relying
of
the
value
of
dark
stores.
In
Marque8e
Township,
MTT
considered
a
Lowe’s
store
just
been
built
for
$10
million,
and
concluded
it
was
only
worth
$4
million.
• Claims
that
a
store
value
based
on
its
exisHng
use
would
result
in
“use
value,”
not
true
cash
value.
But
if
exisHng
use
is
the
same
as
highest
and
best
use,
there
is
no
difference
between
the
“use
value”
and
the
true
cash
value.

6. How Can The MTT Do That?
(2)
• Ignores leases of currently operating big box stores because they are
“build-to-suit” leases. In other words, they were leases signed to recover
the costs of building a particular store. MTT says these leases must be
ignored because they reflect specialized costs that another user would
not have incurred to build a building for its own use. But big box stores
are just large building shells with little ornamentation or frills. No
unique costs justify discounting their value by 50% or more.
• Rejects existing store leases as a basis for valuing stores under the
income approach. MTT claims that using such lease rents improperly
values big boxes for their “leased fee” interest, rather than for a “fee
simple” interest. But if the rent being paid under a lease is at a market
rate, the “leased fee” value and “fee simple” value must be the same.

7. How Can The MTT Do That?
(3)
• Ignores
big
box
stores
that
sold
from
one
investor
to
another
investor
(which
happens
fairly
frequently)
when
the
store
is
subject
to
a
“build
to
suit”
lease
because
this
was
the
sale
of
a
“leased
fee.”
• Claims
that
big
box
stores
are
becoming
obsolete
as
a
result
of
the
increase
in
online
retailing.
But
big
box
retailers
are
conHnuing
to
build
more
stores,
and
are
themselves
using
online
shopping
as
an
adjunct
to
their
local
sales.

8. Can You Appeal To A Higher Court?
• Yes,
appeal
is
available
to
the
Court
of
Appeals
and
the
Supreme
Court.
• But
in
the
only
big
box
cases
that
were
appealed,
involving
two
townships
in
the
Upper
Peninsula,
the
appellate
courts
affirmed
the
MTT.
• Appellate
courts
review
MTT
decisions
very
narrowly;
very
difficult
to
reverse
the
MTT
on
appeal.

9. Is The Cow Out Of The Barn?
• Ader
5
years,
hundreds
of
big
box
stores
have
had
their
values
slashed.
One
big
box
advocate
claims
over
90%
of
Michigan
big
box
have
had
their
values
reduced.
• Once
a
property
value
is
reduced
in
the
MTT,
Proposal
A
prevents
the
values
from
being
significantly
restored
unHl
the
property
is
sold.
• Walmart
and
Target
just
announced
substanHal
addiHonal
store
closings
last
weekend,
including
Flint,
Warren
and
Waterford.
This
may
signal
addiHonal
a8empts
to
further
reduce
stores’
taxable
values.
• Stores
that
previously
se8led
for
lower
values
frequently
return
soon
ader
to
appeal
again
for
more
reducHons.

10. Is This Problem Limited To Big Boxes?
• MTT
is
not
offering
the
same
tax
reducHons
to
other
types
of
uses,
such
as
mom-­‐
and-­‐pop
hardware
stores,
ordinary
department
stores
and
other
retail
operaHons.
• The
inequity
of
the
big
box
treatment
is
obvious;
other
retail,
commercial
and
industrial
uses
will
demand
the
same
steep
discounts
the
MTT
gives
big
boxes.
There
is
nothing
so
unique
about
a
big
box
store
that
jusHfies
their
tax
preferences.
• So
far,
the
MTT
has
refused
to
extend
the
“dark
store”
approach
to
a
Taco
Bell
restaurant
and
a
fitness
center..
• If
led
unchecked,
the
MTT
may
find
it
impossible
to
deny
these
discounts
to
many
other
uses.

