Author: Stefan Sysko

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This Lawyer-Driven Profitability-Enhancement Scheme is Unique to Big Box Retailers

In 2008, Lowe’s, the giant retailer with annual sales around $50 Billion, built their Marquette store on U.S. 41 for $10 million. Michigan has three accepted methods of determining a property’s fair market value: comparable sales, the cost of construction less depreciation, and how much income a property produces.

The Lowe’s store was assessed at a taxable value of $5.2 million. Occasionally, property owners argue a valuation based on sales price of comparable properties is more fair. That’s what Lowe’s did?—?with a twist.

Lowe’s went to court and argued in front of the Michigan Tax Tribunal that big-box stores should be taxed based on comparable properties. Common big-box retail strategy is to erect stores that are cheaply built and essentially disposable (designed to be functionally obsolescent).They argue it would be exquisitely more fair to base brand new big-box taxable values on stores that were previously closed, abandoned by the retailer that built them, and have been sitting empty (dark), sometimes for years.

The Marquette Lowe’s is a successful store generating around $30 million in annual sales. But since the building has very little value (the company will someday simply abandon it and move on), the company feels that taxpayers should cut them a (huge) break on their property taxes.

But wait! There’s more!

Big-box stores typically come with deed restrictions attached, blocking other retailers from moving in to their old buildings for years. And not just direct competitors, but often any retailer that sells anything the chain sells. So, the properties they demand comparison to have been rendered nearly worthless by the retailer’s own actions. It’s like they want to be rewarded for saddling communities with abandoned monolithic structures rotting in the middle of sprawling parking lots, poorly built and banned from use for most other suitable purposes.

“Unlike many other commercial properties,” Lawrence Allen, the assessor hired by Lowe’s argued in court, “free standing ‘big-box’ stores like the subject [property] are not constructed for the purpose of thereafter selling or leasing the property in the marketplace.”

The tax tribunal agreed Lowe’s should be rewarded for their propagation of blight, and the original assessment of $5.2 million was reduced to $2.4 million for 2010, $2 million for 2011, and $1.5 million for 2012. That’s right, Lowe’s demanded the reduction be given retroactively.

This has to stop. We need to begin supporting the rise of local independent retailers instead of kneeling before giant chains, throwing money at them, and begging them to build their ‘disposable’ stores in our neighborhoods. These giant retailers have no stake in our communities, and don’t think twice about fleecing our libraries, schools and fire departments to fatten up their income statements.

Unsurprisingly, not wanting to miss out on a dime of additional profit, 12 other large retail chains in Marquette have appealed their property tax assessments. If they win?—?as they are expected to?—?WNMU Public Radio reports that Marquette’s tax-funded public services will have to refund big-box chains as much as $1.9 million in 2015.

I wonder how many days the library will have to close to pay their share of that homage to the mega-retailers. They’ve already discussed the possibility of having to close Mondays as well.

It’s important to note that other factors contributed to the Marquette library’s abbreviated hours, including dark store tax refunds/reductions granted to Home Depot, Menards, Kohl’s and Target, and a refund of back taxes paid to Duke LifePoint, the for-profit corporation that bought the former Marquette General Hospital two years ago.

So far, in the last three years, ‘dark store’ reductions have cost Michigan $47 million in lost property taxes. Those missing $47 million will likely be made up by individual taxpayers and small retailers.

The big-box retailers employ and retain armies of attorneys and tax specialists who devote their time to finding additional bottom-line dollars for their employers. Indications are that they’re just getting started. Unfortunately, small businesses can’t afford to hire legions of these specialists. Especially now that they’re being forced to subsidize their vastly-larger competitors’ tax bills. What a skillful way to build market share!

A Honigman partner who has tried or argued dozens of dark store cases on behalf of property owners told the Detroit Free press, “the horses are already out of the barn.” He estimates more than 90% of big box stores have already been re-assessed and says very few new stores are now being built.

[If I may offer my translation of his comment, I believe what he’s saying is, “haha…too late, suckers!” Then again, maybe I’m misinterpreting the comment. Please let me know what you think he’s trying to say.]

As for the library enthusiasts of Marquette, don’t worry, you can always go buy some nice home improvement books at Lowe’s, Home Depot or Menards. That is…if you can afford them, with the upcoming increases to your property taxes.

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Everyone is talking about job creation these days. While certainly important, I feel the conversations fall short. I believe there needs to be a broader discussion if we want to see true, sustainable progress.

Laudable efforts are being exerted to bring national retailers into urban areas. The openings of Meijer and Whole Foods in Detroit (and a new Nike store coming soon) are testaments to the city’s success in emerging from bankruptcy into a city worthy of national chains’ attention. However, I don’t believe that turning the city into a giant shopping mall of big box stores is the answer. Here’s why:

It’s true that Meijer creates nearly three hundred much-needed jobs per store. When a big company like Meijer opens a store in Detroit, they provide management expertise, support, and a strong infrastructure back home in Walker/Grand Rapids. They then hire many local folks at $8–11/hour to staff the store. If they work hard, these employees can eventually move up to management positions and earn a decent living.

Why does this solution fall short? Because, while I’m a firm supporter of job creation, I’m an even bigger believer in ownership creation.

Instead of keeping them consolidated and hidden deep in a huge building in the middle of a sprawling parking lot, let’s take some individual departments and help turn them into storefronts on Main Street owned and managed by an entrepreneur from the community. These new owners would then create jobs for others in the community. If employees work hard in thisentrepreneurial environment, they are likely to learn more than just how to stack shelves. They are likely to be better prepared if they someday choose to open their own business. We’d be opening more doors…both literally and figuratively.

Contrary to the corporate perspective, entrepreneurs tend to be proud of helping their employees launch their own businesses. Locally-owned stores have a better chance of starting a cycle of ownership creation/job creation than do chain stores. In chain stores, the ‘cycle’ consists mostly of turnover, which is estimated to be 60% per year. In terms of net job creation, studies by independent economists show that big-box stores eliminate more jobs than they create.

Let’s focus our support on opening independently-owned stores in cities.

 

Additionally, the Meijer store in the example above receives its merchandise from one of their distribution centers in Lansing or Newport, MI, and pays the salaries of support staff working at Meijer HQ in Walker, MI…which is where all the store’s profits are sent as well. While this is great news for the Grand Rapids area, I think Detroit needs to strengthen its own economy some more before the city is in a position to be so generous.

The effect of independent ownership on communities is profound. Per dollar of revenue, locally-owned businesses hire more local workers, purchase more goods and services from other local businesses, and contribute more to local charities than do big-box stores. In other words, more money is pumped into the local economy when its retail is locally owned.

Numerous studies have also shown improvements in property values, health, employment, earnings, crime rates, voter participation, etc. in communities with a greater concentration of locally-owned businesses. With a preponderance of local retail, communities become healthier, more walkable, and generally better places to live.

According to a 2015 poll by the National Association of Realtors® and the Transportation Research and Education Center at Portland State University, the ‘walkable neighborhood’ concept counts as a key factor for millennialsin deciding where to live. They favor developing communities where people do not need to drive long distances to work or shop.

The evidence all leads to one conclusion: we need to provide greater support for citizens working toward retail ownership, and to our existing independent retail store owners. Citizen Retail is the company/movement I started, designed to help open and support local retail businesses in Detroit…and across the country. We’re just getting geared up, but we plan on helping citizen entrepreneurs start and build their retail businesses; then we’ll let them do their thing to rebuild our communities.

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