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COMMERCIAL BIG-BOX RETAIL

A GUIDE TO MARKET BASED VALUATION

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DRAFT Big Box Position Paper 1

I. PURPOSE 2 3 This position paper provides information and guidance for the application of the three 4 approaches to value for commercial big-box retail. Some jurisdictions require consideration of 5 all three approaches while others require one approach specifically or take a tiered process with 6 one approach preferred over another approach. The paper provides aid regardless of the specific 7 methodologies required by a jurisdiction. 8 9 The scope of the paper is limited to big-box retail stores from 50,000 square feet to 200,000+ 10 square feet in size; however, it is acknowledged that the market trend for box retail is shifting to 11 both smaller and larger stores. For example, one major retailer has six different prototype stores 12 that vary from 15,000 square feet to 260,000 square feet depending on trade area characteristics. 13 The discussion in the paper may be applied to any size retail store and also to other property 14 types. 15 16 II. SUMMARY OF BIG-BOX ISSUES 17 18 During the research process for the paper, several issues were identified as repeatedly arising in 19 the appeal of big-box retail ad valorem valuations. What follows is a brief synopsis of the 20 significant issues addressed in the paper from the perspective of big-box users: 21 22

• Dark Store Theory - big-box stores should be valued as-if-vacant and available rather 23 than as a functioning, operating store. 24 25

• Fee simple mandates real property be valued as-if-vacant, owner-occupied, or 26 unencumbered by a lease, so only vacant, or soon-to-be vacant stores can be used as 27 comparable sales properties in the Sale Comparison Approach to Value. An income 28 approach is not applicable. 29

30 • Only comparable leases of second-generation space can be used to estimate market rent 31

in the Income Capitalization Approach. Sale-leaseback transactions and build-to-suit 32 properties should be disqualified, as the assertions made are that these transactions are 33 either based on financing or on costs of customized improvements. 34

35 • Tenant Improvements –no other big-box user wants a store designed for another big-box 36

user. As soon as a store is built it has functional obsolescence, usually in the form of a 37 super adequacy. 38 39

• Tax assessments are based on value-in-use and not on market value. The property’s value 40 is only worth something to the current user, which often times is the retailer that built the 41 property. 42 43



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• No other big-box user wants a store designed for another use, but big-box retailers still 44 frequently deed restrict abandoned stores to prevent a similar or other big-box user from 45 using the improvements in a competing capacity. 46

47 • Existence of abandoned big-boxes, regardless of self-imposed deed restrictions, is cited 48

as evidence of functional obsolescence of occupied and operating properties. 49 50

• Big box retailers and representatives for big box users identify other generic properties 51 that are big boxes for use as comparison with their property. It is the assessors who claim 52 these properties often have a dissimilar highest and best use and should not be used for 53 comparison. 54

55 III. DARK STORE THEORY 56 57 Dark store theory asserts that fully occupied, functional and well maintained big-box properties 58 built to suit the original occupant (first-generation user) should be valued “as-if-vacant and 59 available” for a fee simple absolute valuation to reflect many retailers’ view of the meaning of 60 fee simple absolute. The concept of as-if-vacant has been tried for corporate headquarters, 61 warehouse distribution centers, malls and shopping centers without much success. 62 63 The theory’s premise is that big-box retailers occupy specially designed and constructed 64 improvements built to suit a specific retailer’s needs; thereby, on the date the store opens, it is 65 inherently functionally obsolete because of one or more reasons, such as super adequacy (ex. 66 size) and specialized tenant improvements (façade, signage, and the color). Because the 67 properties are not built with re-sale or leasing in mind, the functional obsolescence limits the 68 market to buyers/users in the second-generation market. It is assumed that these second-69 generation users will not want the improvements for the original intended use but for a different 70 use i.e. the property has a highest and best different than the current use. 71 72 Consequently, the retailers argue that the selection of comparable properties should be based on 73 the hypothetical that the current user vacates and the property is “vacant and available;” thus, the 74 comparable sales should be sales of vacant big-box stores and comparable rents should be 75 second-generation rents from the local market; otherwise, the value is not a fair market value but 76 value-in-use to the current user. “Dark store” is not a defined appraisal term, and it actually 77 means as-if-vacant; thus, dark store will not be referenced in the remainder of the paper. 78 79 80 IV. REAL PROPERTY RIGHTS IN REAL ESTATE 81 82 Ad valorem tax valuation is a legal construct. The specific laws, regulations and case law of a 83 jurisdiction control what is valued and how it is valued. This is why there is a jurisdictional 84 exception in the Uniform Standards of Accepted Appraisal Practice. Because it is a legal 85 construct, interpretation of the law and regulations are controlled by legal analysis not an 86 appraisal analysis; thus, what is required by a jurisdiction for ad valorem valuation may not be 87 consistent with appraisal theory and/or practice. 88 89



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The appraiser must know exactly what a jurisdiction means by fee simple estate by how the 90 jurisdiction defines “real estate,” “real property” and/ or “land” and this requires the ability to 91 differentiate among estates in land, real property rights, including fee simple and leasehold. 92 93

A. Fee Simple Valuation for Ad Valorem Taxation 94

The definition of fee simple estate quoted by appraisers and written into the Appraisal of Real 95 Estate, supra, p. 5 and in The Dictionary of Real Estate Appraisal, 6th ed., Appraisal Institute, 96 (2015), p 90 is in part a definition: 97 98

Absolute ownership unencumbered by any other interest or estate . . . 99 100 and the remainder is not a definition but are examples as to how a fee simple estate may be 101 infringed on by an act of government i.e. without the voluntary consent of the owner of the fee 102 simple estate: 103 104

subject only to the limitations imposed by the government powers of taxation (tax lien 105 foreclosure); eminent domain (a taking under due process of law for a governmental 106 purpose, e.g., roadways or for use by a non-governmental entity in the interest of the 107 health, safety, and welfare of the populace as a whole, e.g., revitalization projects); 108 police power (regulatory for the protection of the health, safety, and welfare of the 109 populace in generation, e.g., building and zoning codes, taking without prior due 110 process of law during a declared emergency or by operation of a law such as 111 confiscation of ill-gotten gains arising out of a crime), or by escheat (death of owner 112 without a will and without heirs, the real estate reverts to the state). 113

114 According to Black’s Law Dictionary, 10th Edition, the term “fee simple” dates back to the 15th 115 Century where the term was understood to mean “The estate in fee simple is the largest estate 116 known to the law, ownership of such an estate being the nearest approach to ownership of the 117 land itself which is consonant with the feudal principle of tenure. It is ‘the most comprehensive 118 estate in land which the law recognizes’; it is the ‘most extensive in quantum, and the most 119 absolute in respect to the rights which it confers, of all estates known to the law.’ Traditionally, 120 the fee simple has two distinguishing features: first, the owner (‘tenant’ in fee simple) has the 121 power to dispose of the fee simple, either inter vivos or by will; second on intestacy the fee 122 simple descends, in the absence of lineal heirs, to collateral heirs – to a brother, for example, if 123 there is no issue.” Peter Butt, Land Law 35 (2d ed. 1988).” 124 125 Today, the current legal definition is defined as “An interest in land that, being the broadest 126 property interest allowed by law, endures until the current holder dies without heirs; esp., a fee 127 simple absolute.- Often shortened to fee.” 128 129 Some appraisers misconstrue fee simple to mean as if unencumbered by a lease or as if vacant. 130 For purposes of ad valorem valuation, the appraiser must know what is to be valued as defined 131 by law. An ad valorem valuation should be based on the law within that jurisdiction. 132 133



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The term “leased fee” is an appraisal term, it is not a legal term and it is rarely used by market 134 participants in the sale transaction market. Leasehold is a legally-defined term as well as an 135 appraisal term. The terms are used in the following context in ad valorem appraisal. 136 137

• Leased fee value – this is simply the value of the fee simple interest in the property 138 subject to a lease. If the lease is at market rent, then the leased fee value and the fee 139 simple value are equal. However, if the tenant pays more or less than market, the value 140 of the leased fee estate may be more or less than the fee simple value. 141 142

• Leasehold value – the interest held by a tenant. If the tenant pays market rent, then the 143 leasehold has no market value. However, if the tenant pays less than market, the 144 difference between the present value of what is paid and the present value of market rents 145 would be a positive leasehold value in the real estate for the tenant. 146

147 B. Possessory Rights (Leasehold) 148

149 A lease creates no ownership interest in real property. Because no ownership interest in real 150 property is created by a lease, the fee simple estate is not affected, but the value of real property 151 may be affected positively, negatively, or not at all. 152 153 A lease creates a leasehold estate that is a right to occupy, which is a possessory interest but not 154 an ownership interest. The fee owner can sell the fee simple in the real estate subject to the lease 155 and without permission of the lessee. Generally, the lease must be honored by the new owner, 156 although may be written to terminate on sale. Under foreclosure, leases can be terminated, and 157 in cases of tax foreclosures they automatically terminate. 158 159 In summary: 160 161

• A lease is not a lien against real estate. A tenant cannot foreclose against the real estate if 162 the lease agreement is breached by the landlord. A breach of the lease is controlled by 163 contract law. 164 165

• A tenant cannot sell the real property. 166 167

• A tenant cannot mortgage the real property. 168 169

• A tenant cannot sublease its leasehold estate without permission of the landlord. 170 171

• A tenant cannot mortgage its leasehold estate without permission of the landlord. If 172 allowed, the rights of the tenant’s lender are subordinate to the landlord’s rights. Without 173 a subordination, non-disturbance and attornment agreement, the rights of the tenant and 174 the tenant’s lender can be terminated on foreclosure by the landlord’s lender. 175

176 • A tenant cannot improve the real property without permission of the landlord and the 177

improvements belong to the landlord on the termination of the lease or the tenant must 178 return the real property to its original state. 179



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180 If a jurisdiction requires the valuation of the fee simple estate it likely means that all of the 181 property rights are to be valued and the value of the property rights are charged back to the 182 owner of the fee estate for the assessment of taxes. A property right can have value regardless of 183 who has an interest in the property right. It is the market value of the property rights that is to be 184 valued not interests or estates in the real property. 185

186 As a leased property is held in fee simple, a property that sells subject to a lease can be used 187 to value the fee simple property rights. It can be used as a comparable for a subject property 188 that is leased or owner occupied. All that is required is to ensure the income stream of the 189 sale comparable property reflected a market net operating income and if not, the sale price 190 needs to be adjusted accordingly. In a similar manner, if the terms of the lease reveal that the 191 rent is above or below what is considered to be at or close to market levels, an adjustment to 192 the rent may be made for excess or deficit rent. 193 194 A leased vacant comparable property may or may not reflect the fee simple property rights. 195 The property may be vacant because it is deed restricted thereby limiting its use. If the deed 196 restriction keeps the vacant property from being used for the same highest and best use as the 197 subject property, it should not be used as a comparable. 198 199

V. DEFINTIONS OF VALUE 200 201

A. As-Is Market Value 202

Most jurisdictions require a market value estimate. Usually the jurisdiction will define market 203 value in a statute and will constitute a willing seller and a willing buyer acting in full 204 knowledge without duress in an open market, arm’s length transaction. Generally, the market 205 value will be the “as-is” market value absent direction to use of a hypothetical condition by 206 statute because real property transfers in its as-is condition. The Dictionary of Real Estate 207 Appraisal, supra, p. 13 defines as-is market value as: 208 209

The estimate of the market value of real property in its current physical condition, use 210 and zoning as of the appraisal date. 211

212 B. Other Market Value Terms 213

A jurisdiction may also use the term market value, fair market value, cash value or true cash 214 value, among others. An appraiser should identify the applicable value as it is defined by the 215 jurisdiction and carefully follow that definition, especially if it requires the as is condition, an 216 open market, arm’s length transaction in cash and between unrelated parties. Other value 217 related terms, such as value-in-use and use value, may apply in some jurisdictions. If so, these 218 should be carefully scrutinized also for possible application in assessment valuations. 219

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VI. THE HYPOTHETICAL SALE 221 222 The ad valorem value is usually to be as of a certain date based on a hypothetical sale. Unless a 223 jurisdiction specifically requires otherwise, by definition, the hypothetical sale is a given; thus, it 224 is assumed that for ad valorem tax purposes there is a market for the subject. The assessor is not 225 required to prove the existence of a market; however, exposure time on the market may affect 226 value when demand is limited or when there is no active market because supply is scarce. Big 227 box retailers often restrict the supply available in the market by the use of deed restrictions that 228 prohibit the original intended use of the subject property. It can be concluded that the value of 229 the property is diminished when these limitations are imposed on the property and that the pool 230 of potential buyers also will be reduced as a result. 231 232

A. Hypothetical Seller 233 234 Among important facts to consider with a hypothetical seller are the reasons or motivations for 235 selling a property. Is the property selling because it has functional obsolescence or is there a lack 236 of market demand that is causing the property to underperform? These are factors that an 237 assessor may want to consider in the property valuation. For example, sometimes the motives for 238 selling have more to do with a retailer’s corporate decision to downsize or move to a different 239 side of the street that has better traffic flow. The store may be fully functional with no obvious, 240 identifiable issues that would render the property unmarketable. It is for the appraiser to 241 determine marketability, functional obsolescence factors, and other variables that may 242 potentially impact the motives of the seller. 243 244

B. Hypothetical Buyer 245 246

As there is a hypothetical sale and seller, there is also a hypothetical buyer. A prospective buyer 247 of a property may consider a functional property that was occupied and operating successfully in 248 a location as validation that the location is viable for their business. The fact that another similar 249 property was successful in that particular location or on a nearby site may be evidence that there 250 is potential success and market demand. The hypothetical buyer should not be eliminated from 251 the universal pool of prospective buyers. 252 253

VII. TENANT IMPROVEMENTS 254 255 In build-to-suit construction, the developer may or may not provide trade fixtures, other personal 256 property, and inventory as part of the construction contract. Often these agreements are for the 257 construction of real estate improvements only. This issue can be researched and resolved 258 through the verification of the comparable rentals and review of actual subject property 259 construction cost documents. Trade fixtures are items of personal property that usually may be 260 removed from the structure without material damage. For example, coolers and freezers may or 261 may not be attached to the real estate and may or may not be considered a cost item in 262 replacement cost new. 263 264 Some argue that specialized retail construction (recognizable features associated with a particular 265 retailer) has no market value but only value to the current user; and thus, the contract rents paid 266



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are above market rents. A close analysis of this assertion suggests that is not always borne out by 267 the facts. On balance, for big-box properties, the interior is a vast space that any number of 268 similar users can put to use if it is not deed restricted. 269 270 Most big-box tenants require some type of tenant improvement specific to their needs. The 271 market determines what, if any, tenant improvements are financed by the owner and what are 272 paid for by the tenant directly. How the market typically handles tenant improvements should be 273 ascertained in the comparable lease properties selected. Consequently, adjustments may or may 274 not be necessary to the estimated market rent used for the development of the income stream to 275 be capitalized. The adjustments should be consistent with market behavior. 276 277 Signage in the interior is personal property and is usually provided by the retailer as part of their 278 trade fixtures. The signage is usually minimal and easily removed without significant damage to 279 the underlying real estate. Typical interior branding that is attached to the interior of the 280 improvement is the paint on the walls and perhaps the color or type of flooring. As all big-box 281 improvements require these types of interior improvements, the cost for these improvements will 282 be relatively the same regardless of the retail user. If such improvements would be removed by a 283 lessee and reflected in the market rent estimate, the removal costs can be adjusted in all 284 approaches to value. 285 286 Tenant improvements such as signage on the exterior may be considered personal property and 287 could be handled one of three ways: 1) the developer pays for the sign and installs it so it is 288 included in the construction agreement; 2) the owner/user pays for the signage and the developer 289 installs it so only labor and equipment is included in the construction agreement or 3) the 290 owner/user pays directly to the company that makes the sign for the cost of the sign and the 291 installation. Again, what is typical in the market will be reflected in the market rent development 292 and adjustment to the approaches to value may or may not be necessary. Further, the costs for the 293 exterior signage is typically inconsequential to the overall improvement value. The signage may 294 be easily removed and replaced and any cost associated with its removal can be deducted from 295 the value conclusion. 296 297 All real property has a façade. The façade uniqueness is often overstated by the big-box retailer. 298 Local zoning laws have very specific requirements for exterior construction materials, 299 landscaping, size of improvements, size, height, type and placement of signs, setbacks, parking 300 requirements, exterior lighting, water retention and runoff requirements, colors, building height, 301 etc. While every retailer has a prototype, it is just that, a prototype. Every big-box prototype is 302 adjusted to meet the site size and the zoning requirements of the locality. Good evidence that the 303 exterior façade is not unique is that existing retailers frequently update exteriors to a new, 304 modern appearance. For example, in the fast food industry McDonald’s, among others, has done 305 a face lift of many of its restaurants. 306 307 Some modification and level of customization are expected when a new tenant takes over a 308 space. This does not make the property functionally obsolete. Consider this, if a big-box has no 309 utility to any similar user, why are deed restrictions placed on the property? The actual actions of 310 the retailers belie the argument that big-box retail is functionally obsolete the day it opens for 311 business. The deed restrictions are put in place because one big-box user may use another big-312



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box user’s store. The deed restrictions are intended to limit competition by forcing a change in 313 highest and best use from a first-generation use to a second-generation use. 314 315 VIII. SALE TRANSACTIONS 316 317 Some appraisers reject a comparable sale as a valid, open market transaction if the property 318 exchanged is a build-to-suit property, a sale-leaseback transaction or a private sale. 319 320 For big-box users and single retail property users overall, the current practice for financing 321 construction of a new improvement is through build-to-suit arrangements. This arrangement is as 322 common, if not more so, than traditional mortgage financing. The developer obtains the 323 financing to build the improvements for the user and the user opts to make lease payments 324 instead of mortgage payments to a bank. 325 326 The elimination of build-to-suit rents, the sale of a property with a build-to-suit lease, a sale 327 leaseback, and private sales should not be automatic. Unless there is evidence to the contrary that 328 is inconsistent with the applicable market value definition, sale transactions of these types of 329 transactions may be used as comparable sales. It is up to the appraiser to verify the transaction 330 details. 331 332

A. BUILD-TO-SUIT 333 334 ABC Retail wishes to enter a new market location as part of its overall plans for expansion. ABC 335 Retail is a creditworthy, regional player in its retail segment and has been making strides to 336 move nationwide. ABC Retail makes a business decision that the best way for it to continue a 337 steady expansion is to not finance the new development with its own capital for which it has 338 sufficient funds available and to forego traditional lender financing. ABC Retail wants to keep 339 sufficient liquid funds available to cover personal property and inventory acquisitions for new 340 locations and to continue its steady expansion plans that include the possibility of acquisitions or 341 mergers. 342 343 ABC Retail sends invitations to bid to various developers and negotiates with Developer Jones to 344 purchase the land and build the improvements as ABC Retail specifies and on completion, ABC 345 Retail will lease the property from Developer Jones. Developer Jones obtains mortgage financing 346 for the development. The lease rate is based on a negotiated rate to cover all of Developer Jones’ 347 soft and hard costs for the development (return of capital) and to provide Developer Jones with a 348 profit margin (return on capital). 349 350 On the reverse side, ABC Retail knows what its cost of capital for mortgage financing would be 351 if it wanted to own the subject. ABC Retail also knows its cost of capital for financing the 352 purchase of personal property and inventory. It also has calculated its expected sales at the new 353 location and its associated costs of owning the subject as opposed to leasing the subject. In the 354 negotiation of the lease rate, it too has negotiated a rent that when amortized over the life of the 355 lease term will be comparable to its cost of capital through other financing mechanisms. 356 357



