Seeking equity in the ad valorem taxation of anchor department stores.
One of the problems in the property taxation of shopping center anchor department stores is supporting the appraisal on which the assessment is based. The usual approach is a cost approach, including a site value based on non-stratified land sales comparables. This article describes a successful suit in which highest and best use was carefully defined for the site value, and the cost approach was complemented by an income capitalization approach as well as a regionwide sales comparison approach. In addition, the appraisals of the taxpayer and the assessor are compared with industry standards to establish credibility. (Reprinted by permission of the publisher.)

Shopping centers (Valuation)
Department stores (Valuation)
Property tax (Analysis)
Real property (Valuation)
Benton, Alvin O.
Vernor, James D.
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Name: Appraisal Journal Publisher: The Appraisal Institute Audience: Trade Format: Magazine/Journal Subject: Business; Real estate industry Copyright: COPYRIGHT 1997 The Appraisal Institute ISSN: 0003-7087
Date: Jan, 1997 Source Volume: v65 Source Issue: n1
Product Code: 6552300 Shopping Center Developers; 5311000 Department Stores; 6531200 Real Estate Appraisers NAICS Code: 23311 Land Subdivision and Land Development; 45211 Department Stores; 53132 Offices of Real Estate Appraisers SIC Code: 6552 Subdividers and developers, not elsewhere classified; 5311 Department stores; 6531 Real estate agents and managers
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Recent events have caused the values of much commercial real estate to decline in relation to residential property. The Tax Reform Act of 1986, capital-driven excess construction following thrift deregulation, liquidations by the federal banking agencies, and the ensuing credit crunch have combined to depress investment property values by 30% and more in many markets. In the wake of these value declines, many commercial property owners have requested reductions in their property taxes and the underlying assessed valuations. Hard pressed for revenue to maintain services, local governments have tried to maintain valuations and real estate tax cash flows. In addition, there are political perils in recognizing the greater declines in commercial values and the resulting shift in tax burden to homeowners. It is no surprise that many disputes over assessed value will result in litigation.

In a recent court case, an anchor department store at a super-regional mall sued the county for a reduction in the assessed value of its site and building. Even though the taxpayer had the advantage of data, it was a challenge to bring the case before a jury of residentially oriented taxpayers. The following discussion surveys the main arguments on both sides which led to a satisfactory, if expensive, result for the taxpayer. Both taxpayer and assessor can resolve disputes more efficiently by anticipating the steps in this process.

The valuation in question was for a two-story department store building on its own 10-plus-acre site as of January 1, 1987. The property was one of four anchors in a super-regional mall in a southeastern city.

The assessor established a market value based solely on a replacement cost approach with the unit costs and depreciation tables drawn from a cost service manual. The land value had been based on transactions survey data (organized by zone regardless of highest and best use) for the previous year and increased by a value growth factor of 20%. Due to the turnover in personnel within the assessor's office over the intervening six years, the transactions data that supported the land value was no longer retrievable, and neither was the study that was the basis for the 20% increase. A key point in the case was that all commercial land transactions were grouped without substratification. In this jurisdiction, at this time, the term "commercial use" included branch banks, service stations, fast-food sites, outparcels, retail of all sizes, and even multifamily housing. The assessor's cost approach used a cost manual program that included depreciation tables.

The taxpayer retained an expert witness appraiser who concluded a market value of about two thirds that of the assessor using three approaches to value. The sales comparison approach used sales data for similar department store sales, but the appraiser had to search outside the local market to find comparable property sales. The cost approach included a site value inferred from sales of anchored mall site sales in a consistent highest and best use. Because there were no sales of anchor stores or sites in the local county jurisdiction, the taxpayer's appraiser searched other southeastern communities for site sales. A main disagreement in the case was that the appraiser's land value estimate was about half of the site value in the assessor's estimate.

The appraiser concluded that the property tax levy on a square-foot basis for this subject property was over two times the industry average noted by one prominent data source, The Dollars and Cents of Shopping Centers.(1)


The concept of agglomeration economics means that stores will choose to locate near one another and even near competitors because the combined attraction draws proportionately more shoppers per store. That is, they are better off individually even next door to their competitors because of the principle of cumulative attraction.

