Walgreens and CVS declare war on property taxes

Walgreens boasts convenient locations, a wide array of products, and a killer tax strategy.

When it works, local tax officials warn, kids and homeowners suffer.

In the fall of 2012, county tax officials across Kentucky began preparing for a clash with the pharmacy chain, which operates thousands of stores in the U.S. and has a market value of more than $90 billion. Walgreens was challenging its tax assessments at stores across the state. If the company won, the assessors feared, other national retailers would follow suit, threatening the budgets of already struggling school districts.

“If you start losing the tax assessments on all of these leases, the cost is going to be hundreds of millions of dollars,” said David O’Neill, the property valuation administrator in Fayette County.

- Advertisement -

The tax people rallied. Workers in the state’s largest counties compiled a report on Walgreens’ strategy and circulated it to smaller tax offices. When the Deerfield, Ill., chain asked a state court to halve the taxes on a drugstore in Lexington, the assessors passed the hat. Kentucky school districts, which receive about two-thirds of property tax revenue, chipped in $26,000 so the county could afford to hire expert witnesses.

Last month, a Kentucky circuit court judge ruled in favor of Fayette County, which includes Lexington, concluding the latest skirmish in a long-running battle between national drugstore chains and tax assessors. Walgreens declined to say if the company would appeal the ruling.

Walgreens, CVS and other big drugstore chains have been challenging property tax assessments in courts around the country for the past decade, with little national notice. They argue, sometimes successfully, that the rent they pay their commercial landlords doesn’t accurately reflect property values. When they win, they get their tax bill slashed.

Here’s how it works.

Most national retailers would rather rent their stores than tie up billions of dollars in real estate. Walgreens leased 80 percent of its 8,300 stores as of August 2014, according to company filings. CVS owned just 5 percent of its 7,800 stores as of the end of last year.

The basic idea is to rent stores under contracts, called net leases, that make the tenants—the drugstores—responsible for property taxes and other expenses. To compensate the investors who sink cash into the real estate, Walgreens and other retailers pay rents that include a premium above the cost of building the store. Once the stores are occupied, net leases often trade between investors.

It’s a hefty market. About $45 billion in net leases for U.S. properties changed hands in 2014, according to Will Pike, a senior vice president at commercial real estate firm CBRE.

In tax board and judicial appeals that have sought to cut levies by more than 50 percent, Walgreens and CVS have argued that the price investors will pay to own a drugstore lease is the wrong tool for determining the tax. Instead, they argue, the assessments should hinge on the amount the landlord could get if the drugstore moved out and another retailer moved in. That would lower the assessment because the pharmacy chains have proved willing to pay higher rents than other tenants.

So the same premium that entices investors to buy the net leases gives the drugstores leverage in their tax arguments.

The chains say it’s only fair. They complain that counties are taxing corporate debt instead of sticks, bricks, and mud—assessors’ slang for land and buildings.

“We’ve become more concerned in recent years with the use of valuation methodologies based on the value of our long-term leases in addition to the value of the real estate itself,” said Phil Caruso, a spokesman for Walgreens.

“CVS Health is committed to being a good corporate citizen in the communities we serve and to paying our fair share of property tax,” said Mike DeAngelis, director of public relations for the company.

The strategy has met with mixed results. In Florida and New York, where Rite Aid has challenged its assessments, courts have rejected the net lease argument. Wisconsin has ruled in favor of pharmacies. Tax assessors scored in the Ohio courts but saw their points erased when the state’s legislature revised the tax law in the pharmacies’ favor.

Commercial property taxes fund public schools, roads, and other infrastructure in many states. Big box stores and other national retailers have tried out the drugstores’ argument, said Tim Wilmath, a tax assessor in Hillsborough County, Fla., whose office won a state court case against CVS in 2013. But the pharmacy chains have the most at stake. That’s because of the premium they’re willing to pay for stores in busy locations, and because they lease a lot of stores, relative to other retailers.

No posts to display