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ABC Retail and Developer Jones are not related parties. Both are knowledgeable, sophisticated 358 parties. Neither party is forced into this arrangement. Both parties act in their own self-interest. 359 Either party can walk away if the arrangement is not mutually beneficial. Developer Jones will 360 not undertake a project that he does not think will be profitable. ABC Retail will not use 361 Developer Jones if it cannot get what it needs for no more than its costs of capital from another 362 developer or other sources. This build-to-suit arrangement, when both parties agree that the 363 rental reflects market rent, is an open market transaction and may be used as a comparable sale. 364

365 B. SALE LEASEBACKS 366 367

Now consider the same facts as above but instead of a build-to-suit, ABC Retail finances the 368 project with its own capital or by mortgage financing as it allows for faster development than a 369 build-to-suit plan. While the project is in development, ABC Retail markets the property on the 370 NNN lease market through a broker and negotiates with NNN Investments to purchase the 371 subject on completion from ABC Retail and ABC Retail will lease the subject back from NNN 372 Investments. Subject to verification, the purchase price and the rental rate is usually set at market 373 as agreed to by the parties. 374 375 ABC Retail and NNN Investments are not related third parties. ABC Retail and NNN 376 Investments are fully knowledgeable and sophisticated parties who negotiate an agreement that 377 meets NNN Investments required return on its purchase price and ABC Retail has negotiated an 378 agreement with NNN Investments for a market rental rate. ABC Retail is not paying more nor 379 paying less than what it would pay in rent through a direct lease with a developer. NNN 380 Investments is not engaged in usury nor has it colluded with ABC Retail so that ABC Retail 381 receives more benefit than it would have received by any other store development arrangement. 382 Subject to verification of the above facts, this is an open market transaction. 383 384

C. PRIVATE SALES 385 386

Now consider both scenarios in which Developer Jones or NNN Investors puts the subject on the 387 market and sells the subject to Retirement Fund subject to ABC Retail’s leasehold. The 388 transaction is not between related parties. All parties are knowledgeable acting in their own self-389 interest and without duress. ABC Retail’s prior business relationships with Developer Jones or 390 NNN Investments are not relevant. This transaction is not a build-to-suit or a sale-leaseback 391 transaction. This is an open market transaction. 392 393 Given the uniqueness, size and location of the property, the broker knows that there is a specific 394 group of market participants who would be interested in the subject and have the financial 395 capabilities to transact the purchase. The broker specifically solicits this group. One of the group 396 buys the property. This may be termed a private sale but it is a valid market transaction. None of 397 the parties is related. No one was under duress. All parties acted in their own self-interest. The 398 broker used segmentation marketing to target potential market participants that the broker knew 399 were the most likely buyers rather than market a vast number of buyers who have no real 400 possibility of purchasing the subject. This is an open arm’s length transaction. 401 402

IX. HIGHEST AND BEST USE 403



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404 Highest and best use is a theoretical concept that underlies valuation analysis. An 405 appraiser must first perform general market analysis in order to then analyze the 406 characteristics of the market that cause the subject property to have value…Highest and 407 best use is the use that generates the highest net return to the property over a reasonable 408 period of time. (Property Assessment Valuation, 3rd ed., IAAO) 409

410 The highest and best use of the land as-if-vacant and available for use may be the same as the 411 existing use or differ from the highest and best use as improved. It will be different when 412 existing improvements are either an interim use or are approaching the end of their economic life 413 but still contribute value to the real property in excess of the value of the land. If the subject 414 property is a vacant big-box store, the highest and best use of the property may be determined by 415 analyzing sales of similar vacant stores and appropriate land sales to establish whether the 416 property’s improvements have reached the end of their economic life. If the subject property is 417 operating successfully, the current highest and best use is often considered to be the current use. 418 419 The process of determining highest and best use as-if-vacant and as improved requires analysis 420 of four elements that should be done in the order as listed below: 421 422

A. As-if-vacant 423 424

1. Legally Permissible 425 426 Legal limitations such as zoning regulations or deed conditions and restrictions impact 427 development potential. If a use is prohibited by government or by private covenants (deeds, 428 plats, developer’s agreements, executory statements), the use is immediately excluded as a 429 potential highest and best use. When the first-generation big-box owner/user vacates, it 430 frequently places restrictions in the deed to prohibit competition, which sometimes leads 431 appraisers to conclude incorrectly that a the big-box is now a second-generation store incapable 432 of commanding first-generation rents when it is the restriction, not the design of the building or 433 changing trade area trends that limits the potential use of the building to a second-generation use. 434 For this reason, it is imperative that an appraiser research and consider the specific reasons why 435 the prior retailer vacated the property. By way of example, the following is an example of such a 436 restriction: 437

438 TO HAVE AND TO HOLD said Land unto Grantee, and its successors and assigns, 439 forever, with all tenements, appurtenances and hereditaments thereunto belonging, subject 440 to easements and other matters of record, and subject to the following restrictions: For a 441 period of TWENTY-FIVE (25) years from the date hereof, said Land may not be used as a 442 discount department store whose overall retail concept is based on a discounting price 443 structure, a wholesale membership club or warehouse store, a grocery or supermarket or 444 similar type store, or a pharmacy (collectively, the "Use Restrictions"). Those portions of 445 the building leased to (intentionally omitted for confidentiality) (collectively, the "Leases'') 446 shall be exempt from the Use Restrictions for those periods the Leases shall be in effect, 447 however, in no instance shall the exemption for the building area leased by (ABC 448 retailer) last beyond May 31, 2018. The aforesaid restrictions shall run with and bind said 449



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Land and shall inure to the benefit of and be enforceable by Grantor or an affiliated 450 company or its successors, by any appropriate proceedings at law or in equity to prevent 451 violations of such conditions and restriction and/or to recover damages for such violations 452 from the then current owner of the Land. However, such conditions and restrictions shall 453 remain in effect for Twenty-Five (25) years from the date hereof. 454 455 And said Grantor does hereby warrant the title to said Land, and will defend the same 456 against the lawful claims of all persons claiming by, through and under Grantor, but none 457 other, subject to the easements, encumbrances, restrictions, and other matters of record and 458 the restrictions as stated herein in Exhibit "B" hereto and incorporated herein.. 459

460 2. Physically Possible 461

462 Factors such as site size, shape, frontage, topography, soil composition, flood zone and access to 463 utilities may limit use. A use may be legally permissible but if the physical characteristics of the 464 land support the use. Thus, the proposed property may not be a viable option on the site. 465

466 3. Financially Feasible 467

The determination if a use is financially feasible is largely dependent on supply and demand for 468 the legally permitted and physically possible uses and the costs associated with development. 469 Recent construction of other big-box properties in the market may be evidence that a big-box use 470 is financially feasible and shows that demand for such big-box properties exists. The fact that the 471 property is occupied further substantiates demand. 472

4. Maximally Productive 473

The first step to determine if a use is the most profitable is to determine the value of the land. 474 The value of the land is the base because the possible use must be at least as valuable as the 475 vacant land. The use that provides the greatest value above the land value is usually the highest 476 and best use; thus, whether segmenting the property by type or by investment class, ideally the 477 use should be specified as narrowly as possible rather than in broad terms, but reference to a 478 specific name retailer should be avoided, especially if the retailer is a current occupant as this 479 may be reflected and be criticized as a value-in-use analysis. The potential use that provides the 480 greatest return is the maximally productive use. 481

B. As Improved 482

The same four criteria for the highest and best use as vacant should be considered in an analysis 483 of the highest and best use as improved. 484 485

1. Legally Permissible 486 487 It must be determined if the current use is a legally conforming use. If zoning has changed or if 488 the improvements were built under a conditional use permit, reconstruction of the improvements 489 may not be allowed should the original improvements be destroyed, and further research may be 490 required. 491 492

2. Physically Possible 493



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494 Consider the land to building ratio. If the land to building ratio is greater than what is typical for 495 the current use, the improvements may be an underutilization of the site. Underutilization may 496 suggest the current improvements are not the highest and best use as improved. 497 498

3. Financially Feasible 499 500

For most properties that are improved with big-box stores and related improvements, one of 501 three possible highest and best use conclusions is likely. 502 503

• Retain the existing improvements for their current use. 504

• Renovate to address physical and functional items that need to be cured and/or convert to 505 a different use to recognize changing trade area demand trends. 506 507

• Demolish the existing improvements and redevelop the site with a different use that 508 represents the highest and best use of the site. 509

If the improvement is occupied and functional for the use for which it was designed, this is 510 evidence that the improvements are financially feasible. If the property is vacant and, especially 511 if it has been vacant for a considerable period, this is evidence that the current use may not be 512 financially feasible and a second-generation use may be indicated. 513 514 Techniques like the land residual, feasibility rent analysis, and the use of profitability index are 515 methods that may be used to test financial feasibility. Another practical method that may be 516 considered is a simple analysis showing that an improved property should not be worth less than 517 a vacant property. This methodology is particularly useful for big-boxes. Consider the following 518 hypothetical: 519 520

An occupied store of 150,000 square feet has a typical land to building ratio of 5:1 or land 521 area of approximately 750,000 square feet. The taxpayer asserts that the building is worth 522 $20 per square foot based on comparable sales of deed restricted, converted stores, and/or 523 vacant properties. This value implies the subject property is worth $20 x 150,000 square feet 524 or $3,000,000. This $3,000,000/750,000 square feet of land area also indicates that land must 525 be worth less than $4 per square foot. If comparable land sales indicate a value for land 526 greater than $4 per square foot, then the market value for the subject property is either greater 527 than $3,000,000 or the occupied property has reached the end of its economic life because 528 the improvements offer no contributory value to the property’s total market value. 529

530 From this example, the comparable properties identified by the taxpayer are not appropriate for 531 comparison to the occupied property or the current use is not the highest and best use. If 532 continued use of the operating store is financially feasible, then the comparable properties 533 offered by the taxpayer are inappropriate because the resulting value is less than land value. 534 535 The same test may also be used with rents. The $3,000,000 value implies that rent for the subject 536 property would be approximately $270,000 annually using a market based capitalization rate of 537 9% as an example. Annual rent of $270,000 /150,000 square foot implies a rental rate of $1.80 538



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per square foot. If comparable leased properties in the subject’s market reflect significantly 539 higher market rents than $1.80 per square foot then either the comparable lease properties are 540 inappropriate or the property is approaching or has reached the end of its economic life. Again, 541 the test reveals that the value of the land exceeds what is proposed as the contributory value of 542 the improvements. 543 544 Comparable land sales provide the benchmark for the lowest value a property can be as-if-545 vacant; thus, the proper identification of land sales is an important step in determining the correct 546 highest and best use. 547

548 4. Maximally Productive 549

550 If the subject property is occupied, the current occupant should not be excluded from the 551 universe of potential tenants or buyers for the subject property. This shows there is demand for 552 the property. According to Property Assessment Valuation, International Association of 553 Assessing Officers, 3rd ed. (2010), p. 44 “In mass appraisal, the current highest and best use is 554 usually considered to be the current use, that is, buildings will not be immediately demolished or 555 replaced.” If the subject property is operating successfully, that fact supports the premise that 556 there is demand for the use for which the property was originally designed. Highest and best use 557 is likely for the continued use of the property in its current use. If the property is improved but 558 vacant, consideration should be given to what classification property the subject is and if there is 559 adequate demand for the property in the market. 560 561 For retail, the perceived worth of a specific property is relative to size, age condition; access; 562 traffic counts; proximity to major employment centers, the concentration cluster of surrounding 563 properties; population size and household purchasing power to name a few considerations. The 564 competitive advantage of a particular property will determine its relative position within the 565 market. A property that has significant advantages over other properties of the same use because 566 of location, demographics and economic forces will command higher prices and rents. As such, 567 differentiating properties into investment classes creates a logical hierarchy that reflects potential 568 market participants’ actions. 569 570

a. Investment Class A 571 572 Investment Class A big-box retail properties sell at the highest prices and lowest capitalization 573 rates. The first-generation user generally occupies these properties. Buyers of investment class 574 A, big-box retail properties typically are national investors such as real estate investment trusts 575 (REIT); insurance companies and retirement funds looking for newer improvements with a 576 creditworthy national or regional retail chain tenant under a long term, generally NNN, lease. 577 These properties are located in areas that generate the high retail sales per square foot, usually 578 above the chain’s nationwide average because they are in close proximity to higher income 579 customers, have greater visibility such as a corner lot location and greater traffic counts to name 580 a few factors. Leased Class A properties generally are subject to long remaining term leases. 581 582

b. Investment Class B 583 584



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Investment Class B, big-box retail properties are usually slightly older properties that sell in the 585 mid-range price level at mid-range capitalization rates. These first-generation properties are 586 situated in good locations but not as well located as Class A properties. The retail sales per 587 square foot usually meet or may exceed the chain’s nationwide average sales per square foot. 588 These properties may still attract national investors but also investors in closer proximity 589 regionally and locally to the subject. Remaining lease terms on these properties, while not as 590 long as for Investment Class A properties, generally exceed 10 years. 591 592

c. Investment Class C 593 594

Investment Class C, big-box properties are nearing the end of their economic life for first-595 generation use, and may be classified as second-generation space. These locations do not meet 596 the minimum requirements for a new improvement of the same use or renovation of the current 597 improvements by the first-generation user. Retail sales at these properties are usually below the 598 chain’s nationwide average. These properties sell toward the low end of prices and high end of 599 capitalization rates. The continued use of the current use is likely an interim use. Remaining 600 lease terms are relatively short, usually less than 10 years. 601 602

d. Investment Class D 603 604

Investment Class D, big-box retail properties sell at bargain basement prices and, when leased, 605 indicate high capitalization rates. They are often vacant or soon to be vacant properties with a 606 highest and best use for a second-generation user. The original market demand for these 607 properties has moved to more desirable retail locations. These vacant properties possibly are 608 ready for redevelopment for a different use (e.g., low end retail, office or warehouse). The 609 original design used is no longer valuable or viable in the marketplace except at very low prices 610 or rents by second-generation users. 611 612 X. THE THREE APPROACHES TO VALUE OF THE FEE SIMPLE PROPERTY 613 RIGHTS 614 615

A. THE COST APPROACH 616 617

The cost approach to value provides a value indication that is the sum of estimated land 618 value and the estimated depreciated cost of the building and other improvements. 619 (Property Assessment Valuation, 3rd ed., IAAO) 620

621 1. Introduction 622

623 The cost approach is a two-step process that provides a value indication of the land and an 624 estimate of value for the cost to build a new or substitute property. Adjustments for depreciation 625 caused by age, utility, or external factors are applied to the improvements and the land value and 626 building value less depreciation are added together for a total property value. The approach is 627 premised on the principle of substitution that asserts a prudent buyer would pay no more for a 628 property than the cost of buying a substitute property of equal utility and without undue delay. In 629 other words, buyers of properties, including big-box properties, consider the costs, rents, timing, 630



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and prices of other properties and how those factors contribute to value. The cost approach 631 reflects market behavior, especially in the valuations of new properties, proposed construction, 632 or renovations and special purpose properties, or in the case of big-box properties for which 633 comparable sales are scarce. 634 635

2. Land Valuation 636 637 An accurate land value estimate is critical to the development of a reliable cost approach. 638 Comparable land sales should have the same highest and best use as the subject property and 639 should be similar in location, traffic count, demographics, zoning, size, visibility, access, and any 640 other attributes deemed important by buyers and sellers. 641 642

3. Strengths of the Cost Approach 643 644 Courts frequently rely on the cost approach because it inherently values the fee simple property 645 rights by eliminating debate about leases and deed restrictions. The cost approach is useful when 646 comparable sales and rental data are insufficient or lacking. Replacement cost new, as opposed 647 to reproduction cost new, typically excludes any functional obsolescence relating to design and 648 utility, like super adequacies for example. The cost approach can serve as a test of 649 reasonableness against claims that build-to-suit costs exceed the market value for the new 650 improvements. 651 652

4. Weaknesses of the Cost Approach 653

Limitations in the cost approach are attributed generally to estimating depreciation and 654 entrepreneurial profit. The economic age-life method and market extraction method are widely 655 used by appraisers to estimate depreciation because of their simplicity in application but lump 656 sum deductions and straight-line depreciation may be oversimplified. Effective age and 657 remaining economic life are based on an appraiser’s subjective opinion and tend to be less 658 reliable as the property ages. The breakdown method is more detailed in measuring depreciation 659 but many forms of depreciation are difficult to support with market evidence and in these cases 660 there is a greater likelihood of a methodology’s misapplication. In the case of big-box properties 661 some of the limitations are lessened as these properties tend to be very well maintained and 662 continued occupancy indicates functional obsolescence to be minimal. 663 664 Entrepreneurial incentive/profit is defined as “a market-derived figure that represents the amount 665 an entrepreneur receives for his or her contribution to a project and risk; the difference between 666 the total cost of a property (cost of development) and its market value (property value after 667 completion), which represents the entrepreneur’s compensation for the risk and expertise 668 associated with development.” [Id page 76, The Dictionary of Real Estate Appraisal, 6th ed., 669 Appraisal Institute (2015)] The estimate of entrepreneurial profit, based on analysis of recent 670 sales of similar properties and/or interviews with developers of similar improvements, is often 671 difficult to support due to the lack of sufficient market evidence. It is often calculated as a 672 percentage of direct and indirect costs and included in the total replacement cost of the 673 improvements. 674 675

5. Special Purpose Property 676



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677 Owners/users of big-box retail sometimes assert that the property is a special purpose property. 678 A special purpose property is “unique” and calls for special construction materials. Sometimes 679 retailers will identify their properties as an owner-user type property rather than a single tenant 680 big-box property to give the impression that the property is customized for a particular user 681 rather than portraying the property as a big-box prototype store. By presenting the property as a 682 special purpose property, retailers introduce the idea that the property is built specifically for a 683 particular use and is obsolete for any other similar first-generation big-box retailer as soon as the 684 building is constructed. They claim that valuing the property as it was built is a value-in-use and 685 not representative of market value or value-in-exchange. As the name implies, big-boxes are just 686 large open spaces; remove the branding features of the façade and the personal property inside, 687 and white wash the walls and each looks similar to another. Big-boxes may easily be adapted for 688 another single user for the same purpose or a similar purpose for which it was originally 689 constructed. 690

691 6. Applications 692

693 When examining all of the potential differences between the subject and the comparable 694 properties used in the sales comparison and income capitalization approaches, the value of the 695 cost approach emerges more clearly. A carefully developed cost approach may be the most 696 reliable approach for new properties that have minimal accrued depreciation and less reliable for 697 older properties, unless there is sufficient market evidence to support entrepreneurial profit and 698 depreciation estimates. 699 700

701 B. SALES COMPARISON APPROACH – FEE SIMPLE VALUATION 702 703

Based on the concept of value in exchange, the sales comparison approach to value 704 compares the property being appraised with similar properties that have recently sold. 705 The characteristics of the sold property are analyzed for their similarity to those of the 706 subject of the appraisal. (Property Assessment Valuation, 3rd ed., IAAO) 707

708 1. Introduction 709

710 The Sales Comparison Approach to value is commonly employed in the appraisal process 711 because it closely reflects how buyers and sellers in the marketplace engage in property 712 transactions. The Sales Comparison Approach is also heavily influenced by the economic 713 principle of substitution, which holds that properties demonstrating similar economic utility will 714 command similar prices. Hence, the maximum value of a property or highest price a property 715 will likely obtain is determined by the cost of purchasing a substitute property of similar design, 716 function and utility. This is a straightforward approach that studies the market’s reaction to 717 similar comparable properties and is particularly reliable when there is ample data available in 718 the market from which to make appropriate comparisons. 719 720 2. Sales Selection and Market Segmentation 721 722



