Will Appraisals of Big-Box Store Properties Affect Nontraded REIT Portfolio Values?
January 8, 2019 | James Sprow | Blue Vault
A January 6, 2019, article in the New York Times reported that big-box retailers are using an aggressive legal tactic to shrink their property tax bills. According to the article, “These businesses — many of them brick-and-mortar stores like Walmart, Home Depot, Target, Kohl’s, Menards and Walgreens that have faced fierce online competition — maintain that no matter how valuable a thriving store is to its current owner, these warehouse-type structures are not worth much to anyone else.”
“So the best way to appraise their property, they contend in their tax appeals, is to look at the sale prices on the open market of vacant or formerly vacant shells in other places. As shuttered stores spread across the landscape, their argument has resonated.”
For example, a Lowe’s store in Wauwatosa, Wisconsin, was constructed at a cost of more than $16 million for its 140,000-square-foot building less than 12 years ago. The company’s appraisal was $7.1 million based on sales of empty and once empty buildings in other neighborhoods. The city’s assessor said that the appraisal was based on comparable sales that were in declining neighborhoods or near a mall that had closed 15 years earlier. While the strategy that Lowe’s is pursuing is intended to lower its property tax bills, a question that could be important to nontraded REITs that hold big-box retailer-occupied properties in their portfolios is the potential impact on estimated NAVs per share if appraisals based upon “dark-store” values will lower the carrying value of these REIT-owned properties.
A quick look at the portfolios of two net-lease retail nontraded REITs shows minimal exposure to these big-box properties. For example, CIM Income NAV, Inc. (formerly Cole Real Estate Income Strategy (Daily NAV Inc.) recently had 154 properties in its mainly single-tenant retail portfolio, and just one Lowe’s and one Walmart property. Cole Credit Property Trust IV, Inc., in its 909-property property portfolio, had 14 Lowe’s, six Walmart, four Kohl’s and three Home Depot- occupied properties. Based only on acquisition prices, these properties represent an estimated 7.1% of the REIT’s portfolio. By contrast, the REIT owns 42 properties occupied by CVS, 62 occupied by Walgreens, 169 properties occupied by Dollar General, and 146 occupied by Family Dollar. (The average square footage (GLA) of the Walgreens-occupied properties is 14,622 square feet compared to 105,907 square feet for the Walmart properties and 126,614 square feet for the Lowe’s occupied properties.)
Appraisal practices that rely on comparable sales of similar big-box properties without taking into consideration the going-concern value of properties occupied by successful big-box retailers such as Lowe’s, Walmart, Kohl’s and Home Depot, may benefit these companies by lowering their property tax assessments. Local taxing authorities are litigating these issues to prevent the loss of property tax revenues that can result from the lower appraisals.
Fortunately for investors in nontraded REITs that hold largely single-tenant retail property portfolios, the potential impacts of lower appraised values so far appear to be minimal.
Sources: New York Times, S&P Global