Dark-store practices gain momentum during pandemic

On Behalf of | Apr 25, 2022 | Business Disputes, Outsourced Business Counsel, Real Estate Litigation |

The pandemic has impacted us personally in so many ways over the last few years. But, it has also changed the way that companies conduct business. For decades, big-box stores have been economic cornerstones in suburban and rural communities. Things have shifted to a point where e-commerce is a significant force, which has put a bite into the brick-and-mortar retailers’ bottom line, prompting some WalMarts, Lowe’s and others to look at ways to generate more income.

What is it?

The dark-store theory has been around since the great recession in the late 2000s. Companies argued that municipal appraisers should base the store’s value as if it is an empty building rather than a functioning business. This argument substantially reduces the value of the building that are routinely 100,000 feet, thus saving the companies millions in property taxes even though the business may be thriving.

Property appraisals are typically a combination of comparable sales in the area while also considering the property’s condition, occupancy, and other legal issues. The companies argue that the stores are generally built for a specific purpose, and it is difficult finding new tenants. The value and potential sale are further complicated by the practice of not selling or buying a building built by a direct retail competitor – the potential buyer would instead build a store that fits its exact needs on a nearby lot.

Shifting the tax burden

Communities depend upon the millions in tax money to pay for necessary services like police and fire as well as schools and public works, particularly in smaller or rural ones where big-box stores are a dominant economic force. If the money does not come in, the county or state has to make up that shortfall, and often it means the bill falls more heavily on homeowners.

Successful strategy

Despite the public outcry, the large chains have had a high degree of success in reducing their property taxes. These disputes are now tying up some courts’ schedules and forcing communities to dedicate already strapped legal resources to the matter that retailers habitually bring up repeatedly despite an initial rejection. Rather than long protracted fights, or ones they could lose on appeal at the state level, some municipalities are giving up and reducing the property taxes.

Location is still key

Real estate’s cardinal rule is “location, location, location.” Regardless of where one sits on this issue, prime pieces of property will still fetch a higher price than less desirable ones. Moreover, municipalities have little input into corporate decision-making regarding sales goals or the need to expand.

This argument is far from over and is shaping up to become an increasingly important commercial real estate legal issue.