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
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
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
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
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
SOME CONSIDERATIONS IN ANCHOR AND MALL VALUATION
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
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
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
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
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.
THE GOAL OF TAX AND ASSESSMENT EQUITY
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 THREE APPROACHES
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
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
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
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"
* Tax appraisals should have supporting information that the public
can get to and understand.(9)
The IAAO's standards provide several guidelines that were
* 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).
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,
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
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):
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):
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.