JoCo cities consider adding caveats on tax incentives for big box retailers who make ‘dark store theory’ appeals

Roxie Hammill - August 7, 2019 8:30 am
Walmart’s victory in a recent appeal of its commercial property taxes in Johnson County has set off alarm bells among local governments.

Should cities continue to give generous tax incentives to big retailers even if it means those businesses will eventually challenge their property valuations, demand several years of tax refunds and leave homeowners and school districts holding the bag?

Some Johnson County cities are beginning to say no. As the news has begun to sink in that yet another corporate discounter – Walmart – recently won an appeal of its property values, a few cities are already looking at ways they can protect themselves. And the idea of the day seems to be tax incentive agreements that can rake back some of the money if retailers get their way in a tax appeal.

Gardner and Lenexa may be the first Johnson County cities to try such a thing, and Shawnee is considering it. Gardner had an agreement written into its Main Street Market Place development for a Price Chopper grocery store. Lenexa’s is for the City Center Hotel development for a Hyatt.

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They’re worded differently, but essentially work the same way: If the property value goes below a certain target on which the incentive is based, the amount the developers get goes down proportionately.

“We plan on giving incentives for development. Everybody does it,” said Gardner Mayor Steve Shute. “But we’ve got to protect the taxpayer in the process.”

“We’re using an incentive which is basically, if you think about it, a taxpayer gift to all these projects to move forward,” he explained. “The price of the project is tied to the appraised value of the building. The appraised value of the building, if it’s contested and goes down, directly impacts the incentive. Or it should. Because the value of the investment has gone down.”

Officials looking for ways to address ‘dark store theory’ appeals

Big retail chains like Walgreens, Target and Walmart have looked at challenges to their property valuations in Johnson County.

Local taxing bodies from cities to schools across the country have had months to think creatively about the future as they’ve watched big box commercial retailers challenge the values county appraisers have assigned their property for tax purposes. In Johnson County, businesses including Target, CVS, Walgreens and Walmart have all won appeals for multiple stores at the state level. The county has asked for a court ruling on all but Walmart, and an appeal of the Walmart decision appears likely after county officials have had a chance to review the state’s reasoning.

At issue is the method used by the county appraiser to assign a taxable value to the commercial properties. The retailers argued that their stores should be valued as if they were vacant or “dark” properties, and not according to their use, as the county had done. The controversy has been nicknamed “dark store theory.”

It could take years, but should the corporations succeed, the impact would be huge. A county analysis issued early last year projected that reduced commercial values could short the taxing districts $133 million. But some officials fear the big box success could inspire other classes of commercial businesses to make similar challenges. If they are also successful, words like “catastrophic” have been used to describe the outcome.

Cities often give tax abatements, revenue bonds and temporary development-created sales and property tax revenues to encourage development. But Shute said it’s basic fairness to make sure the businesses can’t also reap the drastic tax reduction.

“I don’t think you should get a full (tax increment financing) benefit and then we have to cut a check to them for x million dollars for lower appraisals. You can’t have it both ways,” he said.

Some officials call for end of ‘tax giveaways’

Overland Park Councilman Faris Farassati has been a frequent critic of the use of tax incentives.

Overland Park is not among the cities that have considered a claw-back clause based on challenged values. The city is still watching to see how things go with the appeals first. But Councilmember Faris Farassati, one of the most frequent skeptics of tax incentive plans, said he’s not on board with the idea.

Instead, cities should just stop giving incentives – he calls them “tax giveaways”—to projects in popular areas that would get the development even without them. Tax incentives should be reserved for blighted areas, he said.

“First you have to stop the hemorrhaging, and where that’s happening is undeserving projects,” he said. Tying incentives to property valuations just opens the cities to court challenges that may ultimately be lost. “We’ve created for ourselves a huge hole and we have to dig ourselves out of it,” he said.

Nolan Sunderman
“Things that get lost in the conversation are the services that are provided with those taxes to these shopping centers – the roads that lead there, the traffic lights, the calls we respond to,” said Shawnee City Manager Nolan Sunderman.

Limiting incentives if values are challenged isn’t the only idea of how to deal with long-term loss of millions in tax revenue, but it is the one so far with the most legs. Shawnee is working with a bond counsel to see how that could work with industrial revenue bonds, said City Manager Nolan Sunderman.

Some officials mentioned the fact that busy shopping centers cost them more in services like police and fire protection than do the dark stores. “Things that get lost in the conversation are the services that are provided with those taxes to these shopping centers – the roads that lead there, the traffic lights, the calls we respond to” said Sunderman.

But so far no one is considering a surcharge to make up the difference. Doug Robinson, chief financial officer of Lenexa, said that might not be workable under Kansas law. Mission once tried to raise money for street repair based on how much traffic was generated by adjacent property owners. The so-called “driveway tax” failed in court challenges.

Gardner City Council member Rich Melton told county commissioners recently they should consider selling off park land as a way to raise money for future refund checks.

Selling off parcels of it could allow businesses to develop in a “tech woods” type of environment. Still, “you could sell all the parks tomorrow and it wouldn’t make a dent in that budget. So we’ve just got to figure how to monetize what we already have without increasing taxes,” he said.

But Johnson County Commission Chairman Ed Eilert said that idea is not really practical either, because of restrictions when federal funds are used to acquire park land, as they have been in Johnson County. “Nobody has an interest in selling park land,” he said.

There is open land for development at New Century AirCenter and in buildings like the Lackman and Antioch library branches. But those sales would barely register against the amount of revenue loss the county is facing, he said.

County chair says Johnson County could still prevail in courts

County Chair Ed Eilert.

“Hypothetical values” is the term Eilert uses to talk about dark store theory. Hypothetical as in the values are contrary to known facts about the property, he said. Eilert points out that although that method has been embraced by the state Board of Tax Appeals, it is not endorsed by professional appraiser organizations.

“In hypothetical appraisal, there is not a standard,” he said. “It sets up a never-ending process of appeals.”

There’s still some time before all the appeals are decided, which could take several years, he said. In the meantime, one possible solution would be for counties to seek a fix from the state legislature that would bar the dark store method from being used. There’s been some discussion of that amongst counties, but “quite frankly I would not be optimistic,” he said. “I’ve been before a couple of legislative committees in the past two years and the response has not necessarily been positive.”

There’s some hope in possible turnover on the state tax appeals board, too, he said. Two of the three board members have terms ending in 2020, and the third member and chief hearing officer’s terms expire in 2021. The board members are appointed by the governor.

And Eilert doesn’t rule out victory in the courts. The dark store method is not consistent with state constitutional or statutory requirements for uniformity and equity in appraisals, since residential property owners don’t have access to the same way of getting their taxes reduced, he said.

The county managed to get through the falling property values of the Great Recession by conservative use of reserves and by not replacing employees as they left. Commissioners didn’t have to raise the levy. But recessions eventually end, and the lost revenue from appraisals would continue.

Nevertheless, economic development would go on in the county, and that would add to the tax base, he said.

School districts stand the most to lose from the falling commercial property values, particularly in the funds they use to pay for building and maintenance projects. So far, though, the Shawnee Mission School District is watching the situation and has not decided on any cash-saving plans, said David Smith, chief communications officer.

Might shoppers who are being asked to pay more in taxes decide to stay away from the big box stores? That’s still an open question, said Shute.

“They’d say that for about a week and then they’d need something. There’s only so much you can get on Amazon.”

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