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The selection of the comparable sales is essential for the sales comparison approach to reach a 723 reliable conclusion of value. Narrowing the highest and best use of the comparables assists an 724 appraiser in identifying those properties that are most similar to the subject. Once the highest and 725 best use for the subject is determined, the subject may be classified into one of the investment 726 classes (A, B, C, or D as described in greater detail previously in the highest and best use section 727 of this report) and/or segmented by type such as freestanding retail, home improvement, discount 728 department store, etc., if possible. In the case of big box properties, these buildings are 729 configured as single occupant properties and may be modified for other single occupant uses, so 730 while it is ideal to narrow the property’s highest and best use and those of the comparable sales 731 as much as possible, care must be taken not to identify a specific user, as this may be interpreted 732 as a value in use. Relevant characteristics such as size, age, condition of the property, access, 733 traffic counts, proximity to major employment centers, the concentration cluster of surrounding 734 properties, and population size are among factors that will influence a big box retail property’s 735 competitive position in the market. These determinants will contribute to establishing the 736 appropriate trade area and also the suitable comparisons to use in the sales comparison approach. 737 As such, differentiating the subject and comparable properties into segments such as investment 738 classes or retail type creates a logical hierarchy that appropriately reflects market behavior. 739 740

3. Deed-Restricted Comparable Sales 741 742

Deed-restricted comparable sales should not be used in ad valorem valuations for the following 743 reasons. 744 745

• Deed-restricted sales are not sold into a free market of all willing purchasers. 746 • Deed-restricted sales are not sold for their highest and best use. 747 • Deed-restricted sales are not made by a properly motivated seller as the motivation of the 748

seller is to restrict the property from future use by any form of competition and not to 749 maximize its price. 750

751 4. Highest and Best Use and Appropriate Sales for Comparison 752

753 For properties to be considered the best comparable properties to the subject property, they 754 should have the same highest and best use. The less similar the highest and best use, the less 755 comparable the sales properties are for the subject property. If the highest and best use is not 756 reasonably similar, then a comparable property should be rejected in this approach. As 757 previously discussed in the highest and best use section, if the subject property is an occupied 758 property, it should be compared only to similar occupied properties. A vacant property should 759 not be used as comparison with an occupied property, if the properties have a different highest 760 and best use that may be evidenced by the fact that demand exists for the occupied property and 761 not for the other that is vacant. Deed restricted properties that intentionally limit competing uses 762 almost always have a different highest and best use than properties without deed restrictions and 763 do not serve as appropriate substitutes. 764 765 5. Fee Simple/Leased Fee 766 767



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Commercial big-box properties are often leased to a tenant. A fee simple valuation does not 768 mean that you disregard the lease in place and appraise the subject property as if vacant or 769 assuming it may only be owner occupied. This is a common misconception that sometimes leads 770 an appraiser to either exclude the income approach from consideration or discredit the income 771 approach in a big box property valuation. Fee simple does not mean vacant or owner occupied. 772 To clarify, fee simple refers to the bundle of rights that convey, and a property may sell with a 773 lease and be considered fee simple, subject to a lease. If the subject property has a lease, that 774 lease may qualify as a rent comparable if the rent is at market. Regarding a comparable property, 775 the appraiser should determine whether the rent for the comparable sale is consistent with market 776 rent. If the rent is above market or below market, an adjustment may be necessary if the 777 appraiser wants to use the sale as evidence of market value. 778 779

6. Value in Use 780 781 The misunderstanding of fee simple (meaning owner occupied or vacant) often leads to 782 additional assertions that the property is uniquely customized and only valuable to a particular 783 user. This portrayal of the subject property as a customized, special purpose property as opposed 784 to standard, big box retail store is often advanced by additional claims that the property is 785 functionally obsolete for the market and only valuable to the current user as a value-in-use. The 786 subject’s current occupant should not be removed from the pool of prospective, interested buyers 787 or users of the property and that the current use of the property may prove that demand for the 788 property exists. The fact that the property is occupied and operational may affirm that the current 789 use of the property is likely also to be the highest and best use. It may also be determined that 790 value-in-use and market value (value-in-exchange) are equivalent in such cases. 791 792 7. Sale Leaseback and Verifications 793 794 It is essential that each sale is verified to ensure it meets the necessary requirements of an arm’s 795 length transaction between a willing buyer and a willing seller. One should disqualify any sale 796 that is not a valid market transaction. Especially in the case of sale leaseback verifications, one 797 should confirm these sales rather than simply rely on information provided by data services to 798 determine whether the circumstances meet the market value criteria that would allow the 799 transaction to be used as an appropriate comparable to include in a sales comparison approach. 800 801

8. Application of the Sales Comparison Approach 802 803

It is not with great frequency that sales of newly constructed big box retail buildings, as in 804 build-to-suit properties, convey in the open market; however, there are investment grade A and 805 B properties that sell, many times to investors that see an opportunity in buying either a store 806 with relatively new improvements and a high-quality tenant, or as a store vacated by former 807 high-quality tenant where the space may be reused by another quality tenant. In these cases, 808 there may be support also for an income approach, with rents and capitalization rates to use in 809 additional analysis. Other lower investment grade properties will also sell in the open market, 810 sometimes as junior anchors or as properties to be owner-occupied. The Sales Comparison 811 Approach is a well-founded methodology to rely on when there is ample data available in the 812 market. 813



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814 815

C. INCOME CAPITALIZATION APPROACH 816 817

1. Introduction 818 819

One of the three approaches to value, based on the concept that current value is the 820 present worth of future benefits to be derived through income production by an asset over 821 the remainder of its economic life. The income approach uses capitalization to convert 822 the anticipated benefits of the ownership of property into an estimate of present value. 823 Big-box properties are mostly owner occupied by retailers but often these properties are 824 owned by investors and occupied by the retailers under a long-term lease; thus, the use of 825 the income capitalization approach to value can be utilized with empirical evidence 826 supporting market rent estimates and overall capitalization rates. (Property Assessment 827 Valuation, 3rd ed., IAAO) 828

829 The income capitalization approach converts all expected net benefits received from the lease of 830 a property, including annual net operating income and reversion, into an opinion of present 831 value. The two methods of income capitalization are yield capitalization and direct 832 capitalization. 833 834

a. Yield Capitalization (Discounted Cash Flow) 835 836 Yield capitalization considers a series of cash flows over time together with any reversion value 837 or resale proceeds. The basis of the yield capitalization process is to discount the value of the 838 future income streams to present value and then add those benefits to a present value of a 839 reversion amount as an estimate of what the property will sell for at the end of the projected 840 holding period. A criticism of this approach in jurisdictions where market rent is the underlying 841 valuation criteria is that it incorporates speculative modeling criteria and is rarely used by market 842 participants in the sale and purchase of big-box properties. Also, courts are often skeptical as to 843 the reliability of this method. 844 845

b. Direct Capitalization 846 847 Direct capitalization uses the relationship of one year’s net income, usually the first year of 848 ownership, to conclude a value. This method is preferred by buyers and sellers of big-box 849 properties and is often quoted on broker marketing flyers and emails. This is the generally 850 accepted method by appraisers and receives greater acceptance in the courts. For mass appraisal, 851 direct capitalization is used because it is simpler, less speculative, and has more market evidence. 852 853

2. Direct Capitalization Methodology 854 855

a. Identification of Lease Comparable Properties 856 857

The first step in the direct capitalization approach is to determine market rent. The Dictionary of 858 Real Estate, supra, p. 140: 859



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860 the most probable rent that a property should bring in a competitive and open market 861 reflecting the conditions and restrictions of a specified lease agreement, including rental 862 adjustments and revaluation, permitted uses, use restrictions, expense obligations, term, 863 concessions, renewal and purchase options, and tenant improvements (TIs). 864

865 Market rent is the essential basis of fee simple valuations. The Appraisal of Real Estate, supra. p. 866 447: 867 868

Market rent is the rental income a property would command in the open market. It is 869 indicated by the current rents that are either paid or asked for comparable space with the 870 same division of expenses as of the date of the appraisal . . . 871 872 Rent for vacant or owner occupied space is usually estimated at market rent levels and 873 distinguished from contract rent in the income analysis. In fee simple valuations, all 874 rentable space is estimated at market rent levels. . . . 875

876 To determine market rent, recent actual lease data from properties of reasonably comparable 877 utility should be used. The most representative lease data will be leases entered into prior to but 878 as close to the effective date of the valuation as possible. Further, the lease data should be drawn 879 from the same market as the subject property which may not be limited to local buyers only. Just 880 as the comparable sales properties are selected based on the highest and best use segmented into 881 investment classes, lease comparable properties similarly should be segmented. If such 882 comparable rental data is limited, it may be necessary to consider slightly different investment 883 classes with appropriate adjustments. Build-to-suit and/or sale leaseback transactions, if 884 verification deems them open market and arm’s length transactions, may be included to establish 885 market rent. 886 887 For a fully occupied, well maintained, functional big-box property, recent comparable rents for 888 first-generation space (Investment Classes A and B) are most suitable for consideration of 889 market rent estimates: 890 891

First-generation space – a building or space designed to be functionally and economically 892 efficient for the original tenant or a similar class of tenants over a period of time during 893 which the space retains its original utility and desirability. (The Dictionary of Real Estate 894 Appraisal, supra. p. 210) 895

896 Investment Classes C and D improvements are losing or have lost their appeal to first-generation 897 users and may be suitable only to second-generation users. Recent comparable rentals of these 898 types of properties are appropriate for consideration of market rent estimates for subject properties 899 that are nearing the end of their useful lives for their intended use and utility when built. The 900 Dictionary of Real Estate Appraisal defines second-generation space but the proposed definition is 901 a better reflection of second-generation space as it mimics the definition of first-generation space 902 and identifies the importance of demographics to big-box retailers: 903

Second-generation space – a building or space whose design is no longer functionally and/or 904 economically efficient for the original tenant or a similar class of tenants. The space may no 905



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longer retain its original utility and/or desirability for the original tenant but may be used by a 906 tenant other than the original or similar class of tenant. 907 908 Sometimes when a store is vacant, a temporary tenant, such as a Halloween store, will occupy 909 the space for a short period of time. This type of tenant will not require significant tenant 910 improvements depending on how long they intend to remain in the space. As they are short term, 911 rent likely will not reflect market rent but may be bargain rates or excessive rates. Short term 912 tenants are rarely regarded as reliable lease comparable properties. 913 914

b. Verification of Comparable Leases 915 916 The same steps to identify and verify comparable sales properties also must be done for 917 comparable leases. The verification process is similar to the process to determine if a sale is an 918 arm’s length sales transaction. The landlord and tenant should be unrelated parties that are 919 knowledgeable and are acting in their own self-interest not under duress. 920 921

c. Rent Adjustments 922 923 Several factors may influence rents. Just as in the sales comparison approach, older lease rates 924 may not reflect market and may need to be adjusted for time and market conditions. If the market 925 has been generally stable, no adjustments may be needed. Also, the use of concessions, rent 926 escalations, expense stops and tenant improvement allowances, among other factors, may change 927 over time and under differing economic conditions. A comparable lease that has concessions 928 should be adjusted if lease concessions are not a common occurrence as of the effective date of 929 the valuation. Rent escalations that exceed typical market rent arrangements need to be 930 discounted so that effective rent is not overstated relative to market rent. While consideration 931 should be given to any other adjustments relating to physical characteristics and market factors 932 that may potentially influence rents, attempts should be made to obtain data within a reasonable 933 period of time prior to the effective date of appraisal so as to limit the number adjustments 934 needed. 935 936

d. Vacancy and Collection Loss 937 938

Vacancy is typically determined by examination of the market, however, in the case of national 939 credit, single-tenant big-box retailers, the likelihood of incurring any vacancy or collection loss 940 during the term of the lease is highly improbable. Often a vacancy and collection loss, even if 941 negligible, is justified for future uncertainty. 942

943 e. Operating Expenses 944

945 The comparable leases will indicate the typical lease structure in the market. Whether the subject 946 is owner occupied or leased, the market rent used in the direct capitalization approach should 947 reflect the lease structure most common in the subject’s market. It is imperative that the income 948 stream of the comparable leases be the same as the income stream developed in the income 949 approach so that the division of expenses between owner and tenant are accurately reflected 950



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based on market activity. Only expenses that are typically paid by the owner are used to 951 determine the net operating income even if the actual lease terms differ. 952 953 In big-box retail, the lease structure generally is NNN or absolute net, so expenses to the owner 954 are nominal. In the NNN lease, the owner may only be responsible for structural repairs and a 955 management fee. As big-box property is occupied by a single tenant, management involvement 956 is minimal. In an absolute net lease structure, the only expense to the owner typically would be a 957 minimal management fee. 958 959

f. Capitalization Rates 960 961

The Dictionary of Real Estate Appraisal, supra, p. 31 defines capitalization rate as: 962 963

[a] ratio of one year’s net operating income provided by an asset; used to convert income 964 into a value in the application of the income capitalization approach. 965

966 A capitalization rate reflects the investor’s potential return on its investment. The argument is 967 made, not just in big-box appeals but generally, that the leased fee value does not derive a fee 968 simple capitalization rate. Leased fee estate is an appraisal term not a legal term and is the 969 valuation of the actual contract rent in place. The use of market rents eliminates a leased fee 970 valuation as discussed under the property rights adjustment section of the paper. 971 972 A market derived capitalization rate from verified sales of properties of similar utility, i.e. the 973 same highest and best; the same investment class and the same or reasonable comparable market 974 as the subject property should reflect a reliable conclusion. The capitalization rate will reflect 975 market participants’ actions with regard to risk. The investment class segmentation will take into 976 consideration the likely creditworthiness of the tenant; the remaining term on the lease and the 977 physical attributes of the real property. 978 979 As support to the market derived capitalization rate, investor surveys may be examined but not 980 relied on for the capitalization rate without adjusting for what the surveys actually measure. 981 Investor surveys cast a wide net and may not be market specific. Surveys reflect investor 982 expectations, not actual market transactions. It is essential to understand the range indicated in 983 investor surveys rather than simply relying on the average. The average will likely overstate the 984 capitalization rate for Investment Classes A and B big-box properties and understate the 985 capitalization rate for Investment Classes C and D big-box properties. 986 987 The band of investment technique may also be used to determine overall capitalization rates 988 using criteria that factors in current debt and equity parameters. 989 990 The application of this technique for big-box properties that are being valued, assuming they are 991 leased at market rents, results in an overall capitalization rate that reflects the required debt 992 service payment to the lender and the equity dividend rate (equity cap rate) to the investors. The 993 mortgage constant is readily available through a survey of active lenders or from mortgage 994 information providers who survey and report available terms, interest rates, amortization rates, 995 etc. on a periodic basis. 996



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997 Equity dividend rate information is more difficult to obtain. The best source is leveraged 998 comparable sales from which equity dividend rates can be extracted. Because comparable sale 999 data reflects existing leases that may be leased at, below, or above market rent, the extracted 1000 equity dividend rates may have to be adjusted to derive fee simple at market rent capitalization 1001 rate conclusions. The technique works best when there is sufficient comparable leveraged sales 1002 data from which to extract equity dividend rates. If the data is not sufficient, opinions as to 1003 appropriate capitalization rates may be elicited from market participants. This technique reflects 1004 financed transactions but does not reflect all-cash transactions, which for certain property types 1005 and markets may be a significant part of the transaction market. Care must be taken in this 1006 instance to relate the technique to those properties that would likely sell on a leveraged basis. 1007 1008 XI. RECONCILATION 1009 1010 An appraiser should consider all three approaches to value to determine a property’s market 1011 value. Law often requires appraisers to value properties as fee simple estates for ad valorem 1012 taxation, and it is important to employ all appraisal approaches that will lead to credible 1013 valuation conclusions, unless a jurisdiction has specific requirements regarding what 1014 methodologies to consider, disqualify, or rely on. 1015

1016 There are some recurring contentious points that arise in tax appeals for big box retail 1017 properties. One of the more common issues begins with the misunderstanding of fee simple 1018 estate and leased fee estate. The misconception starts with the notion that fee simple means 1019 unencumbered by a lease, which is often misinterpreted to mean vacant or owner-occupied. A 1020 property may be appraised as fee simple, even if it has a lease. It does not mean the income 1021 approach is inapplicable in the analysis of the property. On the contrary, if a property is leased 1022 at market rent this may help the assessor arrive at a supportable conclusion of market value. 1023 The issue to resolve is whether the rent corresponds with market rent. 1024

1025 The Highest and Best Use is a central part of the valuation process, with the identification of 1026 similar properties as a key point. Whether you segment the property by investment class or 1027 retail type, the main thing is to use suitable comparisons in the analysis. Land sales should 1028 have the same zoning and highest and best use, among other important characteristics, and 1029 improved properties should be comparable. Occupied and operational properties are assumed 1030 to have a current use that is estimated to be the highest and best use should not be compared to 1031 dissimilar properties that are vacant or deed restricted. The sales comparison approach echoes 1032 many of the fundamentals outlined in the highest and best use, particularly the steps to take in 1033 identifying and analyzing comparable properties as supportable benchmarks of value for the 1034 subject property. 1035

1036 The Cost Approach should not be undervalued in its usefulness and applicability to fee simple 1037 valuations. This approach inherently values the fee simple estate, and may provide a reliable 1038 indication of value, especially in the appraisal of new buildings or for those properties that 1039 have minimal accrued depreciation. Developers use this approach when determining financial 1040 feasibility for a project, so the application of the cost approach directly replicates market 1041 behavior. When the replacement cost is used, the cost approach also eliminates many issues 1042



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associated with functional obsolescence. This can be particularly important when an assessor is 1043 confronted with big box retailers’ claims that a property’s appraised value is based on value-in-1044 use and not value-in-exchange. Big box owners will argue that their big box store should be 1045 considered a customized property that is functionally obsolete in the market to any user other 1046 than the current occupant, and that the value of the property is driven by that user and not by 1047 the market. However, the subject’s occupant and user should not be excluded from the universe 1048 of prospective buyers/users and current use of the property if occupied and functional may also 1049 the highest and best use. A standard big box retail store may be easily converted for use by 1050 another single tenant retailer, and the cost approach can substantiate that. Another benefit of 1051 the cost approach is that it can also help an appraiser determine market rent when big box 1052 owners claim they are paying above market rent, which is often the argument with new build-1053 to-suit properties. A cost approach can provide support in determining whether there is excess 1054 rent to consider. 1055

1056 The Income Capitalization Approach emulates market behavior from the perspective of 1057 investors particularly in big-box, net leased sale transactions. Investors and sellers buy a 1058 property for the income stream, and they understand that there is a direct relationship between 1059 income characteristics and property value. A property with a high-quality tenant and long term 1060 lease will likely have a lower cap rate and higher value than an older property with a shorter 1061 lease. An older property will usually have a higher cap rate and lower value. The income 1062 approach, despite being a central component for most commercial property valuations traded in 1063 the open market, is often criticized by big box retailers as not being an appropriate valuation 1064 method for a fee simple estate valuation. As mentioned earlier, this misunderstanding states 1065 that valuing a property with a lease is not valuing a property in fee simple. The argument that a 1066 property should be analyzed as if unencumbered by a lease, or as an owner-user type property 1067 is not only a misinterpretation of fee simple but also an attempt to disqualify the income 1068 capitalization approach as a credible analysis. In jurisdictions that require a fee simple 1069 valuation, an income capitalization approach will consider the lease at market rent, where 1070 leased fee equals fee simple. If the property is encumbered by a long-term lease that is below 1071 market, ad valorem taxation generally requires that the appraiser disregard the lease and 1072 consider the property at market. The same methodology would apply to an above market lease. 1073 1074 Common recurring issues that arise in big box valuations and tax appeals include how to 1075 handle deed restricted properties, dealing with claims of functional obsolescence, assertions 1076 that a property’s assessment is based on value-in-use, addressing rents that are purported as 1077 being above market, using vacant stores as comparisons for occupied stores, and clarifying the 1078 fee simple meaning as if vacant and unencumbered. It is difficult to address all of these issues 1079 in one approach to value, and developing all three approaches reinforces one another. Each 1080 approach to value has its strengths and its weaknesses. The strengths are magnified when the 1081 approaches are supplemented and weaknesses are amplified when approaches are eliminated. 1082 1083 A cost approach may serve as a reliable indication of value for properties that are new or well-1084 maintained or when there is a scarcity of sales in the market, but it may not be as applicable for 1085 middle age properties with significant depreciation. The sales comparison approach gives 1086 strong support when there is ample data to identify suitable substitute properties but is less 1087 reliable when true comparisons are not available. The income capitalization approach is a 1088



