Municipal Law Alert, July 2009
On Monday, June 29, 2009, Governor Doyle vetoed the so-called “Walgreens fix” from the state budget. The Governor’s veto is another step in the ongoing saga that began with a challenge by Walgreens to the method of assessment of its stores in the City of Madison. Typically, Walgreens does not own its stores. Instead, the stores are built to its specifications and it leases the stores from the owner of the property. The owners’ costs for constructing the stores are built into the lease, resulting in higher than market rate rent amounts. In addition, Walgreens pays the property taxes as part of the lease. Some Wisconsin municipalities, including Madison, based their assessed values on the high rental rate rather than on the value of comparable properties.
Walgreens disputed this assessment method, arguing that it resulted in Walgreens paying higher property taxes than other comparable commercial properties. In a unanimous opinion, the Wisconsin Supreme Court sided with Walgreens, noting that “[i]f we were to expand the law in the direction the city requests, property assessments would in essence become business value assessments, with assessors improperly equating financial arrangements with property value.” Walgreen Co. v. City of Madison, 2008 WI 80, ¶65, 311 Wis. 2d 158, 752 N.W.2d 687.
The Court held that the correct assessment depends on the “correct methodology for assessing leased retail property.” In doing so, the Court relied on Wis. Stat. § 70.32(1), which requires that valuation of a real property assessment be accomplished through procedures contained in the Wisconsin Property Assessment Manual, including estimation of the market value of a fee simple interest. The Court analyzed the sales comparison approach, the cost approach and the income approach to values contained in the Manual. The Court concluded that the income approach, according to the Manual, was the best fit for leased properties. The Court emphasized that in order to arrive at a reliable indication of value when applying the income approach, the assessor was required to use the market rent, not the contract rent.
In the recently passed budget bill, the legislature adopted language that had the effect of reversing the Walgreens decision and allowing municipalities to assess based on the actual lease amount contracted between the landlord and tenant. However, on June 29, 2009, Governor Doyle vetoed this provision. The Governor said he objected to changing valuation methodology through the legislative process. He said that such a change should be pursued as an update to the Wisconsin Property Assessment Manual.
Thus, for now, the Walgreens decision stands and the relevant data is market rent, not contract rent. However, Department of Revenue staff said that they plan to make adjustments in the Wisconsin Property Assessment Manual that will accomplish the same goal as the language vetoed by the Governor.