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Taxes Based On Outlet Income
by Ron Davis
Do outlet centers differ from traditional shopping centers in their owners’ goals? Connecticut’s courts think they do, and, as a result, they have applied different standards to the taxing of the two types of properties.
The tax issue arose when the owners of a Clinton outlet center—Clinton Crossing Premium Outlets—disputed the local tax evaluation of the property. They felt that the property value set by local tax officials was based on the wrong criterion.
The Clinton outlet center consists of six buildings situated on 47.3 acres of land and, like other outlet centers, has a concentration of brand-name factory stores that sell merchandise at prices well below those charged at traditional retail stores. The location is much like that of most outlet centers, which typically are in remote, nonurban areas.
In judging the value of the property, the local tax officials nevertheless based their assessment on the income derived from the outlet center rather than its appraised market value. That choice resulted in a higher assessment than the owners believed was justified.
A Connecticut court backed the evaluation based on the income approach. The judge pointed out that the typical purchasers of outlet centers are major investors such as large pension funds, institutional investors and real estate investment trusts. He added that those investors are generally more interested in the profit performance of the acquisition and, therefore, are more concerned with income and expenses than the actual value of the outlet center.
He consequently rejected the evaluations of the property based on the market sales approach of two appraisers hired by the owners of the outlet center.
Explained the judge, “The market sales approach is inappropriate for determining the fair market value of the subject property. This is because investors, such as those purchasing outlet centers, are primarily interested in a return of profit from an acquisition.”
As a result, the court set the value of the property for tax purposes at $45,681,848—some $5.6 million more than the center’s appraisers valued the property using the market approach. (Chelsea G.C.A. Realty Partnership, L.P. v. Town of Clinton, 48 Conn.Supp. 387, 844 A.2d 285)
Decision: February 2004 Published: April 2004
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