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method used by investors to convert income into value, but this approach is only dependable 1089 when the data is obtainable from the transactions between buyers and sellers. Jointly these 1090 methodologies will enhance the credibility of an equitable big box retail property assessment. 1091 1092 When there is more than one approach to value utilized, the appraiser should reexamine the 1093 entire appraisal, especially for accuracy, relevance, and market support of all of the data in 1094 each approach, and reconcile the differences in the value conclusion between the approaches. 1095 The final step is to exercise judgment as to what approach or approaches to rely on for a final 1096 conclusion of value. 1097



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APPENDIX A 1098 ISSUES RAISED IN TAX ASSESSMENT APPEALS 1099

OF SINGLE-USER PROPERTY 1100 CASE LAW DIGEST 1101

1102 I. ORGANIZATION 1103 1104 A New York trial court accepted that the build-to-suit, NNN lease, single-user, retail market was 1105 a specific submarket of the national, general commercial market. Data from this national 1106 submarket should be the source for data to value these properties. The New York history behind 1107 this case and the case itself will be discussed first. 1108 1109 The remaining cases are categorized by state and the issues addressed in the case are identified 1110 immediately after the citation. Each case has been reviewed for negative treatment within its 1111 jurisdiction on the issue for which it has been included. Parallel citations are provided when 1112 possible and unpublished decisions are noted with Westlaw citations. Trial court/administrative 1113 decisions are final unless otherwise noted. Citations for trial and administrative decisions are the 1114 caption of the case before the trier of facts if there is no state reporter or Westlaw citation 1115 available. Some decisions were provided by an assessor or counsel and are not available on 1116 Westlaw. 1117 1118 Citations within a case have not been checked to determine if the citation supports the proposition 1119 for which it has been cited by the court. The reader is well advised to do so on his own as on 1120 occasion a court may extend a holding to fit the facts of the case it is reviewing. These internal 1121 citations also provide additional research. 1122 1123 II. THE NEW YORK DRUGSTORE WARS AND THE RITE AID CASE 1124 1125

A. Eckerd Corp. v. Semon, 829 N.Y.S.2d 238, 35 A.D.3d 931 (2006). 1126 1127

Issues: highest and best use, market rent 1128 1129 The New York war of the drugstores against tax assessments begins with this case. The taxpayer 1130 challenged its 2002 and 2003 assessments in the town of Colonie, county of Albany, owned by 1131 Columbia Plaza and leased to the taxpayer. The property was located on a corner lot as a 1132 freestanding store with a drive-thru pharmacy window and parking lot. Taxpayer submitted an 1133 appraisal for a value of $1,950,000 for 2002 and $1,550,000 for 2003. The assessor submitted an 1134 appraisal for a value of $3,100,000 for 2002 and $2,750,000 for 2003. The trial court, with a few 1135 adjustments, accepted the taxpayer’s appraisal report. 1136 1137 Neither appraiser did a cost approach, but both did sales and income approaches. The differences 1138 in value were the result of the determination of highest and best use. The assessor’s appraiser 1139 used the sales of three newly constructed, national chain pharmacies and rents from four national 1140 chain pharmacies located nearby. The taxpayer’s appraiser used no sales of national chain 1141 pharmacy properties but rather a pet store; a restaurant; a strip mall and a specialty market. For 1142 rents, he used five nearby property leases of a thrift store that was a former Rite Aid; a retail 1143



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woodworking store; a real estate brokerage storefront; a video store and a national pet supply 1144 center. 1145 1146 The taxpayer’s appraiser rejected the use of market data from national drugstore chains even 1147 though there was sufficient market data asserting the leases are based on build-to-suit costs that 1148 create above market rents and are not open-market transactions. He also asserted that a drugstore 1149 is like any other retail property. The trial court accepted these explanations and the reviewing 1150 court deems the explanations plausible. 1151 1152 There is a second case, same players, where the petitioner again prevailed based on the same 1153 testimony from its expert. Eckerd Corp. v. Semon, 844 S N.Y.2d 1232, 44 A.D.3d 1239 (2006). 1154 1155

B. Eckerd Corp. v. Gilchrist, 843 N.Y.S.2d 871, 44 A.D.3d 1239 (2007). 1156 1157 Issues: arm’s-length sale 1158 1159 The property was assembled from 16 parcels in 1999 encompassing one block with frontage on 1160 four streets. In 2000, existing structures were demolished and a freestanding, national chain 1161 pharmacy store was constructed. In 2001, the property sold on the open market for $4,000,000 1162 and again in 2003 for $4,850,000. Taxpayer appealed its 2002, 2003 and 2004 assessments of 1163 $2,800,000 for all three years. 1164 1165 Taxpayer’s appraiser valued the property at $1,750,000 for 2002, $1,740,000 for 2003 and 2004. 1166 The assessor’s appraiser valued the property at $4,000,000 for 2002, $4,250,000 for 2003 and 1167 $4,400,000 for 2004. The trial court rejected the petitioner’s challenges citing the two sales as 1168 representative of fair market value far in excess of the assessed values. 1169 1170 Taxpayer’s appraiser testified the sales of the property did not alter his opinion and the taxpayer 1171 pointed to the decisions cited immediately above as support that the sales were not market value; 1172 but this time, the taxpayer’s evidence was given no weight as it “flew in the face of objective data 1173 found in the marketplace.” The reviewing court affirmed the trial court citing appellate decisions 1174 holding that recent sales of the property at issue are the best evidence of value. 1175 1176 The first two decisions are fundamentally at odds with this decision. 1177 1178

C. Brooks Drugs, Inc. v. Bd. of Assessors, 856 N.Y.S.2d 304, 51 A.D.3d 1094 (2008). 1179 1180 Issues: NNN national submarket, arm’s length sale 1181 1182 Taxpayer challenged the 2000, 2001, 2002, 2003 and 2004 assessments of the property in which it 1183 was a tenant. The property was a corner lot assembled from 10 smaller lots in 1999. The building 1184 was constructed by taxpayer in 2000 at the cost of $2,400,000 and sold the same year for 1185 $3,600,000 in a portfolio of properties. In 2001, it sold again for $4,100,000 subject to a mortgage 1186 of $3,700,000 and NNN leased to taxpayer until 2023 with renewal options. The lease provided 1187 that the fair market value in 2000 was $4,100,000 and was not a financing arrangement. The 1188 assessment value for all years was $2,021,600. 1189



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1190 The taxpayer submitted an appraisal of $1,600,000 by the sales comparison approach and 1191 $1,300,000 by the income capitalization approach for all years. The assessor submitted an 1192 appraisal for $3,500,000 for all years based on the same approaches to value. At trial, the assessor 1193 also presented testimony of an expert in the net-lease real estate market who valued the property 1194 at $4,600,000. The judge dismissed the appeals. 1195 1196 The reviewing court noted that the taxpayer’s expert testimony that build-to-suit leases inflate the 1197 value above fair market value had been accepted twice and the same testimony rejected once 1198 based on objective market evidence of two sales of the property. Here there a sale and additional 1199 expert testimony of a national market for drugstores that showed an average purchase price of 1200 $4,000,000. This evidence distinguished it from the two other cases in which petitioner prevailed. 1201 The court reaffirmed the lower court decision. 1202 1203

D. Rite Aid v. Colonie, N.Y.S.2d 642, 58 A.D.3d 963 (2009). 1204 1205 Issues: fee simple; long term lease; NNN submarket 1206 1207 The taxpayer was under a 20-year, NNN lease of a freestanding pharmacy built to its 1208 specifications in 1999. The assessed value for all years was $2,500,000. This time the taxpayer’s 1209 appraiser claimed that fee simple meant unencumbered by a lease. He valued the property at 1210 $1,730,000 for 2004 and 2005 and $1,740,000 for 2006. He used no properties that were occupied 1211 national drugstore chains for use as comparable properties and two of the sales he produced were 1212 of build-to-suit stores that had been abandoned by national pharmacy chains: one was occupied 1213 by Goodwill and the other was vacant. 1214 1215 The appraiser for the assessor used almost exclusively national drugstore chain build-to-suit sales 1216 and leased properties. He testified that if the contract rent equaled the rent that could be obtained 1217 in the market that is a fee simple valuation. He valued the property for $3,600,000 for 2004 and 1218 2005 and $3,900,000 for 2005. The assessor also provided the testimony of an expert in the NNN 1219 drugstore market who attested that national drugstores are a subsector of the larger national 1220 commercial real estate market, noting factors such as location, credit worthiness of the tenant and 1221 the term of the net lease differentiated drugstore assets from other commercial real property. 1222 Perhaps the other compelling factor for the property appraiser in this case was the purchase price 1223 of the vacated drugstore by Goodwill for $3,225,000. 1224 1225 The trial court dismissed the appeals. The reviewing court affirmed. 1226 1227

E. Rite Aid Corp. v. Otis, 954 N.Y.S.2d 666, 102 A.D.3d 124 (2012). 1228 1229 Issue: sale of the subject 1230 1231 The property originally was built for Eckerd, who was later bought out by Rite Aid. Construction 1232 costs were roughly $2,500,000. The store sold in 2005 for $3,600,000. It was assessed for 2008, 1233 2009 and 2010 at $3,950,000. The trial court accepted the valuation testimony of the taxpayer, 1234 and disregarded the sale price of the property. 1235



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1236 The reviewing court noted that the issue of build-to-suit now had been raised numerous times. It 1237 restated the principles in Gilcrist and Brooks, supra, that a recent, open-market transaction is the 1238 best indicator of value. It held that the trial court’s decision to accept the petitioner’s value went 1239 against the weight of the evidence of the sale, and the reviewing court reversed the decision. 1240 1241

F. Rite Aid v. Town of Schodack, 981 N.Y.S.2d 638, 41 Misc3d 1221(A) (N.Y.Sup.St 2013). 1242 1243 Issues: second-generation; sale of the subject 1244 1245 The taxpayer appealed the assessments for 2011 and 2012. The property was built to suit in 2006 1246 and leased to the taxpayer on NNN terms for 20 years with five renewal options. The developer 1247 sold it in 2007 for $5,512,500. It was assessed for $2,500,000. For the first time, build-to-suit is 1248 referred to as “first-generation” space, meaning it was built for and occupied by the original 1249 tenant. 1250 1251 Thee appraiser for the taxpayer asserted a value of $1,600,000. The appraiser for the assessor 1252 asserted a value of $3,650,000. Neither party did a cost approach but both developed a sales 1253 comparison and income capitalization approach. The taxpayer used primarily “second-1254 generation” sales while the assessor used “first-generation” retail drugstores. In the income 1255 capitalization approach the taxpayer used no drugstore leases and the assessor did use drugstore 1256 leases. Both sides agreed the lease for the subject was above market, as it was entered into at the 1257 pinnacle of the real estate boom just before its collapse, and neither attributed the above market 1258 rent to the fact that the property was built to suit. 1259 1260 The taxpayer presented yet a third argument claiming that fee simple required the use of second-1261 generation rents as reflective of market rents for the locality, as opposed to properties encumbered 1262 by above market rents based on build-to-suit construction costs. In opposition, the assessor argued 1263 that there is a substantial national submarket for NNN retail leases of first-generation space and 1264 the property should be valued in its as is condition as first-generation space. 1265 1266 The court noted that several decisions had addressed the issue of the proper method, which is to 1267 value first-generation drugstores without clear direction, and further recognized that there were no 1268 precedential appellate decisions on the issue. 1269 1270 The court determined that the subject property should be valued in its current condition using 1271 comparable sales of similar first-generation properties, in other words, freestanding drugstores 1272 encumbered with long-term leases. The court declared also that second-generation leases were not 1273 comparable. It points to the recent sale of the property as support for the decision even though it 1274 occurred before the market collapse. 1275 1276

G Rite Aid Corp. v Hayworth, 15 N.Y.S.3d 523, 130 A.D.3d 1510 (2015) and Rite Aid Corp. 1277 v Huseby, 13 N.Y.S.3d 753, 130 A.D.3d 1518 (2015). 1278 1279 Issues: fee simple; NNN lease submarket 1280 1281



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These cases were handed down on July 10, 2015 by the trial court. The taxpayer was unsuccessful 1282 in both cases and filed both to the court of appeals unsuccessfully. Taxpayer then filed a 1283 consolidated petition for certiorari with the United States Supreme Court asserting that its equal 1284 protection rights were violated when its property was not valued the same as second-generation 1285 space in the same locality. The petition was rejected. 1286 1287 The process of accepting an appeal is discretionary with no reason for given for denying and no 1288 interpretation of merit provided. 1289 1290 In Hayworth, taxpayer challenged the 2009, 2010, 2011 and 2012 assessments and in Huseby, it 1291 challenges the 2008, 2009, 2012 and 2013 assessments. Both properties were leased by the 1292 taxpayer under 20-year NNN leases. The first property was built in 2003 and the second property 1293 was built in 2002, both under build-to-suit arrangements with taxpayer’s predecessor, Eckerd 1294 Drugs. In each case, the property was assembled from smaller parcels to occupy corner locations. 1295 The first property sold in 2003 for $4,650,000 and was assessed for $3,750,000. The second 1296 property sold in 2005 for $4,903,634 and was assessed for $3,650,000. Both sales were open 1297 market transactions. 1298 1299 The expert for the taxpayer concentrated his analysis on the fee simple using the distorted 1300 definition of unencumbered by any lease. He did not complete a cost approach but did a sales and 1301 income approach. He valued the first property at $1,000,000 to $1,100,000 and valued the second 1302 property at $1,440,000 to $1,490,000. His comparable properties were general retail type stores in 1303 the same geographic location but none of his comparable sales was drugstores or build-to-suit 1304 properties. While he acknowledged that 12 recent sales of retail drugstores had occurred in the 1305 region, he concluded it was not appropriate to use them and gave them “little weight.” 1306 1307 The assessor did not contest that build-to-suit properties may result in above market lease rates 1308 but the assessor’s expert testified that there is an established national submarket for the sale and 1309 purchase of build-to-suit, net lease, national chain drugstores that provides substantial market data 1310 and that this data should be used primarily to value the properties. He specified several 1311 publications that research and analyze this specific submarket. All of the assessor’s expert’s 1312 comparable properties were of national drugstore locations. There was no challenge that this 1313 submarket exists. 1314 1315 For the same reasons as stated by each for the sales comparison approach, the taxpayer did not 1316 use lease data from national drugstore chains and the assessor did. 1317 1318 The New York court stated: 1319 1320

. . . [W]e conclude that the failure of petitioner’s expert to use the recent sale of the 1321 subject property as well as readily available comparable sales of national chain drugstore 1322 properties in the applicable submarket as evidence of value demonstrates the invalidity of 1323 the expert’s conclusion with respect to the sale comparison valuation . . . Moreover, the 1324 failure of petitioner’s expert to use the actual rent, negotiated at arm’s length and without 1325 duress or collusion, as well as the failure to use similar rental comparables from the 1326



31

applicable market as evidence of value demonstrates the invalidity of the expert’s 1327 conclusions using the income capitalization method. 1328

1329 III. BY JURISDICTION 1330

1331 A. CONNECTICUT 1332

1333 Union Carbide Corp. v. City of Danbury, 1999 WL 956659, sustained 257 Conn. 865 (Conn. 1334 2001). 1335 1336 Issues: admissions against interest; sale leaseback, arm’s length transaction 1337 1338 Taxpayer built a “magnificent, state of the art, futuristic” corporate headquarters. The parties 1339 agreed that the highest and best use was for the continued use as a corporate headquarters. That is 1340 all to which the parties agreed. The counsel for the city did an excellent job dismantling the 1341 taxpayer’s credibility by establishing that the taxpayer used a “different purpose, different story” 1342 approach, depending on the forum, in asserting his opinion of value of the property (admissions 1343 against interest). 1344 1345 Another significant element of the case was the appropriateness of relying on the sale-leaseback 1346 of the headquarters building. The trial court held that the sale-leaseback transaction was an open 1347 market transaction and not a financing arrangement. The sale offering was on the open market 1348 and sold to an unrelated third party, with no evidence that the taxpayer was under duress. To the 1349 contrary, security and exchange filings established the taxpayer was flush with cash. Relying on 1350 the evidence of an arm’s length transaction between willing market participants bolstered by 1351 Internal Revenue Rules, the court determined the sale-leaseback was a valid sale and not a 1352 financing arrangement: 1353 1354

1. It met FASB rule 13 standards for treating the transaction as a sale. 1355 2. The sale met applicable IRS standards that the purchase price did not exceed fair market 1356

value and the contract rent did not exceed market rent. 1357 3. The lease did not transfer ownership to the taxpayer at the end of the lease term; there was 1358

no purchase option and the lease term was less than 75% of the economic life of the building. 1359 4. The transaction also qualified as a sale under IRS standards because the buyer made a 1360

substantial down payment to the buyer, there was no seller financing and there was no third-party 1361 guarantee for the payment of the rents. 1362 1363 Aetna Life Insurance Co. v. City of Middletown, 77 Conn.App. 21, 36-37, 822 A.2d 330, review 1364 denied, 265 Conn. 901, 829 A.2d 419 (2003). 1365 1366 Issues: corporate headquarters; sale leaseback transaction; cost approach; value-in-use 1367 1368 The property was a large corporate headquarters built for $167,261,318 completed in 1984. In 1369 1985, the taxpayer entered into a sale-leaseback agreement with a trust. First, the taxpayer leased 1370 the land to the trust and then later sold the improvements separately to the trust for $250,000,000. 1371 The taxpayer then subleased the land and leased the improvements. In 1987, the assessed value 1372



32

was $250,665,000. The assessed value remained unchanged and the taxpayer did not challenge it 1373 until 1996. The Board of Assessment dismissed the case and the taxpayer appealed. 1374 1375 The trial court de novo reduced the value by intermingling each party’s cost approaches. The trial 1376 court used the city’s reproduction cost and depreciation estimates and the taxpayer’s land value 1377 and entrepreneurial profit estimate to arrive at $233,531,549. Both parties appealed. 1378 1379 The taxpayer argued that the court determined the value based on its value-in-use to the taxpayer, 1380 and used the reproduction cost approach and not a replacement cost approach. The taxpayer 1381 asserted that Connecticut law prohibited the use of the reproduction cost approach because the 1382 assessed value must be its fair market value. The court rejected the argument: 1383 1384

