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By Altus Group | August 21, 2016

The key issues at stake in the estimation of market value of the fee interest in big box real property are value in use vs. market value, leased fee vs. fee simple, second generation transactions vs. build to suits, and market rents and sales vs. sale/leaseback rents and prices. All of these are interrelated to a point, and when misunderstood, result in an appraiser at best providing the right answer to the wrong question.  The credibility of the assessment is compromised when value in use of the leased fee interest is substituted for market value of the fee interest. On the other hand, with a firm understanding of these fundamental concepts, an appraiser is able to correctly value the mandated basis of ad valorem tax, which is usually market value of the fee interest in the real property.

Coining of the phrase, “Dark Store Theory,” was a brilliant way of confusing the issues involved with valuing big box real estate. After all, Dark Store sounds so sinister!  However, it is a complete misrepresentation:  we don’t refer to house appraisal methodology as, “Dark House Theory,” yet it involves exactly the same concepts.

A close review of the arguments in both court decisions and elsewhere reveals the same sort of inappropriate rationalization as in hotel real property valuation arguments.

Indiana seems to have the best answer to their concern that the tax base might legitimately be disrupted by applying appropriate appraisal methodology to these property types. That is to restructure the law. If you don’t want to tax the market value of the fee simple interest in the real property then you need to change the law.  Of course, the law must be restructured so that all properties are affected equally, not just one property subset.  If not, it is just a matter of time before they will be back at it.  Unfortunately, their restructuring, with its emphasis on market segmentation, is off target.  Their misrepresentation of market segmentation to mean an operating big box must be compared to other operating big boxes and not dark stores misses the point.  Turns out, it is not an easy task to come up with a new law that is fair to all and results in only taxation of the real property and not the business taking place in it.

Until the law is changed, appraisers have no choice but to follow appropriate valuation methodology when answering the question, what is the market value of the fee simple interest in the big box real estate?

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