Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.
Issue link: https://texasrealestatebusiness.epubxp.com/i/591312
40 • November 2015 • Texas Real Estate Business www.REBusinessOnline.com A s brick-and- mortar store o p e r a t o r s respond to compe- tition from online retailers, shopping center owners face a mounting risk of unfair taxation when assessors fail to account for retailers' chang- ing preferences for space. In markets across the nation, select big box and junior big box retail tenants are chang- ing their existing store concepts and shrinking the building footprints of retail shopping center and standalone locations. Businesses that were once consid- ered strong anchor or junior anchor tenants are even restructuring their business models, renegotiating leases for smaller spaces and closing stores that no longer meet viable internal metrics. JC Penney, Barnes & Noble and Sears have all announced nationwide store closings in 2015, and the merger of Ofce Depot and Ofce Max has fueled additional store closings this year. With other major retailers making similar announcements in 2015, this market shift will likely afect property owners and their property values for years to come. Changes Threaten Values Retailers' new criteria for inline and freestanding stores will almost cer- tainly present a property tax challenge for big box and junior big box space, as store closures and footprint reduc- tions afect demand, market vacancy and lease rates in the sector. Often, assessors will focus too much on the tenant and what the lease states, instead of remembering that the ultimate goal is to properly value the building and land as of the date of value. When working with assessors, it is important to consider that calcula- tions involving existing tenants con- stitute a leased fee analysis, which is inappropriate for calculating value for property taxes. On a fee simple basis, which looks at the property and its market posi- tion, this type of space may have an entirely diferent market value. With that in mind, it is important to know what the space would lease for if available for lease in an open market as of the date of value. Another important factor to consid- er is what the property would sell for in an open market transaction on a fee simple basis. In reviewing the asses- sor's calculations, consider whether any referenced sales of other prop- erties refect leased fee or fee simple pricing. Blending leased fee and fee simple sales without a proper analysis can yield conficting data points, com- promising the integrity of subsequent conclusions. These oversights often result in in- correct market value assumptions and metrics, and lead to artifcially infat- ed property tax values. Interest Shrinks for Big Boxes Some tenants have reduced their store footprints by more than 20 per- cent over the past few years. In part, this adjustment maximizes inventory turnover and sales per square foot. When looking for new space, certain retailers have also set strict size limits with leasing brokers, and some stores that were once considered anchors are moving into inline retail space. This type of size restriction can sig- nifcantly impair a retail property's overall market rent potential if an owner already has a vacant big box or junior box space. These factors are im- portant metrics to consider when sur- veying rent to arrive at an appropriate market rental rate conclusion. One way property owners are deal- ing with unmarketable big boxes is by subdividing the space into smaller suites that better accommodate the growing demand for small retail foot- prints. This conversion can be costly, and if relevant, it is important to discuss the conversion costs with the assessor as of the date of value for the property. It is also important to consider a proper lease up analysis if the prop- erty has substantial vacancy. With store closings triggering an increase in the available retail supply and online shopping continuing to gain market share, a lease up analysis that captures these factors is essential. An additional issue to consider with the conversion into smaller suites is the depth of the original box and the potential for what some brokers term "bowling alley" space. Often when the subdivision of big box or junior big box space is com- plete, new tenants will refuse to lease the excess depth the suite may pro- vide. In this instance owners are some- times left with non-leasable space in the rear portion of the original build- ing. When this happens, it is important to consider excluding this space from the net rentable area of the analysis since the confguration often makes this space impossible to lease. If subdivision is not an option, be re- alistic about the future lease up pros- pects for this type of space and use an appropriate, stabilized vacancy rate in addition to a proper lease up analysis. Even after observing the points mentioned here, be sure to consider the particular characteristics of the lo- cal market before reaching any value conclusions. As business models for big box and junior box retailers evolve, so must the assessor's approach to valuation. Only after considering all of these factors can the assessor determine a proper market value to the fee simple estate. n Kirk Garza is part of the Member Appraisal Institute and a licensed Texas Property Tax Consultant with the Texas law frm Popp Hutcheson, PLLC. The frm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affliation of property tax attorneys. Mr. Garza can be reached at kirk.garza@ property-tax.com. SHRINKING RETAIL FOOTPRINT COMPLICATES TAXES By Kirk Garza, MAI Kirk Garza Popp Hutcheson PLLC Accelerating success. #TexConf I BOOTH 629 BROAD BAND TX FRONT ROW, CENTER Austin I Dallas I Houston From arts to industry and border to border, Texas boasts cultures that are literally all over the map. Technology is the best way to harmonize the powerful information contained in this diversity. Through proprietary platforms, data management, commercial real estate research, and insightful analysis, Colliers International is harnessing technology and placing our clients front row, center. colliers.com/texas With other major retailers making similar announcements in 2015, this market shift will likely affect property owners and their property values for years to come.