The City of Verona has been ordered to cough up more than $60,000 in back taxes and fees to Walgreen's after a judge ruled the company's store in Verona had been assessed excessively.
It's unclear whether the city, which was named as the defendant, would appeal the Dec. 1 judgment. It will be ultimately responsible for less than half of that amount, with the principal, about $53,000, divided up among the various taxing districts and the interest and fees charged either to the city or its legal defense insurance. Final numbers were unavailable Tuesday, but the Verona Area School District might need to reimburse the city as much as $30,000, with the numbers complicated by the presence of a tax-increment financing district.
At the heart of the suit is two adjacent parcels at 104 N. Main St. that were assessed at a combined $4,059,500 in 2007 and 2008 and were taxed a total of $155,614. The lawsuit asked that the valuations be cut almost in half, to $2.37 million in 2007 and $2 million in 2008, requesting refunds of $71,626.
After a two-day trial Nov. 18-19, Dane County Circuit Court Judge Juan Colas mostly agreed with Walgreen Co., setting the property value at $2.75 million for 2007 and $2.6 million for 2008. He added about $6,000 of fees and costs for a total refund of $63,508.
Even though the suit was filed three days after Walgreen Co. won a Wisconsin Supreme Court case against Madison that ruled that city's method of assessment was invalid, in July 2008, the inner workings of the two cases have little relation.
The Madison case had a broad impact in Wisconsin, with that being one of many cities to judge the property value by the rent the stores pay to the land developer, one type of "income approach." The court ruled those long-term leases were not appropriate indicators because they factored in the unusually high cost of developing the property, not what it would sell for on the open market.
But Verona wasn't in violation of that principle, explained Paul Musser, whom the city hired for a 2007 revaluation.
"They were using actual rents to come up with the value," he said of Madison. "We did use market rents (as required)."
Musser added that the market rates he used to help determine the value were actually higher than the contracted rates Walgreen's was paying, making that entire issue moot.
The Verona suit considered three aspects of the assessment: the actual cost, the income and comparable sales, with most of the argument centering on income, Musser said.
"The whole case went back and forth with regards to the income approach, but at the very end the judge's decision threw all its weight on the sales comparison approach," he said. "We didn't even present a case on the sales comparison approach."
Verona argued briefly against the comparable properties Walgreen's produced, he said, but didn't focus heavily on that approach because truly comparable properties are nearly impossible to find.
"What makes them valuable is the capitalization rate they sell for," Musser explained. "There is so low of a risk factor in these Walgreen's because they are long-term leases. ... (Developers) might build the building for $3 million and they can turn around and sell that building for $5 million. They're buying a bond, basically. The owners (of the land), they make all their money at the sale."
The unusual financial arrangements and difficulty in assigning a proper value for Walgreen's stores, generally located at the highest-traffic areas in a given city, has been the source of many legal issues in recent years. Since 2006, Walgreen's has sued seven cities or villages in Dane County for improper assessments and more than 20 municipalities statewide.
In the state Supreme Court case, the justices voted 7-0 in favor of Walgreen Co., recognizing that Walgreen's typically leases buildings from a developer at rates higher than market value. That reflects the high costs of development related to its "super adequacies" - specially tailored features like the high ceilings, large signage and drive-through bays common to Walgreen's stores, the decision said.
As a result, the lease Walgreen's pays to the developer is much higher than the property owner could get from another company, the court concluded. The lease rates, therefore, do not reflect fair market value of an "arms-length" transaction - one in which the buyer and seller would have no other relationship to each other.
"It is erroneous to rely solely on the income approach in a property assessment," read the opinion of Justice Louis Butler.
That statement might have had something to do with Verona's result, with Judge Colas ruling that comparable sales, and not just income, were the most important factor in determining value.
Coincidentally, the decision is the second hit to Verona's wallet in the past three months coming from the 2007 Board of Review. In October, the board (consisting of member of the Common Council) approved a settlement with Prairie Crest Apartments for about $35,000, divided mostly the same way, about one-third from the city, about half from VASD.
Musser's revaluation of city properties in 2007 caused a bit of an uproar.
Because it had been five years since the last revaluation and property values had increased quite a bit in that time, the average assessments in the city increased by about 30 percent. The tax rate also dropped by a commensurate amount that year, meaning the average property's taxes stayed the same, but some properties increased or decreased disproportionately.
The board declined appeals by both Prairie Crest and Walgreen's that year.
