JoCo leaders sound alarm on ‘dark store theory,’ saying it could suck millions from schools, county agencies

Jay Senter - February 28, 2018 8:19 am
County Chair Ed Eilert said a change in the way property is valued could suck millions of dollars out of Shawnee Mission schools.

A significant change to the way commercial property is valued in Kansas being considered in Topeka could sap tens of millions of dollars from Johnson County schools — and districts here should be prepared to fight it, Johnson County Board of County Commissioners Chair Ed Eilert said this week.

In remarks to the Shawnee Mission School Board Monday, Eilert explained the controversy surrounding the state Board of Tax Appeals’ decision to consider an alternate valuation method for big box retail stores like Walmart, Best Buy or CVS.

“Dark store theory” would allow commercial properties to eliminate the amount of business they do at a location from the valuation process for property tax purposes.

In an appeals case brought by Target, attorneys argued that the appraised value of a Target properties were inflated, and that the appraiser should consider using a non-traditional approach to value the stores.

One of the alternate approaches floated to the Board of Tax Appeals is known as “dark store theory,” which posits that the commercial activity of a building should not be considered in its value for property taxing purposes.

“Even though the property has thousands of people going in and out of the store every day, and they’re doing tens of millions or maybe a hundred million dollars in sales, or more, every year, the theory that’s been advance is that the value of that property is that it’s empty,” Eilert said. “The only thing that theory wants valued is the walls, the ceiling, that’s it.”

Another approach, which was accepted by the board of tax appeals in a recent case, is called the hypothetical lease rate, which allows building owners to argue for a reduced valuation based on the amount they would receive if the building were to be put on the market for lease.

When the state board agreed to accept that approach in a case with the Target stores, the total property tax liability for the buildings dropped by around 30 percent, Eilert said.

“That’s a lot of money that’s not collected,” Eilert said. “And if it’s not collected from that class of property, who pays? All of us that are left, and that means primarily residential properties.”

If the state were to move broadly to a commercial property valuation system based in hypothetical lease theory or dark store theory, Eilert said, Johnson County and the school districts here would see tens of millions of dollars in revenue disappear.

Applying the reduction in value accepted by the board of tax appeals in the Target case to big box stores across Johnson County, the total loss in revenue to school districts here would approach $70 million in local and state funds.

Cities would be hit hard as well. Eilert said the county’s calculations showed that Overland Park would lose about $4 million in annual revenue, as would Lenexa.

To replace the revenue lost from commercial property taxes, cities would likely have to increase their property tax rates by 11 to 14 mills.

“In some jurisdictions that means the mill levy would more than double,” Eilert said. “That’s the potential impact that we are looking at.”

Eilert encouraged school board to be prepared to work against efforts to formalize the alternate approaches.

You can watch Eilert’s presentation to the board below:

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