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Debate brews over the sticker price of big box stores

Shoppers leave the Walmart Supercenter in Superior on Thursday evening. The big box retailer is in a legal battle with the City of Superior about the value of its property and how much property taxes it should be paying. Clint Austin / caustin@duluthnews.com1 / 2
The former location of Target in Superior sits about a block away from the Walmart Supercenter and is currently a production facility for Ravin Crossbows. The building sold at a rate consistent with warehouse space. Clint Austin / caustin@duluthnews.com2 / 2

Superior Mayor Jim Paine has little positive to say about "big box" stores these days, especially as his city braces to do legal battle with the corporate ownership of the local Walmart Supercenter over the local tax burden the national retail giant rightfully should bear.

A suit now wending its way through the Wisconsin court system claims the Tower Avenue store, currently assessed at more than $13.1 million, really is worth no more than $9 million. The suit calls for the value to be lowered by at least 31 percent.

In a separate suit, Walmart also seeks at least $90,700 in what it considers to be tax overpayments it made, based on Superior's inflated property assessment in 2017. If the case proves successful, Walmart could seek additional refunds for prior years.

Should Walmart prevail in Superior, Paine said: "John Q. Public will pay more taxes. That's the part that's easy to miss here... It's easy to think that Walmart would catch a break and the city of Superior would just have a little stress trying to figure out how to deal with the lost revenue."

In reality, however, Paine said the city would be obligated by law to collect the same amount of money in taxes, shifting more of the burden to other taxpayers, including owners of residential properties.

"A tax decrease for Walmart is a tax increase for everyone else," he said.

Robert Hill, a Wayzata-based attorney retained by the Wal-Mart Real Estate Business Trust, contends cities such as Superior continue to grossly overvalue big-box real estate, saddling retailers with an unfair share of property taxes.

The former location of Target in Superior. Photos by Clint Austin / News TribuneHe doesn't need to look far for examples. Two stores just up the road from Walmart recently were abandoned by Kmart and Target, and they have been repurposed respectively as a U-Haul Moving and Storage Center and as a production facility for Ravin Crossbows.

Hill argues Walmart's current assessment doesn't jibe with local market realities, borne out by the recent sales of those vacated big-box stores and others throughout the nation.

"When the Target Supercenter sells for $21 (per square foot) in Superior, explain to me how I'm supposed to tell my client to accept an assessment two or three times the per-square-foot value on their store," he said.

'Dark store theory'

However, Paine rejects the notion of basing property assessments for operational big-box stores on recent sales of abandoned buildings — a line of argument critics have dubbed "the dark store theory."

"We don't treat our small private businesses that way. A commercial business is treated based on the fact that you are a revenue-producing business, not that you're empty real estate," Paine said.

Brad Theien, assessor for the city of Superior, also questioned the logic, saying: "They think that their buildings should be valued as if they were vacant even while they're occupied."

Theien doesn't buy that argument.

"We've been holding the line, because our theory is that they (big-box stores) have a value in use," he said.

But increasing numbers of national retail stores are closing as sales shift to e-commerce.

"Bricks and sticks have given way to click and ship," Hill said.

In an already-overbuilt retail landscape, he said relatively few of the abandoned big box properties return to use as storefront operations. Instead, Hill said hundreds of former big-box stores have been selling at prices consistent with warehouse space, typically running between $20 and $30 per square foot.

"What we are doing collectively is perverting the natural market behavior of willing buyers and willing sellers by making up excuses why buyers aren't paying $80 per square foot for this stuff. After all, would there be a controversy if these things were selling for $80 per square foot?" Hill asked.

Theien considers the dark store theory fundamentally flawed, however.

"They think their new stores should be based on the same value that their old stores would sell for. Well, that's just not our concept of how to equitably distribute the tax burden," he said.

Critics of the theory are quick to note that it would value big-box stores at prices far below what they cost to construct.

Michael Wedl, president and CEO of USA Property Tax Associates, an offshoot of Robert Hill Law, agreed the expectation that the construction cost of a building and its value should roughly align "sounds perfectly logical," in layman's terms.

