Dark store storm

Large national chains are taking communities to court over property tax assessments, and it could cost hundreds of thousands for Wausau alone



Rib Mountain Administrator Gaylene Rhoden: Panda Express argued its property value on Rib Mountain Drive should be based on vacant buildings far outside the town, and even outside the state.

Earlier this year, Rib Mountain Administrator Gaylene Rhoden found herself among many municipal leaders in Madison, arguing in favor of legislation meant to fix a loophole that allows companies to be taxed at a lower valuation. This loophole can costs localities hundreds of thousands of property tax revenue, leaving homeowners and smaller businesses making up the difference.

Coincidentally, going on in her town that same evening, was a board of review hearing in which Walmart and Sam’s Club were arguing for a lower assessment of their Rib Mountain property.

There isn’t yet a lawsuit over property valuations in Rib Mountain, but the year prior Panda Express had made a similar argument: Their property was assessed too high, and provided comparables of dark stores—that is, empty storefronts in communities nowhere near Rib Mountain, some not even in Wisconsin. The arguments never got past the board of review, and so far neither Walmart/Sam’s nor Panda Express has appealed the decisions in court.

But similar suits could be coming, and Rib Mountain officials are watching what’s happening in Wausau. The city has faced nine lawsuits over commercial valuation—the CVS and Applebee’s challenges were settled but the remainder are ongoing—and these court challenges are costly. The legal bills have skyrocketed to nearly $300,000 to fight requested refunds. Lawsuits from 2015 and 2016 are requesting a total of nearly $930,000 from seven different companies. (That’s total property taxes, of which around 39% is the city’s portion. Also, a large chunk is an outlier, the $203,978 refund requested by Aspirus Wausau Hospital, whose argument is more about profit versus nonprofit spaces.)


Wausau has spent nearly $300,000 in legal fees over these lawsuits, and Mayor Robert Mielke says he’s committed to fighting them because so much is at stake.

Mayor Robert Mielke says he’s committed to fighting these lawsuits, but believes legislation is what’s really needed to fix loopholes that make these challenges easier to argue.

That $300,000 is a big chunk of change for a small city like Wausau to cough up. But for a town such as Rib Mountain, with a total operating budget just shy of $3 million, paying that much in legal fees would be devastating, Rhoden says. She notes the commercial similarities between Rib Mountain and Grand Chute (near Appleton), which has already been facing these legal challenges. Like Grand Chute, Rib Mountain has a number of big box stores of the type that file these dark store lawsuits.

The gambit for stores, and the lawyers that profit from these cases, is simple. Facing these so-called dark store lawsuits, cash-strapped municipalities face two unsavory options: either settle for a lower valuation, or fight a costly legal battle.

But those representing stores in these lawsuits say that commercial properties are being over-valued by assessors in a market in which commercial property is selling for less and less and retail continues to shift online.

They’re on opposite sides of new legislation making its way through the state legislature would help prevent at least the most extreme dark store arguments before the trend spins out of control and puts municipalities in severe budget trouble.

Understanding the power of the dark store

What exactly is dark store theory? The concept is that a business challenges its property assessment for tax purposes by suggesting that its value should be compared to a similar, but empty store.

That might sound crazy to the average person, but the argument can be successful because there’s at least a theory behind it. Conventional assessment practices, whether in commercial real estate or housing, use sales of similar properties, called comparables, as one way to assess a property’s value.

That’s where a business brings in the dark store concept. If Home Depot closes a store, for example, it wouldn’t sell the building to a competitor like Lowe’s. So whatever business buys the building would be a very different operation, and probably need extensive renovations to make it work. Thus the buyer is unlikely to pay the price of a fully operating store—its market value would be what an empty store is worth. (Critics say this is a self-imposed penalty because the company is limiting the pool of prospective buyers, and thus lowering the resale value.)

