By Martin S. Katz

As published in Midwest Real Estate News, May 1997


Historically, the valuation of regional shopping malls for real estate tax purposes has been based upon a concept that all of the value is related to the real estate. This has occurred even though there has been a tacit acknowledgment that the successful operation of a shopping mall includes entrepreneurial skill on behalf of the owner/developer and hence, some “intangible” business value. The problem that has occurred lies in the difficulty of quantifying this intangible value and has led to a total lack of its recognition.

An excellent example of the contribution to value of the business acumen of a mall owner is the Old Orchard Shopping Center in suburban Chicago. The reported acquisition price was approximately $100 million. Old Orchard was an older shopping center that, although perhaps not dying, appeared to have seen its better days. The purchaser was able to attract both Nordstroms and Bloomingdales as anchor tenants in addition to Marshall Fields and Saks, create food courts and movie theaters and revitalize the Center to the point of turning it into an entertainment complex. After approximately three years, Old Orchard was sold for a reported price of approximately $260 million.

An intelligent analysis of the Old Orchard experience would lead to the conclusion that the increase in value from $100 million to $260 million cannot possibly be attributed entirely to an appreciation of land and building values. Therefore, the logical conclusion is that some portion of the difference between the price paid and the sale price must be allocated to the value of the operating agreements with the four anchor tenants, the goodwill created by the Old Orchard name and reputation and its returning customer base.

Additional intangible business value items are reflected in the revenues of a shopping mall such as stroller income and overage reimbursements of such expense items as property taxes, insurance, utilities, etc., which are paid by the mall tenants for the right to occupy space in a center run by an experienced and successful mall operator.

As stated above, one of the significant problems in trying to convince assessors to acknowledge intangible business value is the quantification process. Numerous theories have been propounded to accomplish this purpose. One theory is that, since anchor tenants can be viewed as “the horses which pull the cart” by attracting the customer base for the mall, most of the marketing expenses which produce that customer base are taken care of for the mall tenants. This relates to an increase in the rental which will be paid by the mall tenants to the owner/developer and corresponds directly to the developer’s ability to attract the anchors in the first place. Therefore, in this analysis, the marketing expenses of the anchors, which have been projected to be approximately 6% of their gross sales, should be allowed as an expense on the owner/developer’s operating statement. This would represent an amortization of the costs necessary to bring the anchors to the center and a reimbursement for costs expended to maintain the anchors’ presence.

Another problem affecting the valuation of regional malls is the fact that it is not unusual for the anchor tenants to own their own stores and separately appeal the assessment from that of the in line portion of the mall. This creates a situation whereby the theory that the shopping mall is actually one economic entity and should be valued as such is physically difficult to accomplish.

Such a scenario is now being played out in North Carolina as the result of a recent State Supreme Court decision which dictated that the valuation of anchor stores should be based principally upon an income approach and not on a cost approach. Due to some language in the Opinion indicating that assessors might be able to pick up any loss in revenues resulting from the reduced values on the anchor stores by shifting the value to the in line portions of the mall, a number of dramatic (in one case tripling) increases in valuation on the mall portion of the property have already been proposed.

It is clear from several court decisions on this issue that a long and difficult battle will ensue before there is an appropriate acknowledgment that a significant portion of the total “value” of a regional shopping mall is “intangible” business value. In order to succeed, owners/developers will need the expertise of experienced legal counsel in assessment appeals and the valuation process, expert testimony from the appraisal community and, perhaps, evidence presented by academia to convince a court that this extremely complicated valuation analysis correctly reflects market value for property tax purposes.