By James P. Regan

As printed in Shopping Center World, April 1996


Over the past ten years, there has been an increasing awareness that shopping centers involve not only real property, but also tangible and intangible personal property and that those different property interests must be taken into account in the development of a valuation methodology for ad valorem tax purposes.

Despite the almost universal recognition that intangible value exists in shopping centers, there has been great reluctance on the part of Assessors and, to a lessor degree, Appraisers to distinguish realty and non-realty assets in shopping centers. Consequently, appropriate models have not been developed to measure intangible value apart from a Shopping Center’s real estate.

The traditional approach has been to characterize non-realty interests, such as above-market leases, franchise agreements and operating agreements as inextricably intertwined with the land, thus making it impossible to separate their income producing capacity from the elements of real estate.

Three disparate occurrences, unconnected in any way, may be moving us beyond the unreasonable position that attributes all value in a Shopping Center “as running with the land” and ignores the economic realities involved in developing and operating a Shopping Center.

These specific issues, as well as others, were explored in depth at a recent seminar on the Valuation of Regional Shopping Centers sponsored by the American Property Tax Counsel, the National Affiliation of Property Tax Attorneys (APTC) in Scottsdale, Arizona. The conference was attended by representatives of many of the major shopping mall owners and developers as well as the attorney members of APTC. The papers presented at the seminar and the ensuing discussion centered around the development of a methodology for separating real estate value from the intangible assets of Shopping Centers and quantifying each of the component parts, the effect of recent revisions of the Internal Revenue Code upon the valuation of Shopping Centers, the relation of anchor department stores to the Mall and the allocation of value in Shopping Centers.

The January, 1996 issue of THE APPRAISAL JOURNAL, published by the Appraisal Institute, contains an article by two MAI’s, Robert S. Martin and Scott D. Nafe, in which the authors take the position that since the Uniform Standards of a Professional Appraisal Practice require Appraisals to segregate real estate and non-real estate components of value, Appraisers must develop methods which segregate and allocate value to these distinct components in sales of going-concern interests in Shopping Centers.

Apart from the methodology presented by the authors, the article has other important implications. The Appraisal Institute, which commissions the most prestigious real estate valuation designation, has provided another forum for the investigation and development of a methodology which measures both the real estate assets and the intangible assets of Shopping Centers.

Further, in calling for value allocations in the sale of the going-concern interest in shopping centers, the authors implicitly recognize the unrealistic market-derived capitalization rates that are currently utilized to determine the real estate value of Shopping Centers for tax purposes.

On another front, a recent Court Decision offers some additional hope that we may be able to move away from the strict view that all Shopping Center assets are rooted in Real Estate.

In April, 1995, the Minnesota Supreme Court in Equitable Life Assurance Society of United States v. County of Ramsey affirmed the Decision of the Minnesota Tax Court which had substantially reduced the assessment on Recital Mall, a Shopping Center located in a suburb of Minneapolis. Most interestingly, for our purposes, the final Decision focuses upon the economic processes involved in maintaining a viable Shopping Center.

Equitable Life Assurance Society operates two regional Shopping Centers, Rosedale and Southdale, both located in the suburbs of Minneapolis. Dayton’s, which enjoys a pre-eminent position in the Minneapolis area, operates an anchor department store in both Centers. The stores are situated on land not owned by the Mall developer. In the assessment challenge brought by Equitable for Rosedale, Dayton’s was not included.

In 1985, when plans were announced to develop Mall of America in nearby Bloomington, Dayton’s informed Equitable that it intended to be one of the Mall’s four anchors. To further exacerbate the situation, Southdale Center is located within five miles of the proposed Mall of America.

Recognizing that Dayton’s presence at Mall of America would adversely affect retail activity at both of its Centers, Equitable negotiated an Agreement with Dayton’s in which it agreed to contribute approximately $58,000,000 to Dayton’s for the construction of new stores at both Rosedale and Southdale. In exchange, Dayton’s agreed not to relocate to the Mall of America and to extend its Operating Agreements with Equitable at both centers for an additional fifteen years.

In the determination of Rosedale Center’s assessed value, we have the beginning of an approach to value which goes beyond a strict adherence to the “running with the land” rule. Equitable’s contribution to Dayton’s at Rosedale Center alone was $28,750,000. It was given specifically for the construction of a new store on a site owned by Dayton’s and which was not the subject of the court action. Nevertheless, in determining the assessed valuation of Equitable’s property, the Court approved the deduction of the total $28,750,000 as an “off-site” expense.

There can be no doubt that Equitable’s contribution was to secure the presence of Dayton’s at its Center and to forestall its move to Mall of America. The reality is that Equitable recognized the economic value of Dayton’s ability to draw a customer base to the Center for its mall tenants.

The “off-site” expenses were so designated because they involved the reciprocal Operating Agreements between the owners of the Mall and the anchor department store which owned its own separate parcel at the Center. Those expenses would be better designated as “relationship” expenses since they represent funds expended in developing and maintaining the presence of the anchor department stores at the Center. They served to cement the relationship between the anchor and the Mall.

The facts dramatically demonstrate that the revised Operating Agreement entered into by Equitable and Dayton’s played a singularly important role in maintaining the viability of the Shopping Center. The Minnesota Supreme Court recognized that the Operating Agreement effected the exchange of property rights between the Mall and the anchors.

Clearly, Equitable did not agree to pay such enormous amounts so that shoppers could have access to the department store and its parking lot. In exchange for Equitable’s commitment, Dayton agreed to provide a very valuable asset, albeit an intangible one. As the premier department store in the Minneapolis area, it committed to deliver its customer base to Rosedale Center. The customer base is an intangible asset which contributes significantly to the Center’s income earning capacity. The lump sum payment for the presence of Dayton’s is a poignant example of the intangible value of the relationship between anchor and Mall created by the Operating Agreement. However, we should also recognize that the relationship is not a one time occurrence; it is on-going. It is a continuing intangible asset which makes a continuing contribution to the Center’s overall value.

The Minnesota Decision opens new vistas which must be refined and developed. Valuation theory has long recognized the existence of intangible value in hotels, restaurants and nursing homes. It is incumbent upon Appraisers, tax managers, attorneys and Mall owners to work toward the day when the intangible value of Shopping Centers and its measurement becomes just as acceptable.