Walmart, Dark Store Valuation Theory, Lakeview School District, and what it all means for schools, counties, and cities
By Lindsey Bailey, AAC Legal Counsel
Benton County-based retail giant, Walmart, has led the effort across the country to slash property taxes for big box stores, joined by others, such as Target, Home Depot, and Menards. The logic behind the effort, widely known as “dark store theory,” is based on the idea that a fairly new and operating store should be valued as if it were “dark” or shut-down. They argue that cost and income approaches should not be considered, but rather the amount they would be able to sell the building to a buyer on the open market, insisting that some construction costs that make the building “unique” actually lower its value since the unique feature would not be of use to a potential buyer.
With a mixed bag of success and failure across the country, Walmart has avoided trying these claims in its home state — until now. In October 2018, Walmart filed a petition with the Pulaski County Court challenging the county assessor’s assessment of 10 parcels (eight Walmart stores and two Sam’s Clubs) totaling $145 million to a reduced alleged value of $93.4 million dollars. Walmart later amended its petition with the court to further reduce its claimed value to $74.3 million, roughly half of the properties’ assessed value according to the assessor. It is peculiar that Walmart incorporated its first petition’s values (which had no supporting appraisal) into its amended petition which was supported by an appraisal, even though there was a nearly $20 million inconsistency between the two petitions’ alleged true and correct values. Approximately $900,000 tax dollars are at stake in this case, of which roughly three-fourths of that loss would be borne by Little Rock, North Little Rock, and Pulaski County Special school districts, with the remaining losses being split between the cities and Pulaski County.
History shows that once a corporation is successful with its dark store theory claims, it does not stop. According to a November 2018 report by CityLab, “[i]n Wisconsin, at least 230 cases have been filed across 34 counties since 2015, many of them repeat appeals for the same properties, by the top three attorneys representing retailers. In Michigan, more than $75 million in tax value was lost from the rolls from related appeals between 2013 and 2015. In Indiana, an estimated $3.5 billion in property value is on the line. Texas stands to lose $2.6 billion per year if successful appeals become widespread.”
County assessors from across the state showed up at Walmart’s Pulaski County Court hearing held on July 17 and 18, driving home their vested interest in maintaining the integrity of the property tax system, as well as fair funding of the schools, counties, and cities. County Judge Barry Hyde presided over the hearing and asked both parties to submit post-hearing briefs before issuing his ruling. At the hearing, the petitioner has the burden of proof, by a preponderance of the evidence, that their alleged values are the true and correct values according to law.
Walmart presented two expert witnesses. David Lennhoff, an expert on appraisal methodology, admitted that he had not reviewed Walmart’s appraisals and could not speculate as to their correctness, nor had he investigated the subject properties personally. Second, Jeff Ford, the appraiser who conducted the appraisals relied upon by Walmart, gave a full day’s testimony on how he arrived at his values. Cross-examination and testimony by the Pulaski County Assessor’s Commercial Division Manager, Robert Clay, revealed numerous and significant flaws in Walmart’s appraisals, especially with regard to comparable properties used by Mr. Ford.
As pointed out in Judge Hyde’s Aug. 14 final ruling against Walmart’s petition for a reduced assessment, some of the comparable properties relied upon in the appraisals were not similarly situated properties. Mr. Ford appraised several properties using comparable properties that were out of state, and not at all similarly situated. Additionally, some of the comparable properties that Mr. Ford used to value some of the petitioner’s properties were not arms-length transaction comparable sales at all, including sales from a Limited Liability Corporation to its very owner, which Mr. Ford admitted he had not investigated.
Also peculiar was Mr. Ford’s reliance on Marshall & Swift data for every metric utilized in his valuation under the cost approach, except depreciation, instead relying on Age and Life tables, resulting in approximately 50 percent greater depreciation than Marshall & Swift on nearly every property, according to the County Assessor’s attorney, Harrison Kemp. Mr. Kemp suggested that Walmart’s appraisals were not independent appraisals at all, but attained for the sole purpose of arriving at a lower value than the county’s assessments, and Mr. Ford’s errors and omissions made that clear. Judge Hyde’s order reflected this concern, stating, “too many errors and open questions render an appraisal unbefitting credibility.” The order continues, “The appraisals were flawed on multiple points and the evidence and testimony presented at the County Court hearings failed to adequately support Petitioners’ assertion of true and correct value,” therefore not meeting Petitioners’ required burden of proof” due to their heavy reliance on fundamentally flawed appraisal reports.”
Earlier this month, Walmart filed its appeal of the county court order to circuit court, which will be a trial de novo, a new trial where new evidence may be presented, with a final appeal being available to the state appellate court. School administrators as well as county and city elected officials will continue to watch this case carefully as it progresses through the court system, which could take years. Washington County Assessor Russell Hill has stated that the impact statewide should the state appellate court rule in favor of Walmart would be upwards of $100 million in tax revenue, again hitting the school districts the hardest. A state appellate court decision in Walmart’s favor could potentially not just impact Walmart’s property values, but the values of all similar big box stores across the state.
It is worth noting that the 2002 Lakeview School District No. 25 v. Huckabee Arkansas Supreme Court ruling (in a case which carried on for 15 years) requires the state legislature to provide an “adequate and equitable” education for all students under the Arkansas Constitution. In response, in 2004 and every two years since then, the Arkansas General Assembly adjusts its “adequacy” funding formula, increasing the money appropriated to school districts in need so that its constitutional duty under Lakeview is met. With the current legislature’s fiscally conservative nature, it is difficult to guess where they would find additional annual funds to make up for the inevitable shortfall to public school funding should the local property tax system take a $100 million hit. The case that Walmart has brought in its home state has real, statewide consequences, and you can be sure that all those who might potentially be affected will be paying close attention to its progress through the court system.