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VOL. 125 | NO. 70 | Monday, April 12, 2010

The Biggest Spenders

Tax-weary malls try to sell themselves short at the assessor's office

By Andy Meek

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Shoppers enjoy the open air atmosphere at The Avenue Carriage Crossing in Collierville.  Photo: Lance Murphey

David Simon, chairman and CEO of the nation’s largest public real estate firm, told analysts a few weeks ago during Simon Property Group’s fourth quarter earnings conference call that 2009 was a challenging year. And he doesn’t think 2010 will be much better for the company, which owns two malls in Memphis.

“Retailers are very focused on expenses and rents,” he said. “They're still closing stores. We're doing the best that we can do, but it's still a challenging environment.”

One way that’s giving mall owners in Memphis an incentive to protect their bottom lines is by scrutinizing the same thing local homeowners have been watching closely in the recession: property tax values, which determine property tax bills.

In Memphis and elsewhere, that’s setting the stage for high-dollar disputes between the taxman and beleaguered mall owners keeping their fingers crossed over the direction of the economy.

Exhibit A

The closures referenced during Simon’s conference call are a big concern to a mall owner of its size. Simon owns or has interest in 382 properties with 245 million square feet of gross leasable area in North America, Europe and Asia.

The Indianapolis-based company employs more than 5,000 people and boasts annual sales of more than $60 billion. Its portfolio of 162 regional malls includes the two in Memphis. One of them is Wolfchase Galleria, which sits on 45 acres at the corner of U.S. 64 and Germantown Parkway. The other is Oak Court in East Memphis.

Wolfchase lost two longtime tenants – Pottery Barn and Banana Republic – in recent weeks. Those spaces have been re-leased, but to tenants with less cachet.

Charming Charlie, a women’s accessories store, is replacing Pottery Barn. Aerie, a brand of American Eagle, is going into the Banana Republic space.

The general reasons for retail closures are widespread. Disposable income remains an abstract notion for many consumers still hunkering down as the economy recovers. Retailers are touting price cuts and value the way they used to hawk budget-busting luxuries.

The Oak Court Mall, anchored by Dillards and the region's largest Macy's, features a number of high-end specialty shops. The mall is at 4465 Poplar Ave.  Photo: Lance Murphey

The Web site for Collierville’s major shopping center – The Avenue Carriage Crossing – asks visitors if they are a “Recession-ista” who likes to swap news about deals with other shoppers. “Find us on Facebook and share shopping deals, gift ideas and tips!” the site announces.

That reflects why the retail sector affords such a clear-eyed picture of consumer sentiment. When buyers stop reaching for the plastic in their wallets, the sector suffers.

But the effects don’t stop there. And that’s why shopping center owners in Memphis, like Simon, have begun using the recession as Exhibit A in an attempt to reduce what in many cases are already hefty property tax obligations.

When owners of large commercial properties do that, it can have community-wide implications. Reductions in the value of those properties can put millions of dollars in tax revenue at stake in cities and counties whose budgets already are stretched thin.

Case in point

In Shelby County, many large-mall owners write six- and seven-figure checks to pay their tax bills. Cut the property value, and you eat into that lucrative stream of tax revenue.

Think your taxes are high? Simon was stuck in 2009 with the biggest single property tax bill in Shelby County: more than $4.4 million for Wolfchase.

Simon is preparing to appeal the property value for Wolfchase, which was issued earlier this month by the Shelby County Board of Equalization. The board recently approved a figure of $150 million – a 15 percent increase over what the mall was worth last year.

The Shelby County Assessor of Property’s office originally tagged Wolfchase with a reappraisal of $154 million, which Greg Moody – director of appraisals for the assessor’s office – said is “on the lower side of correct.”

The next stop for Simon’s challenge of the value increase is the state Board of Equalization.

The $150 million Wolfchase Galleria is fighting its property value in an effort to lower its eye-popping tax bill.  Photo: Lance Murphey

For Simon, the appeals process began when company representatives met privately with the assessor’s staff. No agreement could be reached on lowering Wolfchase’s price tag (Simon wanted it cut from $130 million to $124.5 million), so Simon got in line to make its case to the county board.

