Reduce high retail occupancy costs by ensuring property valuation is not excessive


Small businesses face huge challenges in competing online with big brands like Amazon and Walmart, which have a far greater presence on the web than small, family-owned retailers. Pictured is a recently completed distribution center for Amazon at Pullman Crossings in Chicago.

By Morris Ellison, Womble Bond Dickinson

E-commerce was here to stay even before the pandemic devastated small businesses and placed even greater emphasis on technology. In the changing landscape, lowering occupancy costs by lowering property taxes is one of the most important steps businesses can take to stay competitive.

Home orders still prevent many shoppers from visiting their favorite physical stores, while fear of contagion exacerbates consumers’ reluctance to shop in person. Regardless of customer traffic, however, retailers still incur fixed costs, including insurance, business software, property taxes and, arguably, rent.

Morris Ellison, Womble Bond Dickinson

The costs of occupying online-only retailers are much lower, making it difficult for small, physical businesses to compete. In other words, sales taxes go down as sales decrease, but property taxes don’t. Landlords and tenants of triple net leases often fail to consider property taxes, but the survival of both may depend on reducing that cost.

Other costs such as insurance and the business software needed to run the business are usually beyond a small business’s control and do not decrease as business volume decreases. The active 2020 hurricane season has certainly not reduced insurance costs. During the pandemic, some landlords have postponed or canceled rent, but this forbearance does not provide any long-term solution to the challenges posed by e-commerce.

Mounting pressures

The threat posed by high ad valorem taxes to small businesses affected by the pandemic is compounded by and closely related to the threat of e-commerce. Small businesses face huge challenges in competing online with big brands like Amazon and Walmart, which have a far greater presence on the web than small, family-owned retailers.

The challenge from e-commerce to traditional retail will not end with the pandemic. The bulk of retail sales still take place in stores, with online shopping peaking in the second quarter of 2019 at just 16% of total retail sales in the United States, according to the Commerce Department. This percentage slowed to 14% in the third quarter.

COVID-19 has accelerated the trend towards “Buy online, pick up in store” (BOPIS). Before the pandemic, BOPIS offers were already growing as shoppers used it to avoid in-store navigation time and shipping costs. A 2018 study found that 90% of online shoppers surveyed said high shipping costs and door-to-door delivery of more than two days would likely deter them from making an online purchase. Even before the pandemic, Amazon’s fast delivery model pressured mainstream retailers to be competitive by speeding up shipping times.

BOPIS allows retailers to combine online and in-store customer engagement while providing a more convenient way to shop. COVID-19 has accelerated this trend as shoppers have sought to minimize people-to-people contact during store visits. Merchants should, however, be certain that the applicable restrictive covenants allow BOPIS, as shopping malls often limit the right of tenants to use common areas. Additionally, traditional methods of valuing properties for tax purposes struggle to recognize and separate the intangible, non-taxable value of web presence from the value of a physical location that serves as a pickup point.

Black Friday and Cyber ​​Monday 2020 illustrate the evolution of the relationship between physical stores and e-commerce. RetailNext reported that foot traffic in physical stores from Thanksgiving through the following Sunday declined 48% from 2019, while spend per customer increased by more than 36%.

Shopping mall traffic tracker Sensormatic Solutions found that online ordering and social distancing restrictions made shoppers more “determined” on their Black Friday trips. Adobe Analytics reported that Black Friday recorded $ 9 billion in online sales in the United States, an increase of almost 22% year-over-year, making it the second day of spending in line in importance. Cyber ​​Monday brought the biggest shopping day in U.S. history with a volume of $ 10.8 billion, a 15.2% increase from 2019, Adobe reported. Adobe also noted that Black Friday curbside pickup increased 52% year-over-year.

Common interest

Landlords and tenants need to recognize the mutual prejudice of high occupancy costs and guard against unwarranted property taxes as local governments seek to consolidate their finances. Every penny counts when retailers are under economic pressure just to keep their doors open. The remaining lease years are a cold comfort to a landlord whose tenant is forced to close their doors due to declining income and high occupancy costs.

Some short-sighted landlords ignore the property tax burden on their triple net tenants until a renewal is imminent, as homeowner’s costs are not directly affected. Whenever possible, a good lease on multi-tenant properties will solve tax challenges and discourage taxes from being viewed as a simple passed-on expense. Additionally, prudent landlords should help reduce tax burdens and avoid having to negotiate reduced rents to keep small businesses in business. Most leases do not contain a provision allowing tenants to challenge ad valorem property taxes. Likewise, many state laws only allow landlords, not tenants, to challenge taxes.

Most appraisers have yet to recognize the impact of COVID-19 on retail stores, primarily because the appraisal date for most properties predated the full impact of the pandemic on retail. This will change in 2021 in many jurisdictions. Likewise, the trend towards BOPIS will increase the intangible value of online presence, generally not subject to ad valorem taxation, and decrease the importance of physical locations.

COVID-19 is pressuring local governments to increase the tax burden on small businesses. A recent survey found that municipal revenues fell 21% while spending rose 17% amid the pandemic. The survey reported that 45% of mayors expect drastic budget cuts for education, while at least a third expect drastic cuts to parks and recreation, public transport and roads . Only 36% of mayors expect to see a replacement of businesses closed due to COVID-19.

High property taxes will only exacerbate the municipal revenue problem. A short-term fix to municipal finances, higher property taxes, risks the permanent closure of many small businesses. Failure to fix the problem will only accelerate the decline of brick-and-mortar stores and wipe out their local jobs and taxes.

Morris Ellison is a partner in the Charleston, SC office of the law firm Womble Bond Dickinson (US) LLP. The firm is a South Carolina member of the American Property Tax Counsel, the national affiliation of real estate tax lawyers.