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Kohl : Lower Property Taxes are Silver Lining for Landlords in Weak Retail Market

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08/29/2017 | 01:15pm CEST
By Esther Fung 

In April, the Indiana Supreme Court handed Kohl's Corp. a victory when it agreed not to review a lowered property assessment that was awarded to one of Kohl's stores because of the growing vacancy and dropping values of other shopping centers in its area.

The decision, which translated into a $219,000 refund for Kohl's, was a sign of the drain to tax revenues resulting from the worsening retail real estate landscape for Howard County, the taxing jurisdiction, as well as other local governments throughout the country.

Retail sales and occupancy rates are falling in many parts of the country, partly due to oversupply of stores and competition with online retail. That has meant lower property values, lower tax collections and -- in some cases -- less to pay teachers and firefighters.

But property owners and retailers say lower tax bills, which are a large part of operating costs, will help to keep them in business. "This is one of the ways to lower operating costs and the new owner would then be able to negotiate better deals with tenants and keep them in the mall," said Thomas Dobrowski, executive managing director of capital markets at real-estate services firm Newmark Knight Frank.

National statistics aren't available on reduced tax assessments and refunds for retail landlords. But the sector clearly is suffering reduced property values as landlords face more pressure these days from department stores and other tenants downsizing or filing for bankruptcy protection. Property-services firm Cushman & Wakefield estimates that the number of store closures this year to reach at least 8,000. That would be up from more than 4,000 in 2016.

More retail landlords are defaulting on loans than owners of other property types. In the first seven months of 2017, the loan balances of these defaulted mortgages increased roughly 20% to $1.34 billion, according to data from Trepp Inc.

Buyers of struggling malls that pay low prices often quickly pursue a reassessment of the property based to lower the tax bill. Assessors say more store owners and mall landlords are lodging appeals for a lower assessed valuation for their shopping centers and malls.

"There's a cottage group of people who do nothing but appeal tax assessments. They're tax agents, and their job is to look for loopholes to get property taxes lower," said Tim Wilmath, chief appraiser at the Palm Beach County Property Appraiser's Office. "I've heard lots of reasons why taxes have to be lower due to e-commerce."

Property-tax bills are some shopping center owners' biggest expense, outpacing salaries and rents. "There's a lot of activity in the appeals space. There's a lot of value in doing that," said Tim Trifilo, a partner in the tax practice of CohnReznick LLP, an accounting, tax and advisory firm.

Some landlords appealing their assessments point to the declining amount of sales taxes being generated by their stores. Others cite market conditions in the region, such as sales prices of vacated stores.

Frank Lima, who heads real-estate services firm Hilco Global's tax advisory practice, recently included a value analysis of vacated stores of appliance seller Hhgregg Inc. to lower the assessed value of another retailer's property. "We look at market rents, what an empty box would sell for," said Mr. Lima.

Some battles over tax assessment focus on what is known as the "dark store" method of analyzing value. According to this method, even if a shopping center has solid tenancy and cash flow, its value is affected by low vacancy and store closings in the surrounding area.

In the Kohl's case, the retailer challenged the Howard County Assessor's valuation for 2010 to 2012. Kohl's appraiser looked at sales of what the appraiser said were comparable retail property in the Midwest, including former Wal-Mart and Kmart stores.

These properties were sold for prices ranging from $5.13 to $63.65 a square foot. Howard County Assessor Mindy Heady hired another appraiser who opined that only one property that sold at $63.65 a square foot was comparable. The others were in markets with smaller demographics. One was located in a "dead" mall, according to documents from the Indiana Board of Tax Review.

"We as assessors think that they [landlords and retailers] are misusing it. That's why we're battling it," said Ms. Heady, referring to the "dark store" methodology some taxpayers are using to lower their property valuations.

Kohl's didn't respond to requests for comment.

Write to Esther Fung at [email protected]

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Financials ($)
Sales 2018 18 576 M
EBIT 2018 1 308 M
Net income 2018 635 M
Debt 2018 2 879 M
Yield 2018 4,77%
P/E ratio 2018 12,23
P/E ratio 2019 12,14
EV / Sales 2018 0,57x
EV / Sales 2019 0,57x
Capitalization 7 766 M
Duration : Period :
Kohl's Corporation Technical Analysis Chart | KSS | US5002551043 | 4-Traders
Technical analysis trends KOHL'S CORPORATION
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus HOLD
Number of Analysts 22
Average target price 41,9 $
Spread / Average Target -9,0%
EPS Revisions
Kevin Mansell Chairman, President & Chief Executive Officer
Sona Chawla Chief Operating Officer
Bruce H. Besanko Chief Financial Officer
Frank V. Sica Independent Director
Stephen E. Watson Lead Independent Director
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