Contrary to Aetna’s argument that the court excluded market evidence and ignored market 1385 objectives, the court considered [taxpayer’s] market based inefficiency theory and 1386 specifically chose to reject it. That was consistent with the court’s adoption of [assessor’s] 1387 opinion that “the highest and best use is a continuation of the present use by Aetna as a 1388 corporate headquarters. We refuse Aetna’s invitation to read into that statement of highest 1389 and best use the court’s intention to value the subject property exclusively on the basis of 1390 its “use value” to Aetna and Aetna’s employees because such an interpretation is 1391 inconsistent with the court’s decision when read as a whole [citation omitted]. Aetna’s use 1392 of the subject property and its value to Aetna are clearly representative of the subject 1393 property’s general market value as a corporate headquarters and were considered properly 1394 by the court along with all the additional relevant evidence. 1395

1396 Home Depot USA Inc. v. City of Danbury, 2012 WL 2149654, CV0840251519S (Conn. 2012) 1397 (unpublished). 1398 1399 Issues: built-to-suit, income approach, highest and best use; sales comparison approach; power 1400 centers 1401 1402 The improvements were built for and continuously occupied by the taxpayer. Both parties agreed 1403 that the highest and best use was for continued use as a home improvement store. The parties also 1404 agreed that although the property was owner occupied, it is the type of property that would appeal 1405 to not only to an owner-user but also to an investor who would want it for its steady and reliable 1406 income stream; thus, the market for potential buyers was not limited to owner occupants. Both 1407 parties also agreed that the income approach was the most reliable method to value income 1408 producing property. 1409 1410 Connecticut law allows the use of the income approach only if the property is actually leased. 1411 This is the same requirement in Michigan. As a result, the court rejected the income approach 1412 leaving a cost approach by the taxpayer’s appraiser and the sales comparison approach by the 1413 assessor’s appraiser. The court accepted the sales comparison approach noting the following: 1414 1415

There is a common thread that appears to establish a market for the sale of retail power 1416 centers when considering Lowe's, BJ's and Home Depot stores. This thread comes into 1417 play from the construction of a freestanding retail power center building, the use of a long-1418



33

term lease to a retail power center and a subsequent purchase of the land and building by 1419 the same retail power center within a short period of time following the execution of the 1420 lease . . . These transactions show a pattern of operation for retail power centers: building 1421 a store, entering into a long-term lease and then outright purchasing the property in short 1422 order to become an owner-occupant. 1423

1424 B. DISTRICT OF COLUMBIA 1425

1426 Safeway Stores, Inc. v. District of Columbia, 525 A.2d 207, 211-212 (1987). 1427 1428 Issues: long term lease, sale leaseback suspect as collusion 1429 1430 Taxpayer owned three of eight stores. It previously owned all, but sold five and leased them back 1431 under long term, NNN leases. The assessor valued all eight by the cost approach and did not 1432 develop an income capitalization approach. The taxpayer’s appeal was premised on a below 1433 market, long term lease. The taxpayer asserted that the assessor should have considered the lease 1434 in his valuation of the property. The court rejected the argument that the income approach was 1435 mandatory but that all three approached must be considered but not necessarily completed so long 1436 as there was a reasonable explanation for rejecting an approach: 1437 1438

. . . Safeway may be correct that income capitalization is generally the best method for 1439 valuing income-producing business property, “because it is most similar to the analysis 1440 made by knowledgeable buyers before they purchase” such property. [Citations omitted]. 1441 Here, however, Safeway has not shown the reasons given for rejecting the income 1442 approach were irrational or unfounded . . . 1443 1444 Safeway argues, nonetheless, that the trial court improperly permitted the District 1445 assessors to ignore the impact of inexpensive, long term leases that effectively are 1446 encumbrances on the properties, reducing their resale market value . . . 1447 1448 If the current leases encumber the property, Safeway can hardly complain, for Safeway 1449 itself negotiated these leases. Moreover, Safeway’s very argument gives us confidence in 1450 sustaining the trial court’s approval of the assessor’s decisions to reject the leases as 1451 measures of property value. That argument confirms Safeway entered into the kind of 1452 inexpensive leaseback arrangement which, if permitted to determine the market value of 1453 the property, would allow owners to create artificial sale and leaseback arrangements 1454 solely to reduce their property tax obligations to the community. Because of that 1455 possibility, we believe the Department . . .would be justified in adopting at least a 1456 presumption against recognizing such “encumbrances” in valuing leaseback property 1457 (especially where the lessee also pays the property tax) . . . 1458

1459 See, also, District of Columbia v. Craig, 930 A.2d 946, 969 (2007). 1460 1461 1462



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C. FLORIDA 1463 1464 CVS Corporation v. Rob Turner, Consolidated Case Nos. 07-8515, 08-10799, 09-020997, 10-1465 9490 (Fl.Cir.Ct. 2013); voluntary dismissal, 149 So.3d 10 (Fla.App.2 Dist 2014). 1466 1467 Issues: highest and best use, occupied vs. vacant stores, deed restrictions, cost approach; 1468 substitution 1469 1470 These consolidated cases involved both operating and abandoned CVS properties. The Taxpayer 1471 contended that the highest and best use of the stores was for general commercial use and not for 1472 use as drugstores. The taxpayer argued that sales and income information from bank branches, 1473 auto part stores and office buildings, etc. should be used to value functioning and abandoned 1474 drugstores. 1475 1476 For the abandoned stores, the assessor agreed that because of the deed restrictions and changed 1477 market demand, the highest and best use was for general commercial use but not the highest and 1478 best use for functioning stores. Functioning drugstores value should be based on market data from 1479 other similar functioning drugstores. The assessor testified that the migration of drugstores from 1480 former in-line locations to freestanding, traffic-lighted, corner locations coupled with the 1481 litigation brought by taxpayer’s competitor, Walgreens, prompted him to review the valuation of 1482 these freestanding drugstore properties. 1483 1484 In doing that, the assessor reviewed appraisals of drugstores done for purposes other than tax 1485 appeals. These appraisals concluded that the highest and best use was for continued use as 1486 drugstores; that the properties do not suffer functional or external obsolescence and the sales and 1487 lease rates of other freestanding drugstores are comparable. 1488 1489 The assessor used land sales not involving drugstores at traffic-lighted corners, The Marshall 1490 Valuation Service cost data and depreciation tables, and actual construction costs obtained from 1491 Walgreens as the basis for the development of the cost approach. For the sales comparison 1492 approach, abandoned stores were excluded because of deed restrictions that result in the 1493 underutilization of the improvements. The sales comparison approach established that the 1494 assessed values of nonfunctioning stores were 60% lower than the sales for functioning stores. 1495 For the income approach, contract rates of 20 CVS leases and numerous Walgreen leases were 1496 used to extrapolate market rent. The final assessed values were based on a blend of the cost and 1497 income approach. 1498 The taxpayer put forth the testimony of two experts on methodology, neither of which had done 1499 many drugstore appraisal reports. The Court gave their testimony no weight other than noting that 1500 one admitted that if not for the deed restrictions, another drugstore could acquire and use the 1501 abandoned stores. 1502 1503 The trial court determines that the highest and best use of operating stores was as a drugstore: 1504 1505

. . . [T]he highest and best use of the operating drug stores and the proper appraisal 1506 approach to apply to these properties is the crux of the dispute between the parties. CVS’ 1507 conclusion as to the highest and best of the operating drug stores properties was for 1508



35

“continued commercial use of the existing improvements, which is not solely specific to a 1509 retail drug store.” [citation omitted] Those uses would include restaurants, furniture stores, 1510 office buildings, used car lots, and branch banks, in addition to retail stores. [citation 1511 omitted] Therefore, CVS concludes that a buyer would pay the same for freestanding drug 1512 stores as they would for those types of properties. [citation omitted] Subsequently, those 1513 types of properties are used by CVS in the sales comparison and income approaches. 1514 1515 The evidence shows, however, that when a drug store property is converted to some of the 1516 secondary commercial uses described above, not only does the property have a legal 1517 restriction prohibiting use as a drug store, but the buyers also either renovated the 1518 properties or did not use all of the square footage. Those secondary general commercial 1519 uses are not the highest and best use of the currently operating drug store properties. CVS’ 1520 appraiser also acknowledged that it would be reasonable to conclude that the maximally 1521 productive use of these properties would be for drug store use. [citation omitted] . . . 1522 1523

The court adopted the cost approach because it avoided the issue of leases in place and 1524 functioning stores do not suffer from unusual wear and tear, functional or external obsolescence. 1525 It was noted that CVS weighs the costs and benefits of building their own stores when it comes to 1526 the decision to acquire an existing store or chain of stores: 1527 1528

The Court found the cost approach is a logical appraisal method to apply to the currently 1529 operating stores. These properties suffer little in the way of physical depreciation, 1530 functional obsolescence or external obsolescence. That, according to The Appraisal of 1531 Real Estate, 13th edition, makes the property a prime candidate for the cost approach: 1532 1533

The approach is especially persuasive when land value is well supported and the 1534 improvements are new or suffer only minor depreciation and, therefore, 1535 approximate the ideal improvement that is the highest and best use of the land as 1536 though vacant. 1537

1538 D. IDAHO 1539

1540 In re Shopko Stores, Inc., 98-A-7351, 1999 WL 190545 (ID Bd. Tax Appeals 1999). 1541 1542 Issues: as-if-vacant; limited market special use property; hypothetical buyer; cost approach 1543 1544 The local level court upheld the assessor’s valuation of a regional warehouse/distribution center 1545 with a two-bay truck-washing building, fueling station, guard house, truck scale, warehouse 1546 space, office space and truck terminal wing with 59 dock doors. The chronological age of the 1547 improvements at the time the decision was rendered was seven years. 1548 1549 The taxpayer argued that the property had a limited market. The appraisal presented by the 1550 taxpayer was based on a hypothetical assumption that the property was vacant and available for 1551 sale. Taxpayer argued that the main question to ask was “who would buy the property if the 1552 taxpayer vacated?” 1553 1554



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The court rejected the argument that the property should be valued as-if-vacant: 1555 1556

. . . Appellant . . . argues an “assumption of vacancy” in support of the obsolescence. This 1557 in effect suggests the question, what would the subject property sell for if ShopKo were 1558 not in the market place. Some appraisals required by banks may specify a quick-sale 1559 valuation under a vacancy assumption, however for Idaho’s ad valorem assessment system 1560 we find this position totally without legal merit or other foundation. It is in fact contrary to 1561 . . . the undisputed facts of this case. The subject was a large operating 1562 warehouse/distribution facility on January 1 and we see no reason to assume otherwise. 1563

1564 The Board’s response to the assessor’s cost approach: 1565 1566

It is perhaps somewhat unusual for a large commercial/industrial type facility to suffer 1567 from little-to-no functional or economic obsolescence. However, this appears to be just the 1568 circumstance in this case. The subject property is a relatively new facility and is being 1569 used as planned by the owner for a rather specialized purpose. There was no expression by 1570 either party that the subject property was providing any difficulties for the current user . . . 1571 In considering all of the information presented and otherwise available to the Board, we 1572 feel the cost approach is the most reliable indicator of value for this owner-occupied 1573 property . . . . 1574

1575 E. INDIANA 1576

1577 Grant Co. Assessor v. Kerasotes Showplace Theatres LLC, 955 N.E.2d 876 (IN.Tax.Ct. 2011). 1578 1579 Issues: sale leaseback; personal property 1580 1581 This case is cited in the Prieb, infra [Kansas] as support for the conclusion that build-to-suit rents 1582 de facto cannot reflect market rent without adjustments for financing considerations. 1583 1584 The property sold with 16 other cinemas and then was leased back. The taxpayer expert testified 1585 that the use of sale-leasebacks were prevalent in the cinema industry as financing tools and often 1586 included personal property. He also asserted that “as a rule of thumb,” rent in the industry was 1587 approximately 11.5% of gross revenue and the rate in this lease was 27%; thus, it must have 1588 included more than rent for the real property. 1589 1590 The assessor asserted that because leaseback transactions were the norm in the industry, the sale-1591 leaseback of the property was the most reliable indicator of value. He compared the sale price of 1592 the property to six other cinemas sold throughout the country to establish that the sale allocation 1593 for the property was reasonable; but he also admitted that the contract rent probably included 1594 more than the value of the real property. 1595 1596 The Board adopted the value of the taxpayer stating that the evidence showed the contract rent 1597 was significantly higher than the industry standard and that the industry rents included personal 1598 property financing. Also, there was no evidence to explain how the sale price was allocated to the 1599 subject. 1600



37

1601 F. IOWA 1602

1603 Wellmark, Inc. v. Polk Cty Bd. of Rev., 875 N.W.2d 667. 682-684 (IA 2016). 1604 1605 Issues: corporate headquarters; highest and best use; hypothetical buyer; cost approach; special 1606 use properties 1607 1608 This case does an extensive analysis of decisions in other jurisdictions, so it is a good source as 1609 reference also for additional cases. 1610 1611 The property is a large, state-of-the-art, LEED certified corporate headquarters in Des Moines, 1612 Iowa built in 2010 for $150,000,000. It is five stories with a two- level, underground parking 1613 garage and surface parking. It is an architecturally distinct building, constructed with high quality 1614 materials. The property includes the type of amenities one may find in a specialized corporate 1615 headquarters, such as a convenience store, an art gallery, and a full-service restaurant. 1616 1617 The taxpayer presented two expert witnesses and the assessor presented two expert witnesses. The 1618 valuation indications were widely divergent. Essentially, the taxpayer’s experts appraised the 1619 building for less than half of what it cost to build it. The taxpayer claimed there would be no 1620 viable buyer for such a corporate headquarters building in Des Moines, and that a prospective 1621 (hypothetical) buyer would likely convert the property to a multi-tenant office building. As 1622 support for this stance, the taxpayer identified sales of ordinary multi-tenant office buildings as 1623 comparison to the property. 1624 1625 The assessor, on the other hand, argued that the current use is the highest and best use of the 1626 property and he ascribed a conservative taxable value of $99,000,000 for the property, an amount 1627 that was not only substantially lower than the cost to construct the building, but also a figure that 1628 was lower than the assessor’s own experts’ opinions. The Board of Revision upheld the assessor’s 1629 value. The taxpayer appealed. 1630 1631 In the appeal, the trial court de novo concluded that the cost approach provided a more reliable 1632 indication of value than the other approaches to value. The assessor’s value was upheld: 1633

1634 . . . we conclude that the $99 million valuation of the building is supported by the record. 1635 We embrace the view that the property should be valued based on its current use. That is 1636 the principle articulated in Maytag and Soifer, where we valued a large manufacturing 1637 concern and a franchised restaurant. In those cases, we resisted efforts by the taxpayers to 1638 depart from their current use in the valuation of their property. We decline to employ a use 1639 other than current use here as well. 1640 1641 Our approach does not incorporate the value of prohibited intangibles into the appraisal. 1642 Although the legislature has prohibited consideration of special value and good will, we 1643 have narrowly construed these exceptions.[Citation omitted.] If improvements to a property 1644 are not merely valuable to the specific owner but would be of value to others, such 1645 improvements should be recognized in the valuation process . . . the office space and 1646



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improvements on the Wellmark property “could readily be used by any large enterprise 1647 desiring to house its home office under one roof” . . . 1648 1649 . . .the market for the Wellmark property for use as a single-tenant, office building may be 1650 limited. But we think the fact that the property is currently being successfully used as a 1651 single-tenant, corporate headquarters cannot go unnoticed. Current use is an indicator that 1652 there is demand for such a structure. [Citation omitted.] While no specific potential buyer 1653 has been identified, we do not think there has been a showing of no market, but only of no 1654 active market. We adopt the view of other jurisdictions that under the circumstances, value 1655 should be based on the presumed existence of a hypothetical buyer at its current use. 1656 [Citation omitted.] 1657 1658 Further, we find it ironic that the taxpayer, having expended more than $150 million on its 1659 new corporate headquarters, now urges that the property is worth less than half of that 1660 amount for tax purposes. As noted by one court, “[g]iven a profit-minded owner with 1661 available experience and resources, and a competent builder, the cost of construction is 1662 likely to represent the value of the newly-finished product.” [Citations omitted.] We further 1663 note that under the approach advocated by Wellmark, very expensive and costly properties 1664 such as large manufacturing concerns could escape fair taxation on the ground of lack of a 1665 local market for a specific use. 1666 1667 . . . we conclude that the cost approach provides the best mechanism for determining 1668 market value. There is no dispute that the building is appropriate as a corporate 1669 headquarters for an insurance company. There is also no dispute that the actual cost of the 1670 building was in the neighborhood of $150 million and that there had been very little 1671 physical deterioration of the structure as of the date of the assessment. Courts have often 1672 applied the cost approach in determining the value of a single-tenant, corporate 1673 headquarters property when comparable sales were not available. [Citations omitted].. . 1674 1675 . . . to overcome the Board's assessment, we must be convinced that substantial functional 1676 obsolescence occurred on the day that the doors of the building opened. As in Bankers Life, 1677 where the Board valued the property with a twenty-four percent obsolescence factor, we do 1678 not think any reasonable depreciation of this new building can bring the value below the 1679 $99 million established by the Board. [Citation omitted]. 1680 1681 G. KANSAS 1682

1683 In re Prieb Properties LLC, 47 Kan.App.2d 122, 275 P.3d 56 (2012). 1684 1685 Issue: build-to-suit leases 1686 1687 The property was a Best Buy located in the prime commercial market of the capital city. The 1688 lease was entered into in 1996 for a term of 15 years that required the lessor to construct an 1689 expansion on the existing building. It is not clear if Best Buy already occupied the building. 1690 1691



39

The County’s appraiser used build-to-suit leases for a market rent determination. The appraiser 1692 did not have a copy of the leases. The issue was raised that these are financing arrangements and 1693 may include the financing of personal property. The board of tax appeals used the appraiser’s 1694 income approach, but substituted a rental rate for a so-called build-to-suit second-generation 1695 lease. 1696 1697 The court of appeals held that build-to-suit leases are de facto financing arrangements and do not 1698 reflect market rent without a “disentanglement” of the financial considerations. 1699 1700 In re Yellow Equipment & Terminals, Inc., 107,653 (Kan.App. 2012) (unpublished). 1701 1702 Issues: corporate headquarters; as-if-vacant; leasing commissions 1703 1704 The property was an owner occupied corporate headquarters. The taxpayer argued that the 1705 property should be valued as-if-vacant and available for lease because the owner will vacate on 1706 the hypothetical sale date. In the income approach, the taxpayer’s expert deducted leasing 1707 commissions from below the line: 1708 1709

In order for a lease-up discount to be a viable part of an appraisal, the highest and best use 1710 of a property must involve leasing. Because a lease-up discount calculates the expense to a 1711 new owner to bring the property from vacant to a stabilized occupancy rate by leasing to 1712 new tenants, it obviously does not apply to a property for which the highest and best use 1713 would not involve leasing to tenants at all. COTA found that the highest and best use of 1714 this property was as an owner-occupied facility. An owner-occupied facility does not 1715 involve leasing and therefore does not implicate a lease-up discount. 1716

1717 H. KENTUCKY 1718

1719 Wilgreens, LLC v. O’Neill, 2016 WL 5319593 (KY Ct. App.) The opinion is noted as not final, 1720 but no appeal is noted in the history. 1721 1722 Issues: as-if-vacant; market rent, intangible value 1723 1724 The property was developed by an independent third party to the specifications of Walgreens for 1725 a new drugstore but Walgreens was not a party to the construction agreement. Under the lease, the 1726 developer/owner financed construction and Walgreens leased the premises NNN for 25 years with 1727 5 five year renewals. The rent payments did not increase over the life of the lease terms. The lease 1728 also gave Walgreens right of first refusal to purchase the property outright in the event the 1729 developer/owner decided to sell. 1730 1731 As soon as Walgreens moved in, the developer/owner listed the property in the NNN market. A 1732 buyer, Wilgreens, offered to buy the property for $6,275,000. Walgreens elected not to exercise 1733 its right of first refusal. The sale price was the assessed value for 2007, 2008 and 2009. Walgreens 1734 appealed asserting a value of $3.9 for all three years. A stipulation was reached for $5,250,000, 1735 $5,250,000 and $5,086,000 under which Walgreens concurred that the income approach was the 1736 proper method for valuing the property. 1737