Anchor Sites Contrasted with Mall Sites

Anchor sites generally sell for less than shopping center sites as a whole and especially less than the land attributable to mall tenants. This is because the anchors are strong drawing features for the mall and can negotiate lower prices.(2) These are the market prices. Not only can they negotiate lower prices but one hypothesis is they cannot afford to pay the same amount of rent or purchase price for pads as do mall or shop tenants. Rather, the anchors pay extra money in advertising that benefits everybody in the mall. In essence, because the anchors pay more in advertising than the mall shops, the mall shops pay more in rent to make up the difference. It is an important distinction because the rent paid by the mall shops capitalizes into real estate value, while the advertising expenditures do not. In this assignment it was found that typical base rent for anchors (not owning their sites) was about $3-$4 per foot compared with $10-$17 base rent for mall shops, depending on the category of The Dollars and Cents of Shopping Centers data.


Sales of outparcels and peripheral land sales provide poor comparable sales data for inferring value to the anchor sites. The outparcels gain value after the rest of the mall is operational. There is a non-comparability in the timing of the land purchase for the outparcel. Also, outparcels are much smaller in most cases and trade to a different kind of user, such as a bank, a fast-food restaurant, or an automobile service-related business. These are not the same products or lines or markups as present at a department store.

Appraisal theory states that land sales must have a consistent highest and best use with the subject to be comparable. Therefore, it would be improper to use land sales suited for uses other than a department store.

Business Enterprise Value

There may be a problem in inferring shopping center or anchor real estate values from observed sales prices. That is to say, the sales comparison approach may not tell the correct story. This is because capitalized incomes as well as contract sales prices may very well contain a component of value that is better attributed to an intangible business enterprise value than real estate. This derives from the ability of a center developer/manager to assemble an appropriate tenant mix, get the rezonings, the financing, and all the other coordination that is necessary for a successful retailing enterprise. This is certainly an entrepreneurial activity that goes far beyond the value attributable to real estate. It should be a return to entrepreneurship rather than a residual return to the land. In other words, the residual factor of production in this case is the entrepreneur rather than the land. Land value should be estimated by a very careful land sales comparison approach. The best comparables would be sales of land to or between other anchor stores. Non-anchor site sales are inappropriate unless an operating agreement exists, pledging their use as anchor department stores.

Highest and Best Use

Site valuation is usually based on the site being in its highest and best use. According to current teaching, the highest and best use should be estimated for the site as though vacant and ready to be developed as well as for the present improved property. Because of changes in the merchandise mix of the subject department store, the appraiser concluded that contemporary retail use would probably require a somewhat smaller structure than the present one, but the operating agreement in place mandates a minimum department store square footage. He also concluded that the highest and best use as improved is the property's continued function as a department store in a regional mall (regardless of the construction operating reciprocal easement agreement [COREA]).

A definition of highest and best use is:

The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.

The highest and best use is shaped by the competitive forces within the market where the property is located.(3)

The highest and best use analysis discusses each of the criteria of analysis and sets parameters for the selection of sales of comparable sites from which to infer market value. The taxpayer executed an operating agreement when the mall was built in which they contracted to adhere to a common opening date and operate at least a 140,000-square-foot store for a minimum of 20 years. In this case, the existence of the reciprocal operating agreement mandates continued use as a department store for the rest of the term of the operating agreement, and thus alternative uses must be precluded. Were it not for the reciprocal operating agreement, many alternative commercial and perhaps even high-density residential uses would be contemplated in terms of the physical and legal climates. (The assessor's analysis did not consider highest and best use in the selection of land sales comparables.)

Controversy Over Self-Imposed Limiting Agreements

In some jurisdictions, the statutory and case authorities have established that estimates of market value for takings or for property tax assessment should be based on the fee simple estate without consideration of encumbrances or limitations caused by limitations voluntarily imposed by the owner/taxpayer.

