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Walgreen Co. v. City of Madison, 311 Wis.2d 158, 2008 WI 80, 752 N.W.2d 687

Facts

Walgreen Co. challenged the City of Madison's property tax assessments for two retail properties leased for above-market rents. The City assessed the properties based on the actual lease terms, which included higher than market rental payments due to unique financing and development costs. Walgreens argued that the assessments should reflect market rents instead, leading to a legal dispute that progressed through the circuit court and court of appeals before reaching the Supreme Court.

The properties were constructed by a developer at Walgreens' direction, pursuant to a uniform business model followed by Walgreens. Under that business model, Walgreens rents property rather than purchasing it, working with developers who find sites for Walgreens' stores at prime locations in heavily trafficked areas, buy out existing businesses located at the desired sites, purchase the property, and build and/or develop it with 'super adequacies' to suit Walgreens' needs.

Issue

Whether the property tax assessment of retail properties leased at above-market rents should be based on market rents or the actual contract rents of the leases.

On review, we must determine whether a property tax assessment of retail property leased at above market rent values should be based on market rents (as Walgreens argues) or if such assessments should be based on the above market rent terms of Walgreens' actual leases (as the City argues).

Rule

Wisconsin Stat. § 70.32(1) requires that real property be valued at its full market value, and the Property Assessment Manual specifies that the income approach for leased properties must use market rents rather than contract rents.

Wis. Stat. § 70.32(1) 'proscribes assessing real property in excess of market value.' This holding is consistent with the nationally recognized principle that '[a] lease never increases the market value of real property rights to the fee simple estate.'

Analysis

The court analyzed the methodology used by the City and the lower courts, determining that they incorrectly applied the law by relying on the actual contract rents instead of the market rents. The court emphasized that the Property Assessment Manual mandates the use of market rents for assessing leased properties, and that the previous cases cited by the City were not applicable as they involved properties with below-market rents.

We agree with Walgreens that the lower courts in this case erroneously failed to correctly apply the relevant statutory language of Wis. Stat. § 70.32(1) and pertinent provisions of the Property Assessment Manual, case law, and persuasive authorities that address the assessment of leased property in consistent terms.

Conclusion

The Supreme Court reversed the decisions of the lower courts and remanded the case for further proceedings, affirming that property assessments must be based on market rents.

Therefore, we reverse the decision of the court of appeals and remand for further proceedings consistent with this opinion.

Who won?

Walgreen Co. prevailed in the