What You Need to Know About the Dark Store Theory
BY BILL MEARS
“When you look at the dark side, careful you must be.” — Yoda
I’m not sure if Yoda was referring to the “dark store theory” (I suspect he was not), but for municipalities and homeowners, it is no small matter. Across the country, major companies like Walgreens, big box retailers, and fast food operations are leading the effort to redefine how commercial property is assessed.
Municipal assessors use sales of comparable properties for their assessment of value. And, this is where the issue comes to a head.
Walgreens traditionally builds about a 15,000 sq ft building, merchandises it, and then sells the building to an investor and leases it back from them. The buyer is basically purchasing a stream of income for up to 20 years from a strong credit national tenant, Walgreens. The selling price is based on the income.
Retailers contend that the real value or market value of their property should be based on it being empty, or “dark”. Walgreens stores are built as what is now the new pharmacy, with drive-thru windows, and special appointments. If the tenant vacates and the store goes “dark”, the next tenant will not want those improvements and thus the value will not be there.
We have a great example in Janesville with the closing of the Walgreens at 5 Points. The building was on the market for several years and thankfully now houses a Dollar Tree. It has no use for the drive-thru window, which it blocked off, and may have had to do other improvements to accommodate a discount store versus a full-service pharmacy that had freezers and coolers and such. They also pay a much lower lease rate than Walgreens would on a property specifically designed for its use.
Assessors and their municipalities see it quite differently. They argue that the comparable sales (dark store sales) aren’t truly comparable: while stores may have gone vacant, they are often times shackled with deed restrictions. You can bet that the 5 Points Walgreens has a deed restriction on it preventing a competing pharmacy from leasing or purchasing it.
The dark store theory has won some rounds in Michigan and Indiana and may be coming to your town soon. In Janesville, at least 8 businesses have brought dark store suits against the city since 2011. The city has settled five of them, giving the businesses more than $132,000 in tax refunds. If it prevails nationwide, the tax burden will increase for homeowners, who are a much larger political contingent. This will surely drive legislation aimed at ending what some would call a loophole.
But the courts and tax tribunals have found that there is validity to the dark store theory. Could there have been a conscious effort by municipalities to rally to higher assessments to keep the tax burden lower on its homeowners? I think most responsible business owners are willing to pay their fair share of property taxes but resist an inflated assessment of their real estate.