40

1738 In the years 2010, 2011, 2012 and 2013, the property continued to be assessed at $5,086,000, but 1739 Walgreens appealed asserting $4,397,600 for these years. Testimony stated that the rent payments 1740 were based on the total costs of development. Testimony also stated that Walgreens does not 1741 vacate a store unless it is an unprofitable location. When that occurs, Walgreens subleases to 1742 second-generation tenants such as dollar stores, auto parts dealers and Goodwill. Testimony also 1743 was that Walgreen rents were between $24 and $28 per square foot and second-generation 1744 subleases between $8 and $15 per square foot. 1745 1746 Walgreen asserted the rent it pays is “never market rent because it is never on the market.” 1747 Walgreens asserted that if the goal is to value the fee simple, only market rents in the locality may 1748 be considered and any increment of rent paid by Walgreens above market is non-real property. 1749 1750 What resulted was that the court rejected the assertion of the expert who: 1751 1752

. . . believes to properly value properties like Walgreens the appraiser “has to suspend 1753 reality” and understand the way the property with the lease is being bought and sold is 1754 not reflective of the property’s value in fee simple. . . 1755 1756

. . . Walgreens has repeatedly focused its attention on the fact that the rents it usually 1757 agrees to pay are “above market.” Walgreens attempted to show this property was 1758 overvalued by relying on properties very different from the present. 1759 1760 . . . To interpret the tax assessment statute as requiring valuation of property in a 1761 hypothetical unencumbered form ignores the economic realities of commercial real estate 1762 transactions . . . . 1763 1764

The court determined that the assessor did not distort the value of the property by using the 1765 lease in place. The court further stated that the assessor is allowed to consider the benefits and 1766 advantages that arise from property ownership such as the present value of the rental income. 1767 The assessor successfully proved that the desirable location was one of the reasons that the 1768 property was worth more than other properties in inferior locations. 1769 1770

I. MASSACHUSETTS 1771 1772 Pepsi-Cola Bottling Co. v. Bd. of Assessors, 397 Mass. 447, 450-452, 491 N.E.2d 1071 (1986). 1773 1774 Issues: sale leaseback; long term lease; restricted rents 1775 1776 The property was a warehouse distribution center with an office. The owner sold the property in 1777 1957 and simultaneously leased the property back. The lease was for 25 years with four 5-year 1778 renewals NNN. The original lease rate was $1.44 per square foot and decreased to $0.63 per 1779 square foot during the renewal periods. The property sold again during the first renewal term in 1780 1983 for $310,000. 1781 1782



41

The assessor valued the property at $385,000 in 1982, $1,150,000 for 1983 and $1,253,000 for 1783 1984. The taxpayer argued that the sale price provided the most reliable indication of value. The 1784 board acknowledged the existence of the economically unfavorable long-term lease but concluded 1785 value should be based on potential earning capacity. The decision of $991,800 was affirmed on 1786 appeal: 1787 1788

The company seeks to distinguish Donovan because in Donovan there was no actual sale. 1789 That distinction is immaterial. Donovan focuses on the nature of what is taxed, not on the 1790 method of valuation, noting that the real estate tax is a “tax upon the whole land and not 1791 merely on the interest of the persons taxed . . . 1792 1793 The use of actual rents is an acceptable method of valuation as long as they adequately 1794 reflect earning capacity. [Citation omitted]. There must be a relation to market rental 1795 value. [Citation omitted]. The company does not contend that the actual rents reflect 1796 earning capacity or market rental value. However, it argues that the fixed nature of the 1797 rental income in this case is an “economic reality” analogous to the restriction on renal 1798 income [citation omitted]. In that case we held that the board erred in not taking into 1799 account the restrictions place by federal regulations on the rent received from a housing 1800 project. However, we specifically stated that “we do not think the restrictions on the 1801 company’s housing project resemble a disadvantageous lease.” [Citation omitted]. [T]he 1802 existence of an outstanding lease at an unrealistically low rental for a long term, not 1803 representing the fair rental value of the property is not to be used as a basis for calculating 1804 actual value . . . . 1805 1806 J. MICHIGAN 1807

1808 Troy Technology Park v. City of Troy, 1997 WL 33344256 (Mich Ct.App.) (unpublished), 1809 review denied, 458 Mich. 869 (1998). 1810 1811 Issues: intangible value; as-if-vacant; uniformity; market rent 1812 1813 The property was a combination of office and light industrial space. Each building was occupied 1814 and leased. The parties stipulated that the income approach was the appropriate valuation method. 1815 The taxpayer argued that the leases in place personal property, not real property, and that the 1816 intangible value of the leases be excluded. In the alternative, the real property should be valued 1817 as-if -vacant because the fee interest is separate from the leasehold interest. It also made an equal 1818 protection claim that consideration of lease rates penalizes good management and rewards poor 1819 management. 1820 1821 The value of the property based on existing leases, continued occupancy, and market rent was 1822 $18,161,260. The value of the property as-if-vacant and available for sale was purported to be 1823 $14,250,000. 1824 1825 The taxpayer’s assertion was rejected because a property would likely sell for more with the 1826 leases in place and consideration should be given to the leases for the determination of fair market 1827 value: 1828



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1829 . . . [T]he income approach determines value on the basis of the income produced by the 1830 leased interest plus the value of the reversionary interest, i.e., the base value of the 1831 property itself in addition to its income-producing potential. Put another way, under the 1832 income approach to valuation, the true cash value of the property, or the value of the fee 1833 simple estate, equals the value of the leasehold interest plus the value of the reversionary 1834 interest. [citation omitted] Accepting petitioner’s argument that only the reversionary 1835 interest should be valued would result in an assessment below market value . . . 1836

1837 Petitioner’s argument that the leasehold interest represents a personal, intangible asset that 1838 cannot be taken into account when determining the true cash value of property also fails . . 1839 . A lease has no value apart from the physical property to which it relates because the 1840 rights transferred are the rights to use or occupy the property. Consequently, a lease is not 1841 an intangible asset comparable to a patent or stock holding. [citation omitted] . . . the 1842 Supreme Court expressly held that intangibles may be taken into account where they 1843 influence the market value of the property. Therefore, even if the leases could be 1844 considered to be intangible property, they are properly “considered in the valuation and 1845 assessment process in the same manner as tax benefits, location, zoning and other 1846 intangible value influences [citations omitted] . . . 1847

1848 Petitioner also argues that taking the value of the leases into consideration violates the 1849 requirement of uniformity of taxation. The assertion is that a poorly managed property 1850 will have a lower lease rate than a property that is well managed and this will result in a 1851 lower tax base. That would, it is claimed, amount to a violation of the uniformity of 1852 taxation requirement as the well managed property would be taxed higher than an 1853 otherwise identical property that is poorly managed. The premise of this argument is 1854 flawed because, whether there is good or bad management, with its predictable effects on 1855 income, it is irrelevant to the income the property “can earn” or is “capable of earning.” 1856 This objective evaluation is the relevant question under the income approach . . . 1857 Accordingly, under the income approach, a poorly managed property, that is otherwise 1858 identical to another property that is well managed, should not have a different assessment 1859 because the assessor is to consider the income the poorly managed property “can earn” or 1860 is “capable of earning” [citation omitted] and is not to be derailed in this analysis by the 1861 lower income that is actually being earned as a result of poor management. 1862

1863 JC Penney Co. Inc. v. City of Ann Arbor, 2006 WL 301999 (Mich.Tax Trib.) affirmed, 2010 1864 WL 866145 (Mich.Ct.App.) (unpublished). 1865 1866 Issues: sale leaseback; arm’s length factors; long term lease 1867 1868 In 1969, JC Penney owned several parcels on which it built a department store that became part of 1869 a mall. In 1974, it sold the improvements and leased the land to Pennarbor. Simultaneously, 1870 Pennarbor leased the improvements and subleased the land to JC Penney. In 2004, JC Penney 1871 argued that the subject was overvalued by the use of market rents because the subject was 1872 encumbered by a long term, economically disadvantageous lease. They claimed the income 1873



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approach should be based on the actual rents not market rents. The leases had an initial term and 1874 numerous renewals up to 2034 and/or 2049. 1875 1876 The court found for JC Penney based on the requirements of Michigan law, but it is the court’s 1877 analysis of the sale leaseback that is of interest: The court used a three-part test that relied on a 1878 federal case, Frank Lyon Co. v. United States, 435 US 561, 98 S.Ct. 1291, 55L.Ed.2d 550 (1978) 1879 to determine the intent of the parties to the agreement. 1880 1881

• Is it a two-party or multi-party transaction? 1882 1883

Pennarbor obtained a mortgage to finance its purchase from an unrelated third party indicating a 1884 legitimate transaction. The concern of a two-party transaction is collusion in the disguised as a 1885 lease to lessen a tax burden. 1886 1887

• Is there a tax-independent business or economic motive compelling the transaction? 1888 1889

JC Penney had a business motive to generate capital for its business operations. Pennarbor had a 1890 business motive in that it is an investment company and although the terms of the lease may be 1891 more beneficial to JC Penney if it exercises its option to purchase, it allowed Pennarbor to receive 1892 the greater of the amount under the rent schedule in the lease or the fair market value of the 1893 property as determined by an independent appraiser. 1894 1895

• Does the buyer-lessor retain significant and genuine attributes of a traditional lessor 1896 status? 1897 1898

Because Pennarbor is ultimately responsible for the payment of the mortgage, its capital is at 1899 stake, not that of JC Penney. 1900 1901 Based on fulfilling the three- part test, the court determined that the transaction was a lease, not a 1902 mortgage, which resulted in a long term, unfavorable below market rent that a purchaser would 1903 consider, thus the actual rents should be considered. 1904 1905 Lowe’s Home Centers, Inc. v. Township of Marquette, 2014 WL 1616411, review denied, 497 1906 Mich. 930, 856 N.W.2d 553, reconsideration denied, 497 Mich. 985, 861 N.W.2d 17 (2015). 1907 1908 Issues: as-if-vacant; highest and best use; build-to-suit; super adequacy; tenant improvements 1909 1910 This was a consolidated appeal of an operating Lowe’s home improvement store and an operating 1911 Home Depot home improvement store that presented a united front. 1912 1913 The taxpayers asserted the highest and best use was for “general retail.” The taxpayer’s expert 1914 rejected the use of build-to-suit sales and rents because he claimed the transactions were based on 1915 the cost to construct rather than supply and demand drivers from the market. 1916 1917 The taxpayer’s expert used vacant properties in the sales comparison approach and a mix of actual 1918 rents, build-to-suit rents and second-generation rents in the income capitalization approach. The 1919



44

taxpayer’s expert did a cost approach but regarded it as the least reliable approach of the three, 1920 claiming that substantial functional obsolescence attributable to the large size of these big-box 1921 stores is user specific, and that the special features for these stores are useless to a prospective 1922 buyer. 1923 1924 The assessor asserted the highest and best use was its current use as a “big-box” retail store. The 1925 assessor’s expert rejected sales of closed stores and used sale leaseback transactions, investor to 1926 investor sales, and landlord to tenant sales. The assessor’s expert also developed a cost approach 1927 to value the subject property. 1928 1929 The tax tribunal found in favor of the taxpayers, siding the owners’ assertions that the real 1930 properties should be valued as-if-vacant and available, even though both were operational stores. 1931 The Michigan tax tribunal accepted the taxpayer’s sales comparison approach as the most 1932 credible for a fee simple valuation of an owner-user property. 1933 1934 The court of appeals affirmed based on MCL 211.27 that requires consideration of the “present 1935 income” of “rented or leased” property as of the assessment date. The properties in this case are 1936 owner occupied and have no income stream to consider; thus, the sales comparison presented by 1937 the taxpayers was supported by the evidence: 1938 1939

Moreover, valuing the subject properties as vacant and available for sale, as opposed to 1940 occupied, constituted a proper valuation of the fee simple interest. Because these 1941 properties were owner-occupied at the time of assessment and because MCL 211.27(1) 1942 requires that TCV be based upon the “usual selling price . . . at the time of assessment,” 1943 the interest to be valued was the fee simple interest, which is the value of the property 1944 when sold unencumbered, as opposed to the leased fee interest, which is the value of the 1945 property sold with a lease in place . . . Because a sale of the fee simple interest in a 1946 property means the property is sold without a lease in place, it is also sold without a tenant 1947 in place – i.e., unoccupied. . . 1948

1949 Menard, Inc. v. City of Escanaba, 2016 WL 3022785, review granted, 882 N.W.2d 531 (MI 1950 S.Ct. July 29, 2016). 1951 1952 Issues: deed restrictions; cost approach 1953 1954 The Michigan Tax Court followed the same rationale as in the above referenced case with 1955 Lowes/Home Depot, but this time the Michigan court of appeals remanded the case and ordered 1956 the lower court to consider the cost approach. 1957 1958 In this matter, it was brought out that the comparable properties used by the taxpayer’s expert had 1959 deed restrictions that prohibited the properties from being used for the purpose for which they had 1960 been designed. Both parties agreed that the highest and best use of the property was as an owner-1961 occupied freestanding retail building, and that the taxpayer’s sale comparison approach did not 1962 value the property at its highest and best use: 1963 1964



45

There was no evidence in the record of any deficiency in the subject premises that would 1965 inhibit its ability to properly function as an owner-occupied freestanding retail building. 1966 The functional obsolescence to which Menard refers appears to be the fact that, due at 1967 least in part to self-imposed deed restrictions that prohibit competition, such freestanding 1968 retail buildings are rarely bought and sold on the market for the use as such but are instead 1969 sold to and bought by secondary users who are required to invest substantially in the 1970 buildings to convert them into other uses, such as industrial use. However as stated in 1971 Clark to read MCL 211.27 “as requiring the taxing unit to prove an actual (emphasis 1972 court) market for a property’s existing use would lead to absurd undervaluation.” [citation 1973 omitted] Therefore, the tribunal erred by failing to consider evidence under the cost-less-1974 depreciation approach. 1975 1976

Not surprisingly the taxpayer asked leave to appeal to the Michigan Supreme Court, which is 1977 pending. 1978

1979 K. MISSOURI 1980

1981 Missouri Baptist Children’s Home v. State Tax Comm’n, 867 S.W.2d 510, 512-513 (Mo.S.Ct. 1982 1993). 1983 1984 Issues: long term lease; uniformity 1985 1986 The owner leased property to K-Mart since 1967. The initial term was 20 years with three 5-year 1987 options. At the time of appeal, K-Mart was in the middle of the first option. The only evidence of 1988 value was by the taxpayer’s expert who asserted the value of the real property, unencumbered by 1989 the lease, was $3,125,000, but subject to the unfavorable lease, the value was only $1,092,000. 1990 1991 The Missouri Tax Commission held that actual rent may not be considered a sole factor in 1992 determining value when relying on the income approach. The Commission further declared that 1993 considering the effect of a long-term lease violated uniformity. However, the Missouri Supreme 1994 Court overturned the decision and found in favor of the taxpayer because the assessor did not 1995 provide any evidence for a different value: 1996 1997

. . . Merely because a factor exists which impacts on the value of one piece of property 1998 that does not affect every other property in the same class is not a basis for violation of the 1999 uniformity clause. . . . 2000

2001 The court reviewed numerous decisions in other states noting that there was no true consensus on 2002 the issue of long term leases. The court concluded that the better approach was to consider the 2003 actual and the potential income. The court noted that a long-term lease can be value enhancing or 2004 value reducing, so if the lease was prudent when entered into, it is appropriate to consider the 2005 actual rent as a factor in determining the value under the income approach. 2006 2007 The court did not give any guidance about how to determine if a lease negotiated 25 years earlier 2008 was prudent at the time. 2009 2010



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STL 400 N. 4th LLC v. Bushmeyer, 2005 WL 1121344 (Mo. Tax Comm’n). 2011 2012 Issues: as-if-vacant; intangible value 2013 2014 The property was a mixed-use apartment, office and retail on two parcels with a common parking 2015 garage. The improvements were on a ground lease. In determining the value of the improvements, 2016 the taxpayer asserted that the leases in place were intangible value not attributable to the real 2017 estate and must be discounted in order to value the real estate as-if-vacant and available. To this 2018 end the appraiser deducted 6% of the total property valuation for intangible value. 2019 2020 The commission rejected the argument. 2021 2022

It is understood that in point of fact the purchase price of a vacant apartment or office 2023 building would most likely be at less than the same building with tenants. It only stands to 2024 reason that the same property would command more in a sale where it has leases in force, 2025 than if it were totally vacant. However, there are several points which present problems 2026 with this deduction. 2027 2028 First, as testified to by . . . “if I were to sell just the real property, which doesn’t happen 2029 because you don’t have a vacant apartment complex sell, . . . [citation omitted]. Since, this 2030 is a hypothetical that doesn’t happen, its application to ad valorem tax valuations is 2031 extremely limited, if not non-existence [sic]. Second, [citation omitted], the existence of a 2032 lease or leases is a matter which must be taken into account. We take the property as it 2033 exists in appeals before the Commission because that is the condition which the 2034 prospective hypothetical investor will take the property. Third, if the market does not 2035 provide a basis for the adjustment, then it cannot be supported, and it is not warranted. 2036 [Citation omitted] 2037

2038 L. NEW JERSEY 2039

2040 Lawrence Associates v. Lawrence Township, 5 N.J. Tax 481, 503-504, 514, 535 (1983). 2041 2042 Issues: business intangible value; tenant improvements; cost approach – entrepreneurial profit 2043 intangible value 2044 2045 The property was a super regional shopping mall. The taxpayer challenged the assessments of its 2046 first three years of it operation, 1976, 1977 and 1978. The mall was substantially completed in 2047 October 1976. The parties agreed that the current use of the property was its highest and best use. 2048 2049 The taxpayer’s primary arguments: 2050 2051 1. Much of the value of the mall is attributable to the owner’s extremely good management 2052 (intangible value). The court rejects the argument: 2053 2054

It is true that less income (and thus less value) would result if the same amount of square 2055 footage were leased to tenants of less diversity and lesser quality than plaintiff’s and if a 2056



47

markedly less extensive merchandising effort were undertaken than exists at Quaker 2057 Bridge Mall. It is also undoubtedly true that decisions made by plaintiff regarding the size, 2058 configuration and overall design of the shopping center have led to enhanced rents, as 2059 plaintiff hoped they would. However, it is also beyond dispute that management expertise 2060 generally varies from property to property throughout any taxing district and that 2061 fundamental appraisal principles deal with these disparities. 2062 2063 The first such principle is that a property must be valued at its highest, best and most 2064 profitable use [citations omitted] The parties in this case accept the premise that a super 2065 regional shopping center is the highest, best and most profitable use of the subject 2066 property. Expert management of the kind provided by plaintiff is essential to such a 2067 sophisticated use. If the income potential of Quaker Bridge Mall were not being realized 2068 as a result of inadequate management the court might well have to adjust for this by 2069 adding a factor to the actual or contract rents received from plaintiff’s tenants. This 2070 involves a second fundamental appraisal principle: that “economic” rent or income must 2071 be used in the capitalized income approach to the valuation of property if economic rent 2072 differs from actual rent. [citations omitted] 2073 2074

