DALLAS – A property appraisal concept that values big-box retail sites as if they were vacant could cost local Texas governments billions of dollars in the value of their tax bases, officials warn.
Texas is the latest state to confront the "Dark Store Theory" that has already hit local tax bases in Michigan, Indiana, Kansas and several other states.
The theory is being promoted by "big-box" retailers such as Lowe's Home Centers, Home Depot, Wal-Mart and others with retail properties uniquely suited to their high-volume business.
"The impact of this is huge," said Karen Evertson, an attorney for the Bexar Appraisal District in court, "especially because Texas doesn't have a state income tax. A reduction in local property tax revenue hits Texas harder than other states."
Bexar County's appraisal district estimates the county's schools alone would lose $850 million in property tax revenue for the 2015 and 2016 tax years if proponents of the theory succeed. Statewide, the lost property value could be as much as $8.5 billion, according to Comptroller Glenn Hegar's analysts.
Bexar County Chief Appraiser Michael Amezquita is leading the fight against the "Dark Store Theory" and on Jan. 10 won a three-judge panel's ruling in his favor against the Lowe's Home Centers chain, which sought to reduce the value of four stores from $82 per square foot to about $30.
Lowe's is expected to continue the dispute in court, as litigation remains open for its 10 stores in Bexar County for tax years 2014 through 2016.
While the court ruled on the value of just four Lowe's Home Centers in Bexar County, Amezquita and others warn that a successful "dark store" case would ripple across the entire tax base, forcing appraisers to reduce the value of not just big box retailers but all stores, apartments and other commercial buildings.
Amezquita estimates that application of the theory could cost local school districts and governments 25% of their revenues and threaten the triple-A ratings of San Antonio and Bexar County.
"If you borrow with a triple-A credit rating and you lose 25% of your revenue, that would destabilize your ability to repay your debt," Amezquita said.
So far, no court in Texas has accepted the "Dark Store Theory," but appraisal districts in Dallas, Harris, Williamson and Lubbock counties have settled appraisal disputes with big-box retailers without acceding to the theory Amezquita said.
The fight over "Dark Store Theory" comes as local taxing jurisdictions are facing increasingly successful challenges to commercial property appraisals that essentially shift more of the tax burden to residential taxpayers.
"Four or five years ago, I would get maybe $10 billion to $11 billion in (property value) litigation," Amezquita said. "In 2014 I got $15 billion, and in 2016 we got $23 billion."
In his first month in office in January 2016, Houston Mayor Sylvester Turner told the city council that commercial property appeals were contributing to revenue shortfalls as the city struggled to meet its growing demands.
Appeals of property tax appraisals cost the city $16 million in 2016, about 2.4% of its $667 million of property tax revenue, Turner said.
"When they're not successful at the appraisal districts, they go to court for relief," Turner said of the commercial property owners. "The reality is, that $16 million is a real hit to the city's budget. We cannot ask our homeowners who can least afford it to pay more."
"This cycle is devastating to our city budget," the mayor said. "This month it is a $16 million hit. What will it be next month? Where will we find this additional money?"
As a result of falling revenues, last year's expectation of a $126 million revenue shortfall grew to $142 million, Turner told the council.
For the tax appraisal districts, fighting the commercial challenges is costly, leading some counties to settle with well-heeled legal opponents.
Dark Store Theory began showing up in appraisal fights after the 2008 global financial crisis, when stores were "going dark" in many parts of the U.S. Texas real estate was largely sheltered from the effects of the recession because it had not experienced the price bubble of other regions.
Bexar County estimates it has already spent at least $300,000 on the Lowe's tax protest.
Lowe's also sued Harris County, but in October 2016 approached the county to settle.
Harris County Chief Appraiser Roland Altinger attributes the settlement's timing to the company's desire to avoid a similar but greater legal struggle in Harris County. "They approached us to settle after Bexar County finished its arbitration process [with Lowe's]," said Altinger. "They knew the battle they were fighting in Bexar County was about to be replicated in Harris County, which has three times the number of stores."
Property tax appraisal methods for commercial properties usually rely on "comparables," which is the value of similarly situated properties.
The Property Tax Code requires determinations of appropriate comparable sales to include the property's condition, occupancy and any legal burdens.
Amezquita maintains that dark store theory is inappropriate because it assumes that stores should all be appraised as if they were closed.
"It turns all appraisal theory on its head," he said. "The first step in any appraisal assignment is to determine the highest and best use of a property. The highest and best use of these properties is usually continued use as a big-box retailer. It's never appropriate to pretend one could only look to sales of failed, vacant stores for comparables."
Chris Connelly, deputy chief appraiser of the Williamson Central Appraisal District, points out that dark store theory would be particularly difficult to apply in fast-growing areas such as his suburban county.
"As areas change, there's blight, but we don't have that," Connelly says. "We're a thriving and growing area and don't have dark stores. To take a Kohl's or Lowe's in the center of our jurisdiction and not use nearby property sales [for comparison] — that goes against the main building blocks of appraisal."
Dark-store assessment theory has prevailed in legal battles in Michigan, Indiana and other states, contributing to millions in lost local tax revenue.
The Michigan Association of County Treasurers estimated in 2015 that taxpayers have refunded almost $100 million to retailers since 2013 after they successfully contested their property values to the Michigan Tax Tribunal.
To circumvent the Dark Store Theory, lawmakers in Michigan and Indiana sought to rewrite property tax laws to prevent drastic drops in revenue.
In Texas, Amezquita is proposing that the 2017 Legislature adopt a cap on how much property assessments could be reduced.
Counties in Alabama are also looking for legislative help, according to Sonny Brasfield, executive director of Association of County Commissions of Alabama.
"One of the Lowe's under litigation cost almost $9.5 million to construct," Brasfield said in a report by the National Association of Counties. "It's being insured for more than $10 million, and Lowe's argues that it's worth about $2.5 million."
Lowe's is challenging the assessments of 31 of its stores spread throughout the state's 67 counties, he added. "We're very, very uneasy in Alabama about what happens if we lose this case to Lowe's."