A famous case that helped pave the way for these lawsuits came from Walgreens, which sued the city of Madison over its valuations in 2003 and 2004. The state Supreme Court in 2008 overturned the lower courts’ ruling in favor of Madison, saying that an “above market rent,” couldn’t be used in determining a higher valuation because it doesn’t accurately reflect the building’s value on the market.

In other words, just because it’s valuable to Walgreens, doesn’t mean it’s that valuable to someone else. And in that case, Madison was basing the valuation on the lease, which was tied to Walgreens’ income at those sites.

Subsequent suits from Walgreens following the high court decision have resulted in a $305,000 refund of tax dollars in Oshkosh, and a $350,000 refund in Appleton, for example.

This led the way for other companies to find new ways to challenge assessments and get lower taxes. Businesses turned toward challenging with comparable properties, which led to a number of suits that cited empty storefronts as comparable properties. Those challenges are reviewed by a municipality’s board of review, and businesses can challenge that ruling in court. And it’s happening around the U.S.

It’s important to note that not only does the municipality lose out in tax revenue, but so does the school district, county and state.

Attorneys for Panda Express argued for comparables of empty stores in places far outside of Rib Mountain — some even outside the state, Rhoden says. Panda Express asked for a valuation that wasn’t much higher than what the company paid for the empty lot—the site of a Wendy’s restaurant destroyed by a fire.

These arguments seem to run contrary to the language spelled out in the Wisconsin Assessment Manual: Assessors are supposed to “choose comparable sales exhibiting a similar highest and best use and similar placement in the commercial real estate marketplace.” It would seem clear that a highest and best use could hardly be an empty store or vacant lot.

New law in the works

Under legislation currently working through the state Senate and Assembly, empty stores could not be used as comparables. Also off the table would be using your own buyer restrictions as an argument for the property having less value. In other words, just because you don’t want a competitor to have your building doesn’t mean you can claim it’s worth less.

Those changes protect the taxpayer, according to Rep. Robert Brooks, who introduced the Assembly version of the bill. “The impact on municipalities, school districts and counties can be severe when assessments that accurately reflect the market value of a property are overturned,” Brooks said in written testimony to the Assembly’s Ways and Means Committee.

In a packet to that committee are letters of support for the bill from both Republican and Democratic legislators, the Wisconsin League of Municipalities, and several city, village and town officials.

Their arguments are largely the same, and echo what municipal leaders in central Wisconsin are saying: Lowering the property taxes of businesses that make dark store valuation arguments are hurting municipalities and shifting the burden to residential and small business taxpayers. Municipalities across the state have lost hundreds of thousands of dollars in tax revenue from dark store lawsuits. Proponents point to Indiana’s so-called “dark box” legislation, passed in 2015 to fix the problem.

But not everyone testifying or providing letters to legislators are supportive. The Wisconsin Manufactures and Commerce strongly opposes the dark store legislation. According to materials submitted to the Ways and Means Committee, the legislation would “allow local governments to tax income through the property tax, and have a significant chilling effect on investment in commercial and manufacturing real estate.”

Declining commercial property values will only get worse, Hill says. Online sales continue to encroach on the retail store sector, and the U.S. has six times the retail build-out of any other industrialized nation. Simple supply and demand will dictate lower commercial property values, Hill says.

Income taxes in Wisconsin are already too high, the letter’s author says, and the dark store legislation would increase that burden by allowing local governments to tax income through property tax. “Simply put, these bills constitute a massive tax hike,” the WMC letter says. A letter from real estate firm Cushman and Wakefield, also in the packet, echoes those sentiments.

Further, there really is no such thing as “dark store theory,” says Minneapolis-based tax lawyer Robert Hill. Sales should be based on comparable sales, period, and of course a store being sold would be empty, Hill says, so that’s what it’s sale should be based on. Hill represents Walmart and other stores in the Midwest on valuation cases, and represented Walgreens in the landmark Walgreens vs. Madison case. He also represented Menards in its assessment appeal against Wausau.