A finding of economic rent is dependent on the proofs adduced by the experts. [citation 2075 omitted] If a finding could be made that a particular property generates a level of 2076 extraordinary income from extraordinary management such that the capitalized stream of 2077 the income is indicative of more than the value of the real property, the finding would have 2078 to be based on an analysis or the property’s actual income contrasted with economic rent 2079 for comparable properties. For this reason there could be no preliminary finding that some 2080 portion of Quaker Bridge Mall income is enhanced rent that must be discounted in the 2081 income approach on the grounds that it is reflective of plaintiff’s business acumen rather 2082 than the value of the subject property . . . 2083

2084 2. The improvements to the shell space are the personal property of the tenant and not taxable as 2085 real property. The court declines to consider tenant improvements as personal property to be 2086 piecemealed from the value: 2087 2088

It simply cannot be ignored that the improvements made by the Mall tenants created 2089 finished space that was more valuable income property than was the series of concrete 2090 shells plaintiff leased to its tenants . . . It may or may not be accurate, as argued by 2091 plaintiff, that the tenant finishes of one tenant were of no value to a succeeding tenant, but 2092 that is not relevant. The finishes added value to the Mall structure and that value must be 2093 recognized by the income approach. Furthermore, for the reasons advanced by defendant’s 2094 first expert, an income stream must be imputed to the tenant improvements in an effort to 2095 determine the value of the subject property at its highest and best use, not as a series of 2096 concrete shells. 2097

2098 3. Entrepreneurial profit cannot be not included in the cost approach as it is intangible business 2099 value. The court also rejected this argument: 2100 2101



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One of the most significant disputes between the parties . . . involves the concept of 2102 “entrepreneurial profit.” Plaintiff contends that there is no such profit that may be valued 2103 for ad valorem tax purposes . . I am persuaded that entrepreneurial profit is a legitimate 2104 element of market value that must be measured . . . As defendant argues, no prudent 2105 developer would produce a property . . . and sell if for his actual cost of land acquisition 2106 and construction. The developer’s raison d’être is entrepreneurial profit. 2107

2108 Riegel Products Corp. v. Milford Borough, 13 N.J.Tax 546, 562 (1994). 2109 2110 Issues: hypothetical buyer, highest and best use; cost approach; circular reasoning; value-in-use 2111 2112 This case is referenced in the CVS v. Rob Turner case, supra. [Florida]. 2113 2114 The taxpayer appealed its 1990, 1991 and 1992 valuations. The property was used for paper 2115 manufacturing that required specific improvements. The taxpayer asserted that there was no 2116 market for the property and its highest and best use would be a secondary use of general 2117 manufacturing or warehouse. The taxpayer used various industrial sales of various sizes and uses 2118 and the used these sales to determine depreciation by market extraction. 2119 2120 The assessor asserted the highest and best use was its current use as a manufacturing plant for 2121 paper products. He claimed the sales comparison approach relied on by the taxpayer was 2122 inherently invalid because the comparable properties were not truly similar in any way to the 2123 subject and that the taxpayer’s depreciation adjustment in the cost approach was also unreliable. 2124 2125 The taxpayer countered that the use of the cost approach is a value-in-use, not market value, so it 2126 should not be relied on anyway. 2127 2128 The court, like in Shopco, supra, [Idaho] rejected the taxpayer’s sales comparison approach and 2129 relied on its cost approach, except for the functional obsolescence adjustment (that was based on 2130 circular reasoning) noting the plant ran three shifts, 24 hours a day and the taxpayer had just 2131 added new improvements. The court stated that the cost approach is not a value- in-use: 2132 2133

. . . “Use value focuses on the value real estate contributes to the enterprise of which it is a 2134 part, without regard to the property's highest and best use or the monetary amount that 2135 might be realized upon its sale.”[Citation omitted]. In this case, determination of market 2136 value of the subject must consider the value of its physical characteristics, i.e., general 2137 heavy manufacturing, paper manufacturing and kindred uses and its other special real 2138 property features to a hypothetical purchaser who requires this type of property. Since I 2139 find that the present use of the subject is its highest and best use, my finding of value is 2140 based on market value in exchange to a hypothetical purchaser at the property's highest 2141 and best use, not its value-in-use. The inquiry is not with respect to the value of the 2142 property to the owner, but rather to its market value at its highest and best use regardless 2143 of who owns it. 2144 2145 M. NEW YORK 2146

2147



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Mutual of America Life Insurance Co. v. Tax Commission, 892 N.Y.S.2D 327, 333, 68 A.D.3D 2148 586, 593 (2009). 2149 2150 Issues: as-if-vacant; hypothetical sale, leasing commissions 2151 2152 The taxpayer asserted that an annual allowance for leasing commissions should be allowed on the 2153 40% of space that it occupied as the owner. The taxpayer argued that the hypothetical buyer 2154 would have to lease the 40% of space vacated by the current owner in the hypothetical sale. The 2155 court rejected the argument. 2156 2157

. . . nor are we inclined to set a precedent, for classifying space which is, in effect, 2158 occupied (albeit by the owner, not a paying tenant) as vacant based on the fiction that it 2159 will be leased to a paying tenant at the start of each new tax year . . . while owner-2160 occupied space is calculated as if leased at market rent to produce a hypothetical revenue 2161 stream, the fact that it does not do so is entirely by Mutual’s own choice, and Mutual 2162 “cannot expect [its] fellow taxpayers to compensate [it] for the difference.” 2163

2164 Kohl’s Illinois Inc. v. Bd. of Assessors, 999 N.Y.S.2d 250, 253, 123 A.D.3d 1315 (NY S.Ct 2165 App. Div. 2014). 2166 2167 Issues: second-generation rents 2168 2169 The taxpayer’s expert valued the real property using only vacant, older and lesser location stores 2170 in the sales comparison approach and only second-generation rents in the income capitalization 2171 approach. He asserted that build-to-suit leases were not accurate indicators of market value 2172 because the original user would pay more to build its prototype building than the market would be 2173 willing to pay. The taxpayer’s expert’s value was $4,600,000 to $4,800,000. 2174 2175 The assessor’s appraiser disagreed, stating that such leases were negotiated at arm’s length 2176 between a tenant and a developer motivated to maximize profits. Using build-to-suit sales and 2177 leases in the sales and income approaches produced a value estimate of $10,800,000 to 2178 $11,100,000. The assessed value was $8,967,069. 2179 2180 The taxpayer’s expert report was rejected by the trial court. The assessor’s value was sustained. 2181 The decision was affirmed on appeal noting that it was the trial court’s place to determine the 2182 credibility of the experts; but the appellate court made the following short and sweet 2183 pronouncement that was unnecessary to the decision; and thus, is telling: 2184 2185

Lest there by any uncertainly [sic] here, and “in the interest of judicial economy,” we 2186 exercise our broad authority to independently consider the evidence. [Citation omitted]. 2187 Considering the above, we find that the court properly dismissed the appeal. 2188 2189 N. NORTH CAROLINA 2190

2191 In re Lowe’s Home Centers, LLC, 13 PTC 904 (NC Property Tax Comm’n 2016). 2192 2193



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Issues: as-if-vacant; cost approach 2194 2195 The taxpayer asserted that its real property should be valued as-if-vacant and available to lease 2196 and presented a sales comparison analysis using vacant properties, some with deed restrictions 2197 prohibiting the use for which the improvements were designed. The Commission affirmed the 2198 county’s cost approach valuation. 2199 2200

In this case, Lowe’s expert’s analysis, under the sales comparison approach failed to 2201 establish the market value for the Subject Property as of the Valuation Date when his 2202 comparable sales prohibit the uses consistent with the highest and best use of the Subject 2203 Property because: (a) all of the comparable sales were all located outside of North 2204 Carolina, and were not adjusted for the difference in economic markets; (b) all comparable 2205 sales were inferior to the Subject Property since the sales consisted of former closed Wal-2206 Mart and Target stores with no adjustments or consideration for the change in the 2207 economic and market conditions that caused the store closings; and (c) the comparable 2208 sales were closed, second-generation, discount stores, that had deed restrictions 2209 prohibiting the uses consistent with the highest and best use of the Subject Property. 2210

2211 O. OHIO 2212

2213 Strongsville Bd. of Edu. v. Cuyahoga Co. Bd. of Rev., 112 Ohio St.3d 309, 859 N.E.2d 540 2214 (2007). 2215 2216 Issues: corporate headquarters; sale leaseback 2217 2218 Taxpayer testified that a balloon payment was due on the original mortgage for the construction 2219 of its office building. The amount of the balloon payment, when it was due and when it was paid 2220 are not noted. 2221 2222 Taxpayer solicited offers but how that was done is not provided. There is no indication that 2223 bidders knew of the balloon payment. Bidders would have likely used that information to deflate 2224 the purchase price. That fact definitely would not have increase the amount the buyers were 2225 willing to offer. Four or five offers were received and the highest offer fell through because the 2226 buyer wanted to be a mortgage holder. The next highest bid was accepted. The rent amount was 2227 based on the purchase price but the rent amount was not specified. There was no evidence noted 2228 that it was below, at or above market. There was no indication that the taxpayer and the buyer 2229 were related parties. There was no indication if there was transfer of title back to the seller at the 2230 end of the lease term or an option to purchase. It was also unknown if the buyer financed the 2231 purchase or it if was all cash up front. 2232 2233 The assessed value was $8,326,400. Both the board of education and the city of Strongsville filed 2234 to have the assessed value raised to $9,500,000 based on an appraisal. The sale occurred while the 2235 matter was pending and the city sought to amend its original petition and filed for the following 2236 year asking for the sale price of $16,000,000. 2237 2238



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The Board declined to use the sale price but did adopt the request for $9,500,000. The rejection of 2239 the sale-leaseback as not a valid sale is based on uncorroborated and uncontested taxpayer 2240 testimony that is self-serving. The decision is affirmed on appeal because the taxpayer’s 2241 testimony was uncontested. 2242 2243 AEI Net Lease Income & Growth Fund v. Erie Co. Bd. of Revision, 119 Ohio St.3d 563, 567-2244 568, 895 N.E.2d 830 (OH 2008). 2245 2246 Issues: sale-leaseback 2247 2248 The property was an operational Applebee’s restaurant. Taxpayer asserted the sale was a lease 2249 back that was not an arm’s length, open-market transaction. The taxpayer argued a sale-leaseback 2250 makes the subsequent sale price not indicative of true value. 2251 2252 The previous owner purchased the property in an aggregate sale and leased it and the other 2253 properties back to Applebee’s. It then sold the properties individually with the leases in place. 2254 The lease for the property was 20 years with four 5-year renewals and a right to first refusal that it 2255 did not exercise. The taxpayer purchased the property for $2,788,658. It was valued at $896,040 2256 and the school board filed a complaint requesting the sale price be adopted. The school board 2257 prevailed and the taxpayer appealed. The decision is affirmed. 2258 2259

. . . [T]he sale leaseback in this case constitutes . . . an arm’s length transaction. . . . the 2260 taxpayer admitted that the parties to the sale leaseback were unrelated. Each manifestly 2261 pursued its objective to obtain maximum value from the real property interests in the 2262 transaction . . . Apple American sought to realize the value of the fee interest by selling the 2263 real property to obtain operating capital . . . Preco sought to realize value from purchasing 2264 the fee interest by encumbering the property with a lease that provided a stream of rent 2265 income - income that would allow Preco to sell the property at a premium in the net-lease 2266 market. The fact that the rent rose in accordance with the amount of cash “financing” that 2267 Apple desired does not mean that the sale leaseback, taken as a whole, is anything but an 2268 arm’s length transaction. 2269

2270 CCleveland OH Realty I, LLC v. Cuyahoga Cty. Bd. of Revision, 121 Ohio St.3d 253, 903 2271 N.E.2d 622 (OH 2009). 2272 2273 Issues: sale-leaseback 2274 2275 Revco Discount Drug Centers, Inc. acquired the property in 1999 and then sold it together with 2276 other properties as part of a sale leaseback in 2000 that obligated the parties to a long-term lease 2277 of 23 years with 10 renewals. Subsequently Revco was bought out by CVS who occupied the 2278 property when CCleveland purchased the property in 2004 for $4,084,750. Taxpayer argued the 2279 long-term lease elevated the purchase price and the lease was not an arm’s length transaction 2280 because it was a sale-leaseback. The court reaffirms AEI, supra. 2281 2282

. . . [T]he “concern associated with sale leaseback transactions lies in collusion between 2283 the parties to depress property value for tax purposes. [Citation omitted]. Nothing in the 2284



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record of this case raises this concern; indeed, CCleveland’s central objection arises 2285 because the parties to the sale leaseback succeeded in maximizing the value of the realty: 2286 the seller received an elevated sale price and, as consideration, committed to paying the 2287 purchaser a stream of elevated lease payments, which in turn allowed the purchaser to 2288 fetch a greater sale price later on. . . 2289

2290 Rhodes v. Hamilton Co. Bd. of Rev., 117 Ohio St.3d 532, 885 N.E.2d 236 (2008). 2291 2292 Issues: intangible value; value in exchange 2293 2294 In 2003, the taxpayer purchased a property leased by Walgreen for $4,375,000. The sale price 2295 was adopted as the value by the assessor for 2004. Taxpayer appealed asserting the long-term 2296 lease inflated the purchase price above market. The value was reduced by the Board of Revision 2297 to $1,950,000 based on an appraisal that discounted the lease. The assessor appealed and the 2298 Board is reversed for the following reasons: 2299 2300 1. The sale was an arm’s-length sale between a willing seller and a willing buyer. 2301 2302 2. An existence of an encumbrance does not prevent a recent, arm’s length sale price from 2303 reflecting true cash value. 2304 2305 3. The purchase price does not reflect any business interest of Walgreen as the taxpayer paid for a 2306 fee simple interest in property acquiring all the rights of that interest including the rights of the 2307 lessor and the rights to collect payments from Walgreens under the long-term lease. Although the 2308 lessee’s business may affect the value of the fee simple interest, the taxpayer did not purchase any 2309 interest in the lessee’s business. 2310 2311 4. A sale price is not a reflection of value-in-use; but is a value in exchange. 2312 2313 5. It is not relevant if the sale price exceeds the value of the property to the extent it exceeds what 2314 the buyer would pay to construct a similar property. 2315 2316 6. It is not relevant if the lease was a financing arrangement in lieu of a mortgage as there is no 2317 indication that the developer and Walgreen were not typically motivated market participants that 2318 sought to pursue their own financial interests. 2319 2320 The third point is the concept of intangible value enhancement to the real property. The credit 2321 worthiness of the tenant can and should be considered in the development of fair market value in 2322 the same way that location can and should be considered in the development of fair market value. 2323 2324 The sixth point clearly exposes the hypocrisy that build-to-suit leases are some sort of creative 2325 financing and do not reflect market value. 2326 2327 Meijer Stores LP v. Franklin Co. Bd. of Revision, 122 Ohio St.3d 447,452-454, 912 N.E.2d 2328 560, reconsideration denied, 123 Ohio St.3d 1426, 914 N.E.2d 1066 (2009). 2329 2330



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Issues: hypothetical market; highest and best use; second-generation; external obsolescence 2331 2332 Taxpayer sought to reverse the decision of the Ohio Board of Tax Appeals that adopted the 2333 appraisal presented by the school board. The school board’s expert looked to the taxpayer’s own 2334 use for determining market rent and comparable sales. When the expert was asked “who would 2335 rent the store,” he answered the taxpayer and accordingly market rent was what the taxpayer 2336 would pay if he did not own the building. For comparable sales, the expert looked to sales by 2337 developers who built big-box retail facilities on a build-to-suit basis for the tenant and then sold 2338 properties subject to the leases to third parties. 2339 2340 On appeal, the taxpayer argued that its value should not be based on properties subject to long 2341 term leases that are favorable to the owner because that is a leased fee not a fee simple value. The 2342 taxpayer additionally argued that this results in a value-in-use appraisal. The taxpayer used only 2343 second-generation purchasers and tenants to determine value by the sales and income approaches. 2344 Several of the sales were vacated by Kmart during its bankruptcy, two more stores also 2345 abandoned during bankruptcy, a Walmart abandoned for a new “super” center and a vacated 2346 Sam’s Club. Build-to-suit leases were deliberately excluded because the rents were purported to 2347 reflect value other than market rent. The court rejected these arguments: 2348 2349

Although Meijer’s property is currently not encumbered with a lease, Meijer’s contention 2350 that its property cannot be compared to build-to-suit properties is mistaken. As recent 2351 cases have demonstrated, the possibility of encumbering a property like the one at issue 2352 here constitutes – as a purely factual matter – one method of realizing the value of legal 2353 ownership of the property. [Citations omitted]. It follows that an appraiser when 2354 determining the value of Meijer’s store may take into account the possibility that at some 2355 point, the store could be held as a rental property . . . 2356 2357 . . . [T]he 1996 Meijer case . . . raised arguments similar to those advanced in this case . . 2358 the BTA . . . declined to adopt the larger amount of obsolescence found by the owner’s 2359 appraiser. The BTA had found “nothing about the present property which is obsolete or 2360 useless to the owner . . . a prospective purchaser [would] pay at least the costs of the 2361 property as newly constructed . . . 2362

2363 Taxpayer also asserted external obsolescence because the structure would not be easily adaptable 2364 to the needs of a potential buyer due to its size and that it may be demolished for redevelopment. 2365 The improvements were new. 2366 2367

. . . the present use of a property may be considered when “a building in good condition 2368 [is] being used currently and for the foreseeable future for the unique purpose for which it 2369 was built,” otherwise, “the owner of a distinctive, but yet highly useful, building [would 2370 be able] to escape full property tax liability. 2371

2372 Target Corp. v. Green Cty. Bd. of Rev., 122 Ohio St.3d 142, 909 N.E.2d 605 (2009). 2373 2374 Issues: economic obsolescence; second-generation 2375 2376



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Taxpayer appealed its 2006 valuation of $8,188,290 asserting a value of $4,500,000. The 2377 taxpayer’s appraiser asserted that the highest and best use as improved was “continued discount 2378 storeroom;” but the “improvements have significant obsolescence that is typical of most big-box 2379 developments” that “results in a market value which is significantly less than replacement cost 2380 less physical depreciation.” Even brand new big-boxes are worth less than the cost to construct. 2381 The appraiser used only second-generation sales and rents. 2382 2383 The board of revision reduced the value somewhat, but the Board of Tax Appeals, on appeal by 2384 Target, concluded there was no evidence in the record put forth by the assessor to come to a 2385 different conclusion from that of the taxpayer. The assessor appealed arguing the property was 2386 special purpose as a fall back for failing to provide any evidence to contradict the taxpayer’s 2387 appraisal by citing to Meijer, supra. The court refused to apply Meijer because the county failed 2388 to provide evidence to support its value and contradict the taxpayer’s evidence. 2389 2390 Columbus City Schools Bd. of Eden. V. Franklin Cty. Bd. or Revision, 2013 WL 5595419 (Oh. 2391 Ct. App.) (unpublished). 2392 2393 Issue: sale-leaseback 2394 2395 The property was a fast food restaurant. Baker owned the real property and Setla operated the 2396 restaurant under a lease agreement. Setla negotiated a purchase of the property from Baker and 2397 entered into a sale leaseback transaction with Kaufmann for $675,000. Setla would lease the 2398 property for 20 years with four 5-year options NNN. The assessed value was $216,800 and the 2399 school board filed a complaint asking for $675,000. 2400 2401 While the appeal was pending, Setla filed for bankruptcy. Through the bankruptcy, Checkers 2402 assumed Setla’s lease obligations. Taxpayer argued the sale-leaseback was a financing 2403 transaction. Taxpayer argued the parties were related because Setla leased another property from 2404 Kaufman and Setla directly contacted Kaufman to purchase the property because of the landlord-2405 tenant relationship. Kaufman needed to make a 1031 exchange and Setla needed to obtain 2406 operating capital. The board of tax appeals concluded it was valid sale and taxpayer appealed. The 2407 court affirmed: 2408 2409