In this particular county, a case law precedent was the Sibley case. This was a case involving 1977 and 1978 assessments of "crop land, pasture land and timber land generally categorized as vacant land not commercial, industrial, or residential subdivision."(4) The land, once owned by John Sibley, was developed into a subdivision named Sibley Forest. The case involved a finding by a trial judge in which the assessors, in setting the fair market value of this supposedly vacant land, failed to consider the existing use of the property as was required under Georgia state law. The written decision went on to say that "the assessors are directed to consider also 'existing zoning of property,' 'existing covenants or restrictions in deed dedicating a property to a particular use' or 'any other factors deemed pertinent in arriving at fair market value.'"(5) The significance of this decision seems to be that, in the present case, the assessors should consider the existing use, the highest and best use, the zoning and the operating agreement, and any supplementary agreements that affect the highest and best use of the site under the anchor store. This is just saying that these factors have to be considered. There is no directive that they be determining. But it also means that the assessors should not dismiss leases, operating agreements, and other factors that could enhance or reduce the utility and value of a site.

An argument is that an operating agreement constrains the highest and best use of the site to department store use and represents a possibly substantial diminution of the bundle of rights.(6) This argument does not have to be used and, in fact, many taxpayers would not want to base a case on the operating agreement because other jurisdictions have found that voluntary constrictions on property rights cannot affect highest and best use judgments.

Some owners will choose to argue that highest and best use, as modified by zoning and operating agreements, should be considered. Once the mall site is assembled and, say, a decade or so of successful operations has passed, it is likely that the activity will have raised land values surrounding the mall to a point in which that very site could not be purchased for an economically viable mall and department store development anymore.

Consider, for example, a mall that has stimulated the growth of a substantial office center. All of the high-rise construction for office use surrounding the mall has created very high land prices (i.e., $25-$60 per square foot of land area) in that neighborhood. It would be infeasible to acquire a site the size of a super-regional mall at the unit prices based on office use. Doing so would violate the time specificity of regional and super-regional shopping mall development. Sites for regional and super-regional are acquired only very early in the development of the trade area, before land prices rise. In many cases, the malls are developed, and their very presence attracts other commercial and some residential development, which become the trade area of the malls. Careful analysis must avoid altering the chronology of natural events.


In his valuation, the assessor testified that land values were based on comparable sales within defined neighborhoods of commercial influences. Sales data was stratified as being commercial but not further disaggregated. In later years, the assessor's office stratified sales in more categories than it did in 1987. In 1987, the assessor's office increased land valuations by 20% from the previous year for the entire defined commercial influence neighborhood. The assessor's office found no sales of anchor sites at regional malls in the entire county for 1987 or more recent years, and did not look in any other counties.

The appraiser appraised the land by both a comparative sales approach and a land residual income capitalization method. Six comparable land sales and a single option contract for regional mall sites were identified in the southeastern region of the country. Each sale was discussed and determined to be a truly comparable site. Characteristics to make it superior or inferior were reviewed, along with their impact on the indicated value per square foot. The appraiser successfully argued that it was reasonable to consider land prices in a regional market if the trade area demographics are similar, since the resulting shopping center projects are themselves investment assets traded in a national market by national investors. The discussion considered the trade area adequacy as well as location and their impacts on value. Adjustments in the unit prices were largely reasoned judgment based on trade area population, median household income, trade area competition, number of anchors in the center, access, and others. The conclusion was that the land was worth about $4 per square foot.

The $4-per-square-foot site value was checked against the result of a land residual approach. In this method, a new improvement is envisioned and accorded a market rental rate based on the economic size of that store which, with an appropriate-size auto service store, was estimated to be the area required by the operating agreement. On that basis and supported capitalization rates, the income left over to be attributed to the land value indicates a value for the subject site of considerably less than $4 per square foot. This is a conventional, if perhaps simplistic, approach. The appraiser reconciled these two independent approaches to a final estimate.