Hill says in the Walgreens case, the Supreme Court says only comparable property sales, not income, can be used to determine the value of a property—the only determination assessors should use is a building that sells on the market.

And that tends to be much lower than valuation. Hill says the reason for these so-called dark store lawsuits is because many businesses might be assessed anywhere from $60-$120 per square foot, but the buildings can only fetch $20-$30 per square foot on the market.

Declining commercial property values will only get worse, Hill says. Online sales continue to encroach on the retail store sector, and the U.S. has six times the retail build-out of any other industrialized nation. Simple supply and demand will dictate lower commercial property values, Hill says.

Hill acknowledges that some dark store comparisons go too far. It wouldn’t be appropriate to use an empty store in a blighted neighborhood in Milwaukee to value an operating store in Brookfield, for instance. “That’s why appraisers make adjustments for location,” Hill says.


A ticking bomb

Leaders in communities in central Wisconsin are already on pins and needles with valuation lawsuits. So far, Wausau appears to have been hardest hit. Lawsuits over valuatoins have cost the city $277,096 in attorney fees, according to records provided by the city attorney’s office. City Attorney Anne Jacobson says Wausau contracts with specialized attorneys because they have the expertise to handle complex tax cases.

There’s a lot at stake. Total tax refunds requested through 11 valuation lawsuits total $927,617. And that’s just the ones filed so far. Were the city to roll over and grant the valuation refunds without a fight, the floodgates would open to similar lawsuits.

Leaders in communities such as Rib Mountain or Plover—that happen to be home to large national chains—feel like they’re dealing with a ticking time bomb. After all, Grand Chute, similar in demographics to Rib Mountain, is already facing similar lawsuits. It recently lost a case to Sears, for example, and needed to refund $140,000 in taxes. Were Grand Chute to lose all its cases, it would have to increase taxes by as much as 30%, or cut police and firefighters, says Grand Chute Town Chair Dave Schowalter.

Plover hasn’t yet faced a dark store lawsuit, but last year a business did make similar arguments to the board of review. The fear is that those lawsuits are coming, says village of Plover Administrator Dan Mahoney. With a number of big box businesses in the Crossroads Commons retail area, that could spell big trouble.

Greg Schmidt, assessor for the town of Rib Mountain and the village of Weston, pointed to the Panda Express challenge as a stark example of the dark store theory. Opened in 2014 on the site of a burned down Wendy’s restaurant on Rib Mountain Drive, Panda Express tried to use empty storefronts, including a Pizza Hut, in other communities as a comparable to base its value. The result was a valuation estimate around $675,000 — not much more than the empty lot was purchased for, Schmidt says. The Panda Express in Plover in 2016 was valued at $1.61 million, which to Schmidt seems like a more fair comparison. Panda Express did not respond to a request for comment.

Walmart and Sam’s Club representatives brought a case before this year’s Rib Mountain board of review, making similar arguments, Schmidt says, using empty stores in other communities as comparables.

The challenges are concerning, Rhoden says. Rib Mountain easily could see a similar number of lawsuits as Wausau, and spending hundreds of thousands on legal fees—or the prospect of almost a million in tax refunds—is bone-chilling to a town with a total operating budget of roughly $3 million. Even half of what Wausau is facing would be destructive. “This could really impact the town of Rib Mountain,” Rhoden says. “If one goes, they could all go.”

And there isn’t much way to prevent them on the front end, says Stevens Point contracted assessor Steve Shepro. Even if a developer’s agreement guarantees a value, state law prevents using that in assessing a business.

Stevens Point faced a valuation lawsuit from Walgreens, filed in 2011 and settled in 2014 for a lower valuation. Since then no valuation challenge has gone to court in the city.

Municipalities need to be careful in how they assess commercial property, Shepro says—not over-assessing to the point where they want to leave town, but not so low that it’s unfair to other taxpayers. “There needs to be a balance on both sides.”