An arm’-length transaction has three primary characteristics: (1) it is voluntary; (2) it takes 2410 place on the open market; and (3) the parties act in their own self-interest. . . . 2411 2412 “. . . [R]elated parties may be pursuing the identical interest of common owners rather than 2413 acting as separately interested, typically motivated actors in the marketplace.” [Citation 2414 omitted] . . . 2415 2416 . . . [E]vidence in the record demonstrates each party . . . was acting in its own self-interest 2417 and seeking to maximize the value it received from the transaction . . . 2418 2419 . . . [W]hile an arm’s-length transaction generally occurs on the open market, “[t]he case 2420 law does not condition character of a sale as an arm’s-length transaction on whether the 2421 property was advertised for sale or was exposed to a broad range of potential buyers.” 2422



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[Citation omitted]. . . “private sales” which established that the absence of open-market 2423 elements did not necessarily negate the arm’s-length nature of a transaction. [Citation 2424 omitted]. . . evidence in the record support . . . that the . . sale and leaseback transaction 2425 was an arm’s-length transaction . . . the . . . sale may have been analogous to a “private 2426 sale” because there is no evidence that the property was made available for sale to anyone 2427 other than Kaufmann, we conclude that the absence of open-market elements does not 2428 negate the other indicia that this was an arm’s-length transaction. . . . 2429

2430 Olentangy Local Schools Bd. of Edu. v. Delaware Co. Bd. of Revision, 34 N.E.3d. 150 (2015). 2431 2432 Issues: sale-leaseback 2433 2434 Owner decided to sell three of its properties. The owner leased the properties to a related entity 2435 that operated preschools. The owner hired a broker who marketed the properties nationally. The 2436 owner referred the broker to the buyer. The owner and buyer are not related parties. The buyer 2437 then entered into a 15-year lease with the tenant at the same lease rate as it had been paying to the 2438 owner. The rent rate with the owner had not been based on market but established for internal 2439 purposes. The sale price was based on a negotiated capitalization rate. The agreed to 2440 capitalization rate was applied to the potential gross income generated by the rent rate for a sale 2441 price. 2442 2443 The original value of the assessor was $1,535,400. The school district sought to increase the 2444 assessed value to the sale price of $2,689,642. The buyer argued that the sale price was inflated 2445 because it was a sale-leaseback transaction. The buyer claimed that the fair market value was 2446 really only $1,600,000.The board adopted the sale price. 2447 2448 During the pendency of the appeal, there was an amendment to the controlling statute that 2449 changed the mandate that the assessor “shall” consider the sale price to “may” consider the sale 2450 price. The prior version of “shall” control, but it is unlikely the outcome of the decision would 2451 have been affected. 2452 2453 The buyer did not dispute that the sale was recent and at arm’s-length. The school district cited to 2454 HIN, L.L.C. v. Cuyahoga Cty. Bd. Of Revision, 138 Ohio St.3d 223, 2014-Ohio-523, 5 N.E.3d 637 2455 (2014) as directly on point. The court agreed with the school district. 2456 2457 In HIN, the owner of an office building. in 2003, contracted with U.S. Bank for it to buy the 2458 property and US Bank assigned its purchasing rights to JBK Properties, Inc. JBK purchased the 2459 property for $4.9 million and then leased it to U.S. Bank. JBK and U.S. Bank signed a NNN 2460 lease. In 2004, JBK sold the property to HIN for $7.4 million. HIN argued the sale price was not 2461 fair market value because it sold with a lease encumbrance. The argument was rejected: 2462 2463

The only way a party can show that a sale price is not representative of value is to show 2464 that the sale was either not recent or not an arm's-length transaction . . . 2465

2466 . . . In Berea, [citation omitted], we faced the question of how to value a property subject 2467 to two long term leases. The property had recently been sold in an arm's-length 2468

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transaction. The board of education argued that the BTA should have disregarded the sale 2469 price and valued the property as if unencumbered with the leases. The board also 2470 presented appraisal evidence of what that unencumbered value would be. We rejected the 2471 board's arguments and held that when there has been a recent arm's-length sale, the taxing 2472 authority must disregard appraisal evidence and accept the sale price as the true tax value 2473 of the property, regardless of any lease encumbrances. Thus, despite HIN's contentions, a 2474 recent arm's-length sale price establishes the value of real property for tax purposes even if 2475 that property is encumbered by a long-term lease. See also AEI Net Lease Income & 2476 Growth Fund v. Erie Cty. Bd. of Revision, 119 Ohio St.3d 563, 2008-Ohio-5203, 895 2477 N.E.2d 830, ¶ 17 (“we reject the contention that the existence of a long term lease 2478 resulting from a sale leaseback makes the subsequent sale price not indicative of true 2479 value”); Cummins, 117 Ohio St.3d 516, 2008-Ohio-1473, 885 N.E.2d 222, at ¶ 18 (“the 2480 arm's-length sale price of a legal fee interest should not be adjusted on account of the mere 2481 existence of an encumbrance” [emphasis sic] ); Dublin City Schools Bd. of Edn. v. 2482 Franklin Cty. Bd. of Revision, 118 Ohio St.3d 45, 2008-Ohio-1588, 885 N.E.2d 934, ¶ 12 2483 (same); Rhodes v. Hamilton Cty. Bd. of Revision, 117 Ohio St.3d 532, 2008-Ohio-1595, 2484 885 N.E.2d 236, ¶ 3 (holding that a sale price established the tax value of property, even 2485 though the property was encumbered by a long-term lease). 2486

2487 P. TEXAS 2488

2489 Issues: as-if-vacant; fair market value means available for lease; small pool of buyers. 2490 2491 Lowe’s Home Centers, Inc. v. Bexar Appraisal District, Nos. No. 2014-CI-11636 and 2015-CI-2492 13547 (57th Judicial Arbitrators Decision 2017). 2493 2494 The taxpayer used one appraiser for an opinion and two on methodology. Their opinions were 2495 based on vacant big-box properties. The assessor used occupied big-box properties. 2496 2497 Texas law presumes the highest and best use is the current use. Comparable properties must 2498 reflect the same or similar highest and best use. The leasehold value is subsumed within the fee 2499 simple. It is appropriate to consider leased fee comparable properties. Occupancy is one of the 2500 factors to be considered. 2501 2502 The assessor’s values are sustained. This decision was rendered January 10, 2017. It is unknown 2503 if the decision has been appealed for trial. 2504 2505

Q. WISCONSIN 2506 2507 Royal Terrace Partnership v. Wisconsin Dept. of Revenue, 1996 WL.511204 (1996). 2508 2509 Issues: sale-leaseback; private sale 2510 2511 The property is a manufacturing facility and the operations had contaminated the ground water. 2512 There was a remediation program that required ongoing capital expenditures. In 1993, the 2513 property was sold and leased back. The sale was done by the parent company. The actual owner, 2514











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subsequently the tenant, was not involved in the decision to sell or in the negotiations of the sale 2515 price or the rent amount established for the leaseback. 2516 2517 The objective of the sale was to raise funds for the parent to retire debt and/or acquire new 2518 businesses. The parent hired an investment banker to find a buyer in the private capital markets. 2519 The sale price was fixed at $14,500,000 based on reconstruction costs new before depreciation. 2520 95% of the sale would be obtained from a lender or lenders who would purchase notes from an 2521 equity investor secured by the property; the lease and a guarantee of the parent. 5% of the 2522 purchase price would be obtained from an equity investor whose bid would be couched on the 2523 terms of the rent it would require under the leaseback after considering the interest rate on the 2524 notes it would issue. 2525 2526 A private placement memorandum was sent to a number of institutional lenders. The bids were to 2527 be based on the amount of rent they would require to pay the fixed price. Four bids were received. 2528 The winning bidder required an absolute net rent, indemnification from contamination liability 2529 and a guarantee by the parent. 2530 2531 The Board concluded this was not an open market transaction, the sale price was not market 2532 value, the rents were not market rents and the seller was not a willing seller. The sale price and 2533 rents could only be achieved based on the guarantee. 2534 2535 ABKA LP v. Bd of Review, 231 Wis.2d, 328, 336, 341-342, 344, 603 N.W.2d 217 (Wis. 1999). 2536 2537 Issues: intangible value 2538 2539 The property was a resort. Next to the resort were condominiums that were individually owned, 2540 but taxpayer received 50% of the rental income from the condos for providing a myriad of 2541 services including reservation and check-in, rental rate determination, advertising and marketing, 2542 maid service and the renters have full access to the resort amenities. 2543 2544 In 1996, the assessor included the rental income received by the resort in the development of the 2545 income approach. The assessed value was $8,500,000. The taxpayer challenged the assessment 2546 arguing the income was business value. 2547 2548 The assessor’s income approach was accepted by the tax commission and the circuit court and 2549 court of appeals affirmed the decisions. The taxpayer was unsuccessful with the Wisconsin 2550 supreme court. 2551 2552

“[I]ncome that is attributable to the land, rather than personal to the owner, is inextricably 2553 intertwined with the land and is thus transferrable to future purchasers of the land. This 2554 income may then be included in the land’s assessment . . . because it appertains to the 2555 land” . . . 2556 2557 As long as the potential to produce income exists with the land and transfers to a 2558 subsequent owner, whether a subsequent owner of the Abbey is able to maintain the same 2559 level of management income as ABKA has historically maintained is not central to our 2560



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concern. The relevance of a subsequent owner's success in maintaining the same level of 2561 income would be strictly limited to the specific amount included in the assessment. This 2562 amount may vary depending on the ability to exploit the income-producing capacity that 2563 inherently exists with the Abbey property. 2564 2565 A competent level of management can be expected to reproduce the predicted income 2566 stream from the condominiums. Most entrepreneurs willing to participate in the 2567 competitive resort market are likely to possess the requisite business savvy and skills to 2568 provide clean linens, switchboard services, and help with reservations and check-in and 2569 check-out. The services offered by ABKA do not suggest any unique skill on the part of 2570 ABKA, but rather militate in favor of finding a unique quality of the land itself that attracts 2571 prospective condominium renters. 2572 2573 Moreover, there is evidence that the assessor did indeed factor out the amount he believed to 2574 be attributable to ABKA's own labor and skill in management. He did this by including 2575 appropriate management fees as an expense of the resort in the stabilized operating 2576 statement. The remainder was properly included in the assessment as income attributable to 2577 the Abbey property and not to any unique skill on ABKA's part. . . 2578 2579 In summary, upon applying the test to determine whether business value may be included 2580 in a property tax assessment, we conclude today that ABKA's management income is 2581 inextricably intertwined with the Abbey. The management fees are generated both by and 2582 on the land on which the Abbey is located, and the ability to earn the fees is transferable to 2583 future purchasers of the Abbey. As value that is inextricably intertwined with the Abbey, 2584 the management income appertains to the Abbey 2585

2586 See also, S Associates v. Bd. of Review, 164 Wis.2d 31, 473, N.W.2d 554 (Ct.App. 1991) (mall’s 2587 business of leasing space to tenants is a transferrable value inextricably linked to the land.) Waste 2588 Management v. Kenosha Co. Bd. of Review, 184 Wis.2d 541, 568, 516 N.W.2d 694 (1994) 2589 (income from landfill attributed to inherent capacity of the land to accept waste). 2590 2591 Nestle U.S.A., Inc. v. Dept. of Revenue, 331 Wis.2d 256, 278-279, 795 N.W.2d 46 (Wis. 2011). 2592 2593 Issues: special purpose; cost approach; highest and best use; hypothetical buyer 2594 2595 In 2001, Taxpayer completed construction of a powdered infant formula plant to meet rigorous 2596 Food and Drug Administration standards. The plant had numerous expensive features. The 2597 greatest net return would be the continued use as an infant formula plant by Nestle or one of its 2598 competitors. There had been no sales of infant formula plants in the United States. The assessor 2599 used the cost approach. No deductions for “super adequacy” were made to the cost approach 2600 because all the features were necessary for its continued use as an infant formula plant. 2601 2602 Taxpayer asserted that there was no market for an infant formula plant because one had never 2603 sold and thus, its highest and best use was a food processing plant. The taxpayer’s expert arrived 2604 at a value of $3,430,000 after deducting $13,895,020 for functional obsolescence in his cost 2605 approach. 2606



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2607 The tax commission accepted the assessor’s valuation and the decision was upheld at the circuit 2608 court. The court of appeals affirmed the circuit court and taxpayer filed for review by the 2609 Wisconsin supreme court. The taxpayer was not successful: 2610 2611

The taxpayer’s argument that the Commission found there is no market for the Gateway 2612 Plant as a powdered infant formula production facility attempts to create a new requirement 2613 in our case law where actual sales must be identified when determining a subject property's 2614 highest and best use. . . 2615 2616 The purpose in requiring that assessors determine a subject property's highest and best use is 2617 to ascertain a property's “greatest net return to the property owner.”. . . the Legislature and 2618 this court have concluded it is improper to assess a taxpayer's property at a value that does 2619 not equate to what that taxpayer would receive for their property on the open market. This 2620 objective to determine a subject property's fair market value, however, does not require actual 2621 sales of other properties to be identified. A market can exist for a subject property, especially 2622 a special-use property, without actual sales data of similar properties being available . . . 2623 2624 The taxpayer’s “actual sales” interpretation would always force assessors to look for 2625 active markets when determining a property's highest and best use, even if the subject 2626 property already operated in a thriving, albeit limited, industry.15 This requirement would 2627 result in subject properties in limited markets being assessed, not at their fair market 2628 value, but rather at a value based on the subject properties' costly and hypothetical 2629 conversions to alternative uses. 2630

2631 Walgreen Co. v. City of Madison, 311 Wis.2d 158, 164-165 752 N.W. 2d 687 (2008). 2632 2633 Issues: build-to-suit; prevalent in the market 2634 2635 Prieb. supra,[Kansas] cites to this case as support that a build-to-suit lease is “creative” financing, 2636 but the specific facts presented here do not support the de facto conclusion in Prieb. This case 2637 received negative treatment in Great Lakes, infra. 2638 2639 Taxpayer leased the property for 20 years with numerous renewals up to 60 years. The property 2640 was built by a developer pursuant to a uniform business model of Walgreens. The developer 2641 found a site at prime locations in heavily trafficked areas, bought out the current owner or owners, 2642 demolished existing structures, and built a new drugstore. 2643 2644 The City conceded that the rent payments were above market because the rent was based on all of 2645 the costs of acquisition and construction including super adequacies and excessive developer’s 2646 profit. The super adequacies were not specified and the excessive developer’s profit is not 2647 substantiated. The City did not put on any evidence of market rent for this highly desirable 2648 location, but relied on the contract rent. The trial court agreed with the City. Walgreen appealed 2649 and the decision is reversed by the supreme court. 2650 2651

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Because of the City’s concessions, it was presumed by the reviewing court that the build-to-suit 2652 lease was a financing mechanism and not “typical of normal financing and payment arrangements 2653 prevalent in the market.” Because the City put on no evidence of market rent, the only evidence 2654 of rent as a result was second-generation rents presented by Walgreen. 2655 2656 Great Lakes Quick Lube LP v. City of Milwaukee, 331 Wis.2d 137, 154-155, 794 N.W.2d 510 2657 (Wis. 2010). 2658 2659 Issues: sale-leasebacks; prevalent market; uniformity 2660 2661 The properties are Valvoline Instant Oil Change operating businesses. In September 2004, in an 2662 asset purchase agreement, Great Lakes and three others agreed to purchase 29 parcels owned by 2663 Valvoline and 18 parcels leased by it and to allocate the purchase price of $26,000,000 among the 2664 parcels. The agreement required the parties not to take any position contrary to the terms of the 2665 agreement. The sellers and Great Lakes are unrelated parties. 2666 2667 On November 9, 2004, Great Lake assigned its right to purchase the 29 parcels to CRIC, an 2668 unrelated third party. On that same day, Great Lakes entered into lease agreements with CRIC to 2669 run the businesses on those 29 parcels and pay CRIC a defined rent. The leases are defined as 2670 operating leases in the agreements. 2671 2672 On November 10, 2004, the asset purchase agreement closed. CRIC acquired all of the parcels 2673 and Great Lakes acquired all of the leaseholds of the 18 leased properties so that it now operated 2674 all of the businesses and paid CRIC rent. CRIC filed real estate transfer returns on three of the 2675 properties and did not allege any “creative financing” was involved as the purchases were 2676 financed with cash and traditional mortgages. 2677 2678 In 2005, CRIC purchased three more leased parcels located in Milwaukee in the same manner. In 2679 2005 and 2006 CRIC sold all of the parcels in the two prior transactions to various unrelated 2680 individuals. Again, CRIC filed the real estate transfer forms that identified the purchase prices 2681 financed as all cash, conventional financing or third party financing. 2682 2683 At trial, Great Lakes argued that “creative financing” in the form of a sale leaseback transactions 2684 inflated the sale prices. The trial court found the 2005 and 2006 sales were not sale leasebacks 2685 because at no time did the actual seller lease the properties back from the buyers; there was no 2686 special financing that impacted the sales and the leases were at market rates. The trial court stated 2687 that “[T]ransactions reflect the nature of today’s markets for the sale of single tenant investment 2688 properties.” The court affirms: 2689 2690

There is significant evidence to support the trial court’s findings . . .[that] a recent sale of 2691 the subject property be used to establish the value . . . The trial court properly rejected [Great 2692 Lakes’] formula because there were recent arms-length sales of the subject properties. The 2693 trial court’s findings that the leases did not reflect above market rents is supported by the 2694 evidence . . . Walgreen does not require a contrary result. [Citation omitted] . . . here there 2695 were arm’s-length sales that the court determined established fair market value . . .There 2696 were no sale leasebacks “because the seller of the real estate never leased the properties 2697



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back from the buyer. The lease rents did not included other “creative financing” costs which 2698 pushed the leases beyond market rates. . . . 2699

2700 The taxpayer also argued disparate treatment in valuation than other similar properties. The 2701 argument is rejected: 2702 2703

Here, there is no evidence that all other similarly zoned properties were systematically 2704 assessed at less than fair market value. [Citation omitted]. There is also no evidence that 2705 Great Lakes was arbitrarily singled out for reassessment based on factors equally applicable 2706 to properties not reassessed . . . 2707 2708 Simply comparing a taxpayer’s appraised value to lower values assigned to a relatively 2709 small number other properties has long been rejected as a claimed violation of the 2710 uniformity clause . . . 2711

2712 Bonstores Realty One LLC v. City of Wauwatosa, 351 Wis.2d 439, 450, 454-455, 839 N.W.2d 2713 893 (Wis.App. 2013). 2714 2715 Issues: as-if-vacant; 2716 2717 The property is a department store anchor to a mall. The taxpayer asserted it should be valued as-2718 if-vacant and used distressed or vacant sales in the sales comparison approach. The court rejected 2719 the use of these properties as not being comparable to an operating store with no foreseeable 2720 likelihood that it would discontinue operations. 2721 2722

. . . Bonstores effectively admits that at least some of the comparable properties were fairly 2723 characterized as “distressed.” Kelly confirmed that a store going “dark” may have a 2724 significant impact on the property. It appears from the record that the circuit court used the 2725 phrase “distressed property” to refer to a “dark” business. Kelly agreed that the subject 2726 property is not a “dark” store, has never gone dark, and there is no evidence it would go 2727 dark and be sold off as a single property. As such, the circuit court did not erroneously 2728 determine that Kelly’s reliance on the sales of properties he deemed comparable was 2729 unreliable. 2730

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