The difference in land value accounted for about half the disparity in total value. In court, the taxpayer demonstrated that the assessment resulted from basing inferences on a wide variety of commercial uses that included noncomparable highest and best uses, the values of which resulted from interactions of demand different from anchor site users and for which the supply forces were also different. Furthermore, incrementing all values by the same percent over the previous year makes the same error in overaggregating.


It is usually the goal of the property assessment process to strike a balance between efficiency and equity. Efficiency means establishing a value estimate for a large number of parcels with a limited operating budget, perhaps less than $10 per parcel to be assessed.

The assessor defended the overaggregation of land comparables on the need for efficiency. He defended increasing all land parcel values by the same percent as being equitable to all taxpayers.

The taxpayer argued that equity means treating all owners fairly - defined in terms of the ratio of the tax to the market value of their parcel - as appraised according to recognized standards of professional practice. The thrust of the taxpayers' rebuttal was that treating all commercially classified land without further subclassification failed to consider highest and best use, and that being careless to all does not make carelessness fair.

While highest and best use usually is shaped by legal arrangements, similar results can come from thinking carefully about the concept of what uses are "reasonably probable." In the absence of an operating agreement to preserve a 10-plus-acre site from being used for a fast-food restaurant, branch bank, discount store, or other roadside retail, what is the probability of such occurrence? How many examples exist of such a change? What would be the desire of the mall owner to attain such a tenant mix? What reaction could be expected from mall tenants if the anchor "went dark," or closed down? Is not the value of the entire regional mall entity dependent on the presence of the anchor? If the mall is highly successful, say, with over $300 per square foot in sales, would a "dark" anchor be replaced by a different chain or an existing chain operating two stores?


The cost approach to estimating the value of the improvements is thought to suggest a maximum, but not mandatory, value for a property. In addition to a market-based site value, the cost of replacement or reproduction is estimated. Then that cost estimate is reduced by accumulated depreciation from several sources. Many appraisers would choose a 40-year estimated economic life for estimating time-based depreciation. But in many assignments, including this one, it could be shorter, considering that the owner must continually renew and remodel the space. (Market-based depreciation could also be abstracted from comparable sales.) In the present case, the owner had spent 47% of the original cost to upgrade to modern standards and preserve the economic life. Of course, the selection of a shorter economic life would have resulted in a lower value.

Documented original costs were available so that the historical construction cost could be indexed. The appraiser verified the survey-based cost estimate with primary survey information gathered in the current market. These two checks added credibility to the indication.

In the sales comparison approach, five comparable sales of improved property dating from June 1987 through May 1990 were gathered. The details of each transaction were verified with a party involved in the sale. They were personally inspected along with the mall, other anchors, the trade area, and other competitors in the trade area. The importance of ascertaining the details is that many department store sales are not necessarily totally real estate transactions because a business operating out of multiple stores may have been purchased. Often, the real estate portion of the transaction price is arbitrarily allocated. In addition, an appraiser must learn how the position of the anchor or mall in its market influences sales prices. Sales prices per square foot for land and improvements ranged from $27.91 to $45.90. In each case a judgment was made adjusting the price of the comparable property sale toward the subject property. In addition to the five sales, raw but generally unverified data were gathered on an additional 70 department store sales. Statistically this data indicated that 87% of the sales were made at less than $45 per square foot of building area. This data weighed heavily in the jury's decision.

The income capitalization approach included an analysis of comparable rental properties. Substantial detail was offered concerning 11 comparable rental properties, including their age, size, the lease price and term, gross sales per square foot, mall size, number of anchors, trade area population, and median household income. Urban Land Institute secondary data were provided for 1987, indicating that both sales and rent for department stores were essentially flat - nationally as well as for the subject property - from 1987 through 1990. The rental comparables and industry data were used to forecast rental income for the subject property. The appraiser observed in the analysis of comparable rental properties that per-square-foot rents declined as department store size increased. The subject property was larger than all 11 comparable rentals.(7)

