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Wisconsin Businesses and Retailers Should Assess the Importance of Walgreens Decision in Pursuing Tax Refund Actions

Posted on in Business Law


The Wisconsin Supreme Court has paved the way for many Milwaukee businesses and retailers to take advantage of a number of benefits associated with the sale-leaseback transaction and business model. In Walgreen Co., v. City of Madison, 2008 WI 80, the Court made two major rulings: 1) the assessor was required to determine the value of leased properties under the income approach using the market rent terms rather than contract rent terms; and 2) the assessor could not include real estate's atypical financing or above market rent when assessing the property under the income approach.

In so doing, the Court also confirmed that assessors must use and adhere to the Wisconsin Property Assessment Manual in the absence of other conflicting law. (Id. at ¶3). What the manual did, and what the Court found, is that the analysis required "an income approach assessment of a leased retail property's fair market value of the fee simple interest to be based on market lease rates, not actual contract rates, as long as encumbrances to the property do not cause its leased fee value to fall below a market rate value." Id.

One of the key reasons that Walgreens was able to persuade the Court of its argument was because it had a uniform business model wherein Walgreens would build or develop its properties such that they had "super adequacies" to justify the particular needs of Walgreens. (Id. at 6). As part of its model, Walgreens would plan to rent its properties, and target areas where it could build or buy out properties in prime locations in heavily or densely trafficked areas. Then, Walgreens would structure its lease payments under its business model so that its compensation to the builder or developer would be built into the financing arrangement, along with a solid profit margin for the developer. The Court observed that Walgreens would be paying above-market rents because the developer would be "recovering his development costs on a building that contains super adequacies demanded by Walgreens" Id.

The reality was that the Wisconsin Supreme Court decided that in determining the value of fee simple real estate there was a major distinction between the value of real estate and the value of a business investment or contract derived from that real estate. That distinction was a major one for the Court.

What result did the Walgreens decision have for the retailer in the real world? Well, here in Milwaukee it likely had an impact on a recent settlement related to a number of tax refund actions with the City of Milwaukee. As this recent article notes, the City of Milwaukee agreed to pay Walgreens $3.7 million dollars to settle its tax dispute over its assessment of 18 stores within the city limits.

A word of caution: a retailer or business owner does need to be careful about how the sale-leaseback transaction is structured. As Attorney Robert Hill, who argued the Walgreens case before the Supreme Court advised:

Hence, if your property is the subject of a sale-leaseback, one must make sure your local assessor is made aware of the terms and conditions of the business transaction. If you fail to do so, the assessor's temptation to co-mingle the contract rents with the market rents can - and often will - result in an assessment well above the actual market value of the "sticks & bricks."

As such, if a retailer or business owner is planning on building or developing a property, it needs to be mindful that the deal needs to be structured correctly.

Not only that, if the business owner or retailer with a sale-leaseback transaction is considering challenging its assessment at a board of review hearing with the City of Milwaukee, or some other assessor within the State of Wisconsin, it is important for them to contact attorneys that understand the implications of the Walgreens decision in order to assist them in their challenges.

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