Brick and mortar retailers are increasingly seeing their revenues eroded by e-commerce merchants, from the 800-pound gorilla Amazon to small boutique brands with on-line-only presences. Wal-Mart’s recent decision to spend over $3 billion on money-losing on-line retail platform Jet.com speaks to the seriousness with which even the largest retailers take this threat. This directly impacts the retail sector in the form of vacancies and reduced rents, and these trends must be considered when valuing a property for tax purposes. Whether it’s a downsizing of space, rent reduction, or contributing to a build out, the changes occurring in the retail market are negatively impacting owners’ profit and loss statements. Making municipalities and their assessors aware of these changes can significantly reduce the property tax burden at many retail locations.
For these retail trends to be factored into a property tax case, both the cause and effect of this shift must be demonstrated. The cause is something many people have personal experience with: competitive pricing and easy return policies, along with quick shipping at low costs, have made on-line shopping a very convenient option for everything from flat screen televisions to everyday household items. While there are many on-line options, Amazon has staked its claim as the largest player and their extensive reach has affected almost all retailers. Ironically, Amazon has grown so large that their need for warehouse space has begun to have a positive effect on the industrial market. This was seen on Long Island just a few months ago when Amazon agreed to lease a 161,360 s/f Bethpage facility formerly occupied by Goya Foods as a distribution warehouse. Elsewhere, Amazon is investing in 18 new fulfillment centers, most of them over 1 million s/f, this year alone.
Mass closures of anchor stores like Sports Authority, Office Depot, Macy’s and others are the most evident proof of the effect resulting from on-line purchasing. The loss of these major tenants not only leaves thousands of square feet that must be absorbed, it also takes away the foot traffic relied upon by other stores in a shopping center. Retailers hoping to survive these changes have had to adapt to a new world that focuses on walkable downtowns and an in-store experience uniquely tailored to specific consumer needs. However, providing additional personalized service to differentiate the in-store experience from a click and purchase on-line world can be costly. Additional dollars spent here is money that cannot be spent in rent and, as could be expected, requests for rent reductions from retail tenants increases each year.
The property tax burden associated with retail properties should reflect these new realities. In the absence of a recent sale, retail properties must be analyzed on an income approach to value to determine the proper assessment. In this analysis, the deduction for market vacancy and collection loss must be increased significantly to show an owner’s reduced gross income. Even if the subject property does not have any current vacancies, the state of the current market means they are now more likely to experience a vacancy issue and, a deduction for vacancy and collection loss will be appropriate under the law.
Landlords’ expenses are increasing as well. They are being asked to contribute greater amounts for tenant improvements and, in some cases, perform the work themselves. These costs must be accounted for and deducted from gross income. The last component of the income approach is the selection of the proper capitalization rate. The increased risk that owners face, given the increasingly uncertain retail environment, must be taken into consideration by this higher cap rate.
In order for municipalities to properly account for these adjustments to their analysis, the property tax case must be fully detailed and these changes must be documented. When the case is presented properly, it can not only create a significant windfall of property tax refunds but also set the assessment at a reduced figure going forward that will diminish future annual payments at the location. The lower property tax burden each year will also assist owners in improving the quality of their properties, and attracting new tenants to fill the vacancies and maximize their rental income.
In a rapidly evolving retail market, not only must traditional retailers adjust, so must traditional retail property owners. Fortunately, along with the new challenges, costs, and responsibilities brought on by these changes, comes the opportunity for retail owners to obtain significant tax relief by ensuring these changes are accurately reflected in their property tax assessment.
Brad Cronin, Esq., and Sean Cronin, Esq., are partners at Cronin & Cronin Law Firm, PLLC, Mineola, N.Y.