Three methods of estimating market rents were employed with a conclusion of $3 per square foot for 1987. Operating expenses and an allowance for vacancy and credit loss were estimated, and the resulting net operating income was capitalized by a direct capitalization rate. This rate was derived with three techniques, each of which followed traditional industry teaching and practice. The selection of the capitalization rate from the improved sales was made, considering differences in tenant sales, trade area, mall size, and other relevant features. Although the resulting range in overall capitalization rates was somewhat wide, the selection of a 9%-9.5% rate for the subject property was well supported and credible. This was corroborated by reference to a secondary data source, the Real Estate Research Corporation's investment survey.(8)

The indicated overall cap rate (OAR) range was 9%-12.3%. In reviewing the quality of the trade area, the appraiser concluded "a sound economic base with a reasonable amount of buying power but generally flat to declining gross sales." Based on that, he selected a cap rate. The capitalization of net operating income (NOI) at a cap rate between 9%-9.5% indicates a range in value correlated to a final income approach indication.

Substantial data were located and analyzed in both the sales comparison and income approaches. Wherever possible, more than one approach was used to derive an estimate of key inputs, such as the cap rate and market rent rates. The estimation of an operating expense ratio was brief, for this was a market for net-leased properties and with very little extra in the way of operating expenses to be absorbed by the landlord.

In the reconciliation, the taxpayers' appraiser reviewed each of the three approaches and the quality of data used within them, indicated that each of the three approaches offered useful data, and indicated applicable methods of investor thinking for properties like the subject. The jury found the reasoning to be credible.

Assessor's Response to the Appeal

Although usually required in an appeal process, the assessor did not write an individual report on this property and relied on the replacement cost approach only. Instead of preparing with a quantity of data, the county emphasized the difficulty of assessing a large number of parcels with few resources, recognized the goodwill of the assessor staff, supported increasing all land values by the same rate, and relied on the sympathy of the residential taxpayers on the jury.

Examining the Credibility of Appraisals

Naturally, both sides try to make the best credible presentation for their valuation. The taxpayer contrasted the two valuations with an expert witness review appraiser who evaluated both the assessment and the appraisal against the recommended standards of The Appraisal Foundation and the International Association of Assessing Officers (IAAO). Some of the important provisions of the Uniform Standards of Professional Appraisal Practice (USPAP) which were applicable and troublesome for the assessment included the following:

* An expectation that individual property appraisals will be made when a mass appraisal valuation is appealed.

* A statement that the assessor's office should take reasonable steps to assure that the quantity and quality of the factual data are sufficient to produce credible appraisals.

* An expectation that databases should be established and maintained for information regarding sales, income and expenses, costs and property characteristics data.

* In an appeal, more than one appraisal method should be used.

* The appraiser should consider easements, restrictions, encumbrances, leases, reservations, covenants, contracts, etc.

* A mass appraisal for ad valorem tax purposes should consider the effect on use and value of the following factors: existing land use regulations, reasonably probable modifications of such land use regulations, economic demand, the physical adaptability of the property, neighborhood trends, and the highest and best use of the property" (emphasis added).

* Tax appraisals should have supporting information that the public can get to and understand.(9)

The IAAO's standards provide several guidelines that were relevant:

* There is a long discussion of the sales comparison approach and a summary of its major steps including statistical validation. None of this was attempted for the improvements nor documented for the site of the subject anchor store.

* Another section treats the income approach in detail on alternative methods of capitalization and the derivation of capitalization or discount rates in the construction of components of income and expense analysis.

* The assessor's staff is expected to be able to produce sales data or appraisals of comparable properties in order to support the appraisal under appeal.(10)


The expert witness review appraiser explained the reason behind three approaches to value and reviewed how the assessor's work compared with the standards of the IAAO and The Appraisal Foundation. He explained the role of highest and best use analysis as discussed above and responded to questions from both sides about mass appraisal methods. On January 1, 1987, the jury reached a verdict of market value of $7,772,000, representing a reduction of 29% from the proposed market value and saving about $38,000 annually in property taxes.

The jury was probably willing to be sympathetic to the budget problems of the assessor's office and were probably aware that tax burden was being shifted to residences. But the assessor's case was weakened by the absence of comparable site sales data, the loss of the data as the basis for value increments, the lack of improved property sales data, and the lapse in not preparing the three approaches once the appeal had been initiated.

