Wisconsin Supreme Court Holds Contract Rent Cannot Be Used to Determine Leased Properties' Values

Wisconsin Supreme Court Holds Contract Rent Cannot Be Used to Determine Leased Properties' Values

The Wisconsin Supreme Court has held that a city may not use above-market rents to determine the value of two leased retail properties because the monthly lease payments included business and financing costs, and therefore were significantly above the market rental rate.

The Wisconsin Supreme Court has held that a city may not use above-market rents to determine the value of two leased retail properties because the monthly lease payments included business and financing costs, and therefore were significantly above the market rental rate (Walgreen Co. v. City of Madison, Jul. 8, 2008). Walgreen Co. (Walgreens) leases two retail properties in the City of Madison (city). The properties were purchased and constructed by a developer at Walgreens's direction. Walgreens's lease payments include compensation to the developer, land acquisition, construction, development and financing costs, together with a profit margin. During the tax years at issue, the city assessed property tax based on the above-market rent terms of Walgreens's leases. Walgreens appealed to the Board of Review (board), arguing that the assessments were excessive and the properties' values should be determined using the market rents. Following an unfavorable decision by the board and circuit court, Walgreens appealed to the court of appeals, which affirmed. The court of appeals concluded that Walgreens's contract rents, rather than market rent, should be used to determine the properties' values. Walgreens appealed to the Wisconsin Supreme Court. The court held that the city was required to use market rent and not the above-market rent terms of Walgreens's leases in determining the properties' value. The court determined that section 70.32(1) requires real property to be valued in the manner specified in the Wisconsin property assessment manual. The manual, the court concluded, requires income approach evaluations to be based on market, not contract rates, except in cases in which encumbrances lower the property value below market rate. In clarifying the proper method for property tax assessments, the court reaffirmed its holding in Flood v. Bd. of Review (1990) that section 70.32(1) "proscribes assessing real property in excess of market value." Applying Flood, the court concluded that tax assessors must refrain from including creative financing arrangements under a specific property's lease in their valuations. "All of the information needed for the income approach," the court said, "is either obtained or verified by what the assessor finds in the marketplace." The court determined that the manual's general rule was consistent with section 70.32(1)'s requirement that the full value of property must be assessed in terms of ordinary conditions of sale. Regarding Walgreens, the court held that the leases included contract rights that were not inextricably intertwined with the bundled property rights ordinarily considered at the property sale. The court explained that those rights were not directly reflective of the property's value and were severable from the rights or privileges appertaining to real estate as described in section 70.03. The court of appeals' decision was reversed.

The Wisconsin Supreme Court has held that a city may not use above-market rents to determine the value of two leased retail properties because the monthly lease payments included business and financing costs, and therefore were significantly above the market rental rate (Walgreen Co. v. City of Madison, Jul. 8, 2008). Walgreen Co. (Walgreens) leases two retail properties in the City of Madison (city). The properties were purchased and constructed by a developer at Walgreens's direction. Walgreens's lease payments include compensation to the developer, land acquisition, construction, development and financing costs, together with a profit margin. During the tax years at issue, the city assessed property tax based on the above-market rent terms of Walgreens's leases. Walgreens appealed to the Board of Review (board), arguing that the assessments were excessive and the properties' values should be determined using the market rents. Following an unfavorable decision by the board and circuit court, Walgreens appealed to the court of appeals, which affirmed. The court of appeals concluded that Walgreens's contract rents, rather than market rent, should be used to determine the properties' values. Walgreens appealed to the Wisconsin Supreme Court. The court held that the city was required to use market rent and not the above-market rent terms of Walgreens's leases in determining the properties' value. The court determined that section 70.32(1) requires real property to be valued in the manner specified in the Wisconsin property assessment manual. The manual, the court concluded, requires income approach evaluations to be based on market, not contract rates, except in cases in which encumbrances lower the property value below market rate. In clarifying the proper method for property tax assessments, the court reaffirmed its holding in Flood v. Bd. of Review (1990) that section 70.32(1) "proscribes assessing real property in excess of market value." Applying Flood, the court concluded that tax assessors must refrain from including creative financing arrangements under a specific property's lease in their valuations. "All of the information needed for the income approach," the court said, "is either obtained or verified by what the assessor finds in the marketplace." The court determined that the manual's general rule was consistent with section 70.32(1)'s requirement that the full value of property must be assessed in terms of ordinary conditions of sale. Regarding Walgreens, the court held that the leases included contract rights that were not inextricably intertwined with the bundled property rights ordinarily considered at the property sale. The court explained that those rights were not directly reflective of the property's value and were severable from the rights or privileges appertaining to real estate as described in section 70.03. The court of appeals' decision was reversed.