The former Kmart building in Superior has been repurposed as a U-Haul Moving and Storage Center. But he said: "When a big-box retailer builds one of these properties, they're not building it to sell it. They're not a real estate company or a developer or a builder. If one of those types of companies built it and couldn't sell it for what they paid to build it, they'd go out of business... But the big-box stores make their money by selling stuff out of the store. It's just a shell."

Hill said it's completely understandable why big-box retailers are asking for relief.

"Americans are all about fairness," he said. "And why should any taxpayer be forced to accept an assessment well in excess of what they already know their real estate would sell for? Give me an answer to that before you start talking about 'dark store theory' or 'manipulating market data.'"

Retailers have been fighting back, and mostly winning in Wisconsin, where they have filed more than 230 assessment appeals since 2015, according to

Indiana and Michigan also have seen numerous successful appeals.

Nor has Minnesota been spared.

What about Minnesota?

Assistant St. Louis County Attorney Nora Sandstad said the county has received a number of petitions from big-box retailers contesting property valuations in the past four to five years. The county recently resolved appeals by Walmart, Sears and Younkers.

St. Louis County also has faced challenges by Cub Foods, CVS, Kohl's, Lowe's and Shopko.

Over a year ago, the county settled a case brought by Hill on behalf of Menards. That case resulted in the assessment of a Menards store in Virginia dropping from a previous value of $12.3 million to $6.8 million by 2017 — nearly a 45 percent decrease.

Meanwhile, Menards stores in Hermantown and West Duluth respectively saw assessed values reduced by about 27 and 29 percent.

Sandstad said Minnesota tax courts have waded into the issue in a measured fashion.

"These 'expert' appraisers retained by these petitioners, the big-box companies, have been arguing the 'dark store' theory for several years now, and what I've seen in court cases in Minnesota is that there's kind of a fear around that," she said.

Sandstad said she was encouraged by two recent Minnesota tax court decisions — one involving a Lowe's in Plymouth and another involving a Menards in Anoka.

"They essentially affirmed the county values. There was a small reduction, but there was no indication by the court they were buying the 'dark store' theory and slashing prices. That is making us cautiously optimistic about our cases, and we continue to work to make sure that our assessments are keeping pace with the market," she said.

Hill was involved in one of those cases and said he was flummoxed, given the sales of empty stores in the surrounding area.

"The most that anyone has paid for one of these white elephants is my client's Walmart in Blaine, Minn.," he said. "It sold for $5.2 million. And you'll note that a tax court judge just proclaimed that somehow somebody would be stupid enough to pay $12.1 million for a Menards 8 miles due west of it. You tell me who that someone is."

Give and take on both sides

But Sandstad said St. Louis County has been making use of the services of independent appraisers to re-examine large retail store properties and has settled most of its appeals out of court.

Wedl said St. Louis County is not alone in seeking out settlements.

"What's happening is these bigger-city assessors, who know better, they end up working out deals, where the small towns are going: Hey, the big-city assessors told us, 'Do not settle with these guys. They're just pulling our chain.'"

The county's settlement agreements have involved give and take on both sides, Sandstad said.

Wedl said that stands to reason.

"A lot of these big boxes, they understand that the communities that they are in are going to have to pay money back, and that's going to be a struggle for them. So, what they end up doing is settling for a number that's maybe twice the value, instead of three or four times the value. They're still overpaying. They're overpaying by a lot. But they're willing to do that, because they don't want all the bad press," he said.

However, Paine remains skeptical of claims national retail chains are paying more than their share.

"Big-box retailers start by ripping us off. It's their default position," he said.

"Generally they have so much square footage on their lots. They pretend to be the largest taxpayers in the city, when in reality they're among the smallest," Paine said.

After consulting with the city assessor's office, Paine said he compared the taxes paid by small local storefronts in downtown Superior to the property tax burden borne by big-box retailers.

"Places like Walmart and Menards are paying something like $2.50 a square foot compared to $5 a square foot in property taxes for these small independent retailers. That's before any lawsuits at all," Paine said.

"So, the idea that a major international corporation is going to say that they're being overtaxed when they're already paying half what our actual citizen-run businesses are paying — regular people who are just pursuing their dream, making donuts and stuff — is an absurd argument to begin with. And then it gets more absurd from there," he said.