1. The Dollars and Cents of Shopping Centers (Washington, D.C.: Urban Land Institute, 1995), 88.

2. In most cases, the anchor department stores have sufficient leverage to obtain their sites (not just the building pad) for little, if any, consideration.

3. Appraisal Institute, The Appraisal of Real Estate, 10th ed. (Chicago: Appraisal Institute, 1993), 77, 274.

4. Cobb County Board of Tax Assessors et al. v. Sibley, 244 Ga. 404, 260 S.E.2d 313 (1979).

5. Ibid.

6. Michael A. McElveen and Barry A. Diskin, "Valuation of Anchor Department Stores," unpublished paper, September 1989.

7. Generally, larger department stores were not leased. Rather, they were owned by the anchor because of anticipated market share. Department stores are making turnkey-style deals to pay rent based on a stated return on cost of real estate, fixtures - which may cost as much as real estate - and, in some cases, inventory.

8. Real Estate Research Corporation, RERC Real Estate Report, v. 20, no. 6 (Chicago: RERC, Fourth Quarter 1991).

9. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (Washington, D.C.: The Appraisal Foundation, 1996).

10. International Association of Assessing Officers, Standard on Assessment Appeal (Chicago: International Association of Assessing Officers, December 1981), 5-7. Also Standard on the Application of the Three Approaches to Value in Mass Appraisal (August 1995), 5-15.


Beebe, Robert L. "The Assessor and the Shopping Center: Valuation Issues and Problems," International Association of Assessing Officers Legal Seminar, San Francisco, California, October 13, 1988.

Gelbtuch, Howard C. "Shopping Centers Are a Business Too," The Appraisal Journal (January 1989): 57-64.

Gimmy, Arthur E. "Conflict at the Mall: The Tax Reduction Solution," Appraisal Views, v. 3, no. 2 (Second Quarter 1990): 3-4.

Gossett, James F. "Assessment Law Notes; The Myriad Problems of Shopping Center Assessment," The Journal of State Taxation, v. 4, no. 2 (Greenvale, New York: Panel Publishers, Summer 1985): 217-227.

Gruen, Nina J. "Retailing Fundamentals, Problems, and Solutions," Urban Land (July 1990): 26.

Kinnard, Jr., William N. "Valuing the Real Estate of Regional Shopping Centers Independently of Operating Business Value Components: A Review of Recent Research," prepared for Annual Meeting of the American Institute of Real Estate Appraisers, Chicago, May 3, 1990.

Lafakais, Gregory J. "Valuation Concepts and Issues and the Taxpayer's Responsibilities Concerning Regional Shopping Centers," paper presented at the International Association of Assessing Officers Legal Seminar, San Francisco, California, October 1988.

Mangan, Daryl T. "Consolidation of the Shopping Center Industry," Urban Land (June 1990): 30-31.

Tessier, Vern, "The Valuation of Regional and Super-Regional Malls," Assessment Digest, v. 13, no. 5 (September/October 1991): 2-13.

Turchiano, Francesco. "The Unmailing of America," American Demographics (April 1990): 37.

Vernor, James D., Niel Carn, and Joseph S. Rabinski. "Trial Techniques of Expert Witnesses," Real Estate Review (Spring 1996): 66-74.

Vernor, James D., and Joseph S. Rabianski. Shopping Center Appraisal and Analysis (Chicago: Appraisal Institute, March 1993).

Alvin O. Benton, MAI, is president of the Benton Advisory Group, Ltd., Atlanta. He received his BS in business administration from Syracuse University, Syracuse, New York. He specializes in retail properties, including super-regional malls and department stores.

James D. Vernor, MAI, PhD, is associate professor of real estate at Georgia State University, Atlanta. He earned his PhD, MBA, and BA in real estate and urban affairs at the University of Wisconsin, Madison. He is co-author of the Appraisal Institute's book, Shopping Center Appraisal and Analysis.
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