Wolfchase’s tax attorney, Andy Raines, told board members Simon’s big concern for the mall is getting and keeping national tenants. That trend is playing out at Simon’s other local mall, Oak Court.

The bookstore Brentano’s closed there last year. So did Hallmark. Brentano’s was replaced by the clothing store Her She, and Hallmark’s space has not been filled.

“You cannot look at Wolfchase in a vacuum,” Raines told the county board. “It’s a difficult retail environment, and Wolfchase has to act – has to be in that environment.

If your mall cannot keep Pottery Barn open, that’s a sign there are issues in the mall.”

The assessor’s office countered that vacancies at Wolfchase are practically nonexistent, that the cash registers are still ringing loudly at most of its stores and the mall was refinanced two years before the reappraisal, at $225 million.

The value of enterprise

As Wolfchase’s example shows, this year the battle between the taxman and large mall owners has begun in earnest. What’s more: Almost every major shopping center in the county challenged the new tax appraisals they received last year.

The updated tax values were calculated during the 2009 reappraisal, a process that happens once every four years. Its purpose is to make sure changes in the local real estate market are reflected in property values.

The assessor’s office for the past several weeks has been working through those mall disagreements one by one. Most of the disputes have been resolved – resulting in lowered tax appraisals and, thus, reduced tax bills for some of the owners.

Oak Court’s appraisal of approximately $45 million was left unchanged. The assessor’s staff decided that mall is still performing well. And its stores’ incomes remain steady.

But the staffers decided the mall’s tenant mix is less of a sure bet than it used to be.

“If your mall cannot keep Pottery Barn open, that's a sign there are issues in the mall.”

– Andy Raines, Tax attorney for Wolfchase Galleria

“If the Gap leaves, it’s not necessarily a Gap-type store coming back in,” Moody said, referring to newer stores with less widespread name recognition. “That’s one of the things I did allow for at Oak Court.”

Carriage Crossing, which sits on 60 acres and opened in 2005, was valued at $77.98 million in 2008. The assessor first reappraised it last year at $80 million.

After studying information from the mall and taking a second look, the assessor’s office dropped the reappraisal value to $66 million.

Whitehaven’s Southland Mall went from $8.25 million in 2008 to more than $15 million last year. The assessor’s staff cut its 2009 value to $13 million and settled the disagreements with the mall's owners, Oak Court and Carriage Crossing within the past few weeks, leaving Wolfchase – the biggest mall value at stake – still up in the air because of the pending appeal.

The issue matters on a big picture level because of the 10 most highly valued properties in Shelby County, three are malls: Wolfchase, Oak Court and Carriage Crossing.

Wolfchase sits at the top of that list. It has the county’s largest individual appraisal.

For 2009, those three malls collectively were billed $7.53 million in property taxes by Memphis, Shelby County and Collierville (the city to which Carriage Crossing pays its city taxes).

Based on those three malls’ updated property values, though, they’ll pay no more than $7 million this year, assuming the city and county tax rates don’t change.

Wolfchase was built in 1997. The two-story, 1.1-million-square-foot retail behemoth has the usual mall staples – Sears, Dillard’s and Macy’s, plus a Malco movie theater.

Simon reported in its most recent annual report the mall was almost 95 percent occupied at the end of 2009.

Regarding its appraisal, Wolfchase has been in this situation before. After the last reappraisal in 2005, lawyers more aggressively appealed the mall’s tax value than they did this year. They argued the new 2005 value should be shaved almost in half.

The reason: an appraisal industry concept known as “business enterprise value.” Wolfchase at that time argued much of the mall’s value was tied up in the intrinsic worth of the Simon brand and shouldn’t be included for tax purposes.

A supporter of that concept was brought in to do his own appraisal of the mall. A state administrative judge sided with the assessor’s office on appeal.

Then-assessor Rita Clark said the judge’s decision was a big one, because had it gone the other way the assessor’s office expected other retail businesses would have followed suit.

“Obviously, people are more price-conscious right now. So the sales and special offers and things like that – those are really driving traffic.”

– Elizabeth Allen, Spokeswoman, The Avenue Carriage Crossing

In a sign of how closely the dispute was being watched, Clark’s office held off sending out reappraisal notices for similar retail properties while the Wolfchase appeal worked itself out.

A representative of the assessor’s office at the time told The Daily News, sister publication of The Memphis News, that appraisal appeals normally come down to mathematical arguments.

One side says a property is worth this much. Another side counters with a different figure. Both sides put on their proof, and the affair is largely fact-driven.

The business enterprise value methodology brought a controversial, less scientific element into the mix.

The effort was not arbitrary on Simon’s part. The company, after all, is publicly traded to maximize value for shareholders.

However, it’s generally understood that the mall owners are not somehow taking advantage of any legal loopholes or that the efforts to reduce their tax values mean they’re suffering more than other property owners.

Many homeowners also complained loudly that property value increases last year didn’t make sense amid the worst recession in decades.

A cut above

Likewise, Moody told the county board he doesn’t relish recommending increases during this climate, even when he feels it’s the right call. Commercial property owners have those same factors to consider in weighing whether to appeal their values.

When they do so, the pitches they make in favor of reduced values also don’t necessarily signal trouble.

The three biggest local mall properties, for example, give an air of stability in their own ways.

They’re also adding new touches here and there to draw shoppers. New features at Wolfchase include a vendor selling rugs under a large tent in the section of the parking lot that faces Germantown Parkway.

In the mall’s carousel area, a ride has been installed that resembles something from a large-scale amusement park. It looks like a giant slingshot, and patrons can strap themselves in and kick upward to launch themselves into the air and back down several times.

Carriage Crossing is getting even more creative. Atlanta-based Cousins Properties’ ‘lifestyle center’ in Collierville keeps a full slate of community events, like “Fridays at the Avenue,” which it’s starting this month.

Every Friday from April 30 through the end of October, Carriage Crossing will host a free series of events: live music, outdoor movies and more. The center will hold free showings of movies such as “Up,” “E.T.” and “Hoosiers” in a common area.

“Obviously, people are more price-conscious right now,” said Carriage Crossing spokeswoman Elizabeth Allen. “So the sales and special offers and things like that – those are really driving traffic. But we’ve also noticed a change with this recession in consumer attitudes and behaviors.

“We’ve noticed a recommitment to values, beliefs, whatever you want to call them, that might have diminished during the high times of the economy. There’s a renewed focus on the importance of family, friends and community. People are trying to make the moments count.”

She said Carriage Crossing is pushing to continue attracting more local boutiques, specialty stores and restaurants to complement its existing mix of upscale tenants.

Furniture and accessories retailer I.O. Metro opened its 16th store with a 15,000-square-foot showroom at Carriage Crossing earlier this year. The store donated 10 percent of sales from its grand opening event to St. Jude Children’s Research Hospital.

In the past year, Divine Rags, Bed Bath & Beyond and Ben & Jerry’s all opened at Carriage Crossing, which is currently anchored by tenants like Dillard’s and Macy’s.

But those are the kinds of moves Carriage Crossing would be making even if these were normal economic times – recruiting unique tenants to make the center stand out from the competition.

What all this means is large commercial property owners have something in common with job seekers amid the economic downturn. To find success, they have to keep their edge.

How each mall owner is addressing its reappraisal is one piece of that.

Another has to do with the way they’re indelibly changing the once popular notion of the American shopping mall.

They’re no longer viewed as a basic mix of stores centered around staples like Dillard’s and Sears, with food courts peddling pretzels and pizza, where teenagers hang out in their free time.

Witness Carriage Crossing – the owners of which loathe even calling it a “mall” – and the way it hosts pet adoptions for the Collierville Animal Shelter.

It’s also where families are encouraged to come enjoy events later this year like watching the free family oriented movies under the stars.

“In attracting tenants, like everybody, we have really aggressive leasing packages right now,” Allen said. “At the same time, we’re also trying to find ways to be part of peoples’ lives and part of the community. And the long-term effects of that, I think, will really make us stand out from the competition.”

PROPERTY SALES 51 328 20,960
MORTGAGES 58 387 24,132
BUILDING PERMITS 170 842 43,435
BANKRUPTCIES 50 288 13,468