11. Can The Legislature Stop This?
• SB
524
(Sen.
Casperson)
would
mandate
a
method
of
using
the
cost
of
construcHon,
less
depreciaHon,
to
assess
the
value
of
big
box
stores.
It
would
require
a
determinaHon
of
the
value
of
property
as
vacant
and
a
value
of
the
property
as
improved.
a
big
box
store,
the
highest
and
best
use
of
the
property
must
be
the
conHnued
use
of
the
property
as
improved.
• HB
4909
(Rep.
Kivela)
would
prevent
owners
from
placing
restricHons
on
deeds
when
they
sell
their
stores.
• HB
4681
(Rep.
Dianda)
a8empts
to
recoup
lost
tax
revenue
by
requiring
big
box
stores
to
pay
an
annual
“user
fee”
in
the
amount
that
the
property
would
have
paid
if
the
“dark
store”
assessment
method
had
not
been
used.

12. How Can You Defend Big Box Appeals
In The Mean/me?
• Townships
have
the
responsibility
to
defend
MTT
appeals.
This
duty
can
be
very
costly,
especially
when
the
Township
is
facing
the
well-­‐financed
a8orneys
and
appraisers
for
the
big
box
stores.
But
the
stakes
are
very
high
for
townships
and
other
taxing
units.
• Get
the
best
se8lement
you
can.
But
consider
liHgaHon
if
the
peHHoner
will
not
reasonably
se8le.

13. How Can You Defend Big Box Appeals
In The Mean/me? (2)
• A8ack
the
comparability
of
any
dark
stores
used
in
the
peHHoner’s
appraisal.
Dark
stores
should
not
be
used
as
comparables.
• Show
that
the
dark
stores
used
in
the
peHHoner’s
appraisal
are
subject
to
deed
restricHons
that
make
them
unusable
for
stores.
This
approach
has
been
successful
in
other
states.
• Consider
hiring
a
separate
“review
appraiser”
to
criHque
the
peHHoner’s
appraisal.
• Avoid
characterizing
the
exisHng
use
as
a
“Home
Depot”
or
a
“Lowe’s.”
It
is
a
“big
box
home
improvement
store.”

14. How Can You Defend Big Box Appeals
In The Mean/me? (3)
• A8empt
to
correlate
the
store
value
to
the
strength
of
the
store’s
retail
sales
compared
to
other
similar
stores,
since
this
can
demonstrate
the
strength
and
value
of
the
store’s
locaHon.
• Consider
using
as
comparables
the
purchases
by
big
box
retailers
of
their
own
buildings,
which
is
rare
but
occasionally
occurs.

15. How Can You Defend Big Box Appeals
In The Mean/me? (4)
• Demonstrate
value
relaHonship
between
“sale-­‐leaseback”
transacHons
or
“leased
fee”
sales
and
“fee
simple”
sales.
Downward
adjustments
may
need
to
be
made
to
such
comparables.
• Demonstrate
value
relaHonship
between
market
leases
and
build
to
suit
leases.
Downward
adjustments
may
need
to
be
made
to
such
leases
to
reflect
the
current
market
and
the
age
of
the
building.
• Always
use
the
cost
approach
as
one
of
your
alternaHve
valuaHons.
In
other
cases
where
there
are
inadequate
sale
and
lease
comparables,
the
MTT
and
the
courts
have
oden
defaulted
to
the
cost
approach.

16. What Other Solu/ons May Be Available?
MTA recommends that townships include a provision in zoning
ordinances that prohibits new big box stores from including deed
restrictions upon sale of the property. Cannot affect existing big
box stores, but might be applied to future stores. Justifications:
• Deed restrictions artificially depress the value of properties.
• Deed restrictions cause stores to remain vacant.
• Vacant stores create blight, can lead to vandalism and crime,
negatively impact local economy and nearby property values

17. Ques/ons?
WILLIAM K. FAHEY, TOWNSHIP AT TORNEY
FAHEY SCHULTZ BURZYCH RHODES PLC
4151 OKEMOS ROAD, OKEMOS, MICHIGAN 48864
TEL: (517) 381-­‐3150
WEBSITE: WWW.FSBRLAW.COM