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As Market Values Fall, Malls Seek Lower Tax AssessmentsLock Icon

6 min read

Two Arkansas malls are challenging their 2017 property assessments, saying they are millions of dollars too high, a move that could become a trend as market values fall for malls and department stores struggling to attract shoppers.

The owners of the Northwest Arkansas Mall in Fayetteville and the Hot Springs Mall have appealed their assessments in their respective circuit courts, and legislation passed last year by the Arkansas General Assembly could lend them support.

Documents filed in the appeals suggest both malls are stumbling.

Sears recently closed its store at Northwest Arkansas Mall, leaving two anchors: Dillard’s and J.C. Penney. The mall’s net income in 2016 was $4.4 million, down nearly 25 percent from the previous year, according to documents the mall’s owners filed in Washington County Circuit Court. The lawsuit said the market value of the property should be $39.5 million, not the $63.6 million calculated in the assessment.

In Garland County, 22 of 60 storefronts in the Hot Springs Mall are vacant, according to the mall’s website. It still has its three anchors of Dillard’s, J.C. Penney and Sears. It argues that its assessed value should be $6 million, not the $10 million value placed on it in November by Garland County.

Bryan Reis of Hot Springs, the attorney for Rockstep Capital Opportunity Fund LLC, which owns the Hot Springs Mall, didn’t return a call.

Attorney J. Douglas Gramling of Fayetteville, who represents the investors from Great Neck, New York, who own the Northwest Arkansas Mall, said he couldn’t comment unless he received permission from his clients.

Brandon Svec, a market economist, finds the malls’ trends troubling. He is with the CoStar Group Inc. of Washington, which provides commercial real estate information.

Once an anchor closes, he said, it becomes “extremely difficult” to find another retailer to rent the space. “That is going to put a substantial dent in the operating revenue of the mall” and in the “long-term viability of the location for retail,” he said.

When it was announced in November that Sears was closing its doors in the Northwest Arkansas Mall, the mall’s value dropped, Svec said. The Sears closing is also likely to lower the value of nearby retail properties, Svec said.

“Not only will that mall be worth less, but you could make a case that really any retail within that immediate trade corridor also will be worth less because there’s going to be substantially less [customer] flow,” Svec said.

Garland County Judge Rick Davis said he couldn’t comment on the Hot Springs Mall case because it was pending. But he fears the case “could create a chain reaction at some point,” with other retailers challenging their assessed valuations.

Svec agreed. He said any retailers in the area of the Northwest Arkansas Mall should use the closing of the Sears as leverage to get their assessments lowered.

“I am quite frankly out of line with my fiduciary duty to my shareholders if I’m not pushing and leveraging that to get my taxes lowered as much as possible,” Svec said.

Legislative Change
Arkansas property owners’ efforts to challenge the assessed value could be helped by the Legislature’s passage last year of Act 659, which was promoted as a way to improve the fairness of property tax administration and appeals and supported by the Arkansas State Chamber of Commerce/Associated Industries of Arkansas.

The act “lowers a taxpayer’s burden of proof when appealing a board of equalization decision, and it specifically provides that courts must not presume that a board of equalization’s valuation decision is correct or is entitled to some special weight,” Matthew C. Boch, a member at the law firm Dover Dixon Horne PLLC of Little Rock, said in an email to Arkansas Business. Boch advises clients on state and local tax issues.

“This is a tremendous departure from the historic approach of judicial deference unless the assessment is manifestly excessive, clearly erroneous, or confiscatory, and it should go a long way to giving taxpayers a fair shake.”

However, he said, uncertainty lingers on how the act will apply to 2017 assessment challenges because the act’s effective date wasn’t crystal clear. “It will be interesting to see how cases play out,” Boch said.

Boch added that he expects more challenges to assessments on malls and big-box stores.

Svec also sees a likelihood of more challenges. “The number of secondary and tertiary malls that will close over the next 10 years in this country will be astounding,” he said. “And it will have a ripple effect on local cash markets and local retail markets, no doubt.”

Last year, Credit Suisse projected that 20-25 percent of malls across the country will close over the next five years as more customers turn to shopping online.

Svec said the better malls are “performing very well” and outperforming the market.

But malls that are having trouble are the ones losing their anchors like Sears and in, some cases, Macy’s. Both retailers have closed or sold hundreds of locations in recent years.

“Once you see one or two of those anchors go, it’s pretty much the death knell for the mall,” Svec said.

Northwest Arkansas Mall, Fayetteville
Financial Statements

2013 2014 2015 2016
Base Rent Revenue $6,446,677 $6,337,122 $6,171,307 $6,195,784
Gross Revenue $10,517,840 $10,821,722 $10,096,287 $10,014,967
Total Operating Expenses $3,885,874 $4,127,567 $3,986,814 $3,266,914
Net Operating Income $6,631,966 $6,694,155 $6,189,111* $5,815,381
Net Income NA NA $5,822,334 $4,428,700

* Another filing reports net operating income as $5,181,037
Source: Documents that Northwest Arkansas Realty LLC filed in Washington County Circuit Court in a lawsuit against the Washington County Tax Assessor and Washington County Board of Equalization. NA: Not available

Mall Challenges
In its court filings, Rockstep Capital did not list specific reasons that the Hot Springs Mall’s value should be assessed at $6 million instead of the county’s $10 million figure.

The lawsuit said the assessed value was “arbitrary and manifestly excessive, oppressive and does not value the property … at its true market value.”

The lawsuit, filed in December, marks the second time since 2015 that the mall has challenged its appraisal.

In December 2015, Rockstep sued the Equalization Board of Garland County to appeal the mall’s property assessment of $19.25 million, an assessment later lowered by the Equalization Board to $12.8 million, according to Rockstep’s lawsuit in Garland County Circuit Court.

Rockstep said the 2015 value of the mall should have been $5.5 million. The dispute was sent to mediation and both sides agreed that the assessed market value for 2015 was $8.6 million and $9.1 million for 2016.

As of Wednesday, a court date hadn’t been set in its most recent appeal.

The owners of the Northwest Arkansas Mall also didn’t have a court date for their appeal, which is pending in Washington County Circuit Court.

The mall is owned by Namdar Realty Group, through its Northwest Arkansas Mall Realty LLC, and CH Capital Group, through Northwest Arkansas CH LLC. Each owns 47.5 percent of the 820,500-SF mall.

The remaining 5 percent is owned by Mason Asset Management through Northwest Arkansas Nassim LLC. The investors bought the mall in December 2015 for $39.5 million.

Investors said in their appeal that the assessment is excessive and “greatly exceeds what willing and knowledgeable buyers will pay.”

They also said in the complaint that the assessment is “unfair compared with other properties” and “clearly erroneous.”

Washington County Judge Joseph Wood didn’t return a call for comment.

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