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Case Involving CVS Pharmacy Says 2008 Walgreen's Decision Continues to Rule the Day Despite Revisions to Wisconsin Property Assessment Manual
By Claire Silverman, League Legal Counsel 

The Wisconsin Supreme Court's 2008 decision in Walgreen Co. v. City of Madison [1] (Walgreen/Madison) continues to control how assessors must value Walgreens, CVS and other retail pharmacies for property tax purposes, despite changes made to the Wisconsin Property Assessment Manual to counteract the effects of that decision.  CVS Pharmacy, Inc. v. City of Appleton, 2015AP876 (Ct. App. 12/28/16), unpublished per curiam. [2] Relying on Walgreen/Madison, the Wisconsin Court of Appeals affirmed the CVS Pharmacy's property in 2013 was $1,855,000, much less than the City's $4,459,500 assessment based on an actual sale of the property in 2009.

In Walgreen/Madison, the supreme court agreed with Walgreens that a property tax assessment by the income approach of retail property leased at above market rents must be based on fair market rents rather than the above market rent terms of Walgreen's actual leases and that the value added by an above-market rent constitutes a contract right, rather than a real property right. The Court said, "[W]hat really matters in income approach evaluation, is the fair market rent, not the particular terms of the subject lease."  The Court emphasized that the above market rents paid as part of Walgreen leases were intentionally part of the "creative financing arrangements" made by Walgreen and the developer, which bought the land, built the building, and leased it to Walgreen and that the assessor must assess real property based on the value of the real estate, not the business concern which may be using the property.
The Walgreen/Madison decision was based on language from the Wisconsin Property Assessment Manual (Manual), with the Court finding "particular relevance" in the Property Assessment Manual's explanation that "[w]hen applying the income approach, the assessor must use the market rent, not the contract rent, of the property (unless valuing federally subsidized housing ... [)] and its statement that "[m]arket rent is the rent that a property would receive based on the current, arm's-length rent commanded by similar properties in the marketplace."  The Court noted the Manual adds that "[t]o value the fee simple interest of a property, market rent rather than the actual, or contract rent is to be used in estimating potential gross income." Id. 9-12."  Walgreen Co. v. City of Madison, 2008 WI 80, ¶ 26, 311 Wis. 2d 158, 175-76, 752 N.W.2d 687, 695.
Following the Madison/Walgreen decision, a provision was inserted in the budget bill requiring assessors to consider the actual rent and terms of a lease when determining the value of  leased property using the income approach. The provision stated: "In determining the value of a leased property under sub. (1 ), the assessor, if applying the income approach, shall consider the effects of the actual rent and provisions of all leases affecting the property." 2009 Wis. Act 28, § 1520(d).  The Governor vetoed this provision, stating: "I am vetoing this provision because I object to changing valuation methodology through the legislative process. Currently, property assessment methods and standards are set forth in the Wisconsin Property Assessment Manual. The manual is developed in accordance with professionally accepted appraisal practices and is researched and reviewed thoroughly by experts working in the appraisal field. Changes to property assessment practices should be pursued as updates to the manual to ensure sufficient review by property appraisal experts."
Following the Governor's veto, the Manual was revised to address the provisions relied on by the Court in Walgreens/Madison and counteract the decision.  Despite these changes, the Wisconsin Court of Appeals recently held that under Wis. Stat. § 70.32, assessors must value real property in accordance with the Manual unless it conflicts with applicable law and that to the extent post-Walgreen/Madison revisions to the Manual conflict with that decision, courts are required to follow Walgreen/Madison.  See CVS Pharmacy, Inc. v. City of Appleton at fn. 7. 
The Bottom Line

It is apparent that legislation will be necessary to overrule Walgreen/Madison.  The League is working closely with legislators on introducing and passing such legislation during the 2017-2018 legislative session.

[1] 2008 WI 80, 311 Wis.2d 158, 752 N.W.2d 687.
[2] CVS Pharmacy operates a one-store, single-tenant retail facility in the City of Appleton.  CVS Pharmacy purchased the land for its facility in 2008 for $1,975,000. After acquiring the land, CVS Pharmacy tore down the existing building and hired a contractor to do site work and build a new retail store.  The total cost to construct the new retail store amounted to $1,822,000.  After constructing the new store, CVS Pharmacy sold the property in 2009 to a real estate investment group for $4,459,470.  The property was sold as part of a bundle of 166 CVS Pharmacy stores in a sale-leaseback transaction. The long-term lease requires CVS Pharmacy to pay all taxes and maintenance costs associated with the property, and tied rental payments under the lease to the repayment schedule equal to the property's mortgage payments.  CVS Pharmacy's parent corporation guaranteed compliance with all of CVS Pharmacy's obligations under the lease. 
The City assessed the property at $4,459,000 for 2011, 2012 and 2013 based on the 2009 purchase price and CVS commenced an action under Wis. Stat. § 74.37(4)(d) alleging the City's assessments were excessive.  The circuit court concluded that the City's assessments were not entitled to a presumption of correctness because the assessments violated the principles set forth in Walgreen/Madison and CVS presented significant contrary evidence rebutting the City's assessment; the circuit court determined that  the property's value was $1,690,000 in 2011, $1,760,000 in 2012 and $1,8555,000 in 2013.  The City appealed and the court of appeals, applying the holding in Walgreen/Madison, affirmed the circuit court's decision finding the circuit court's valuations were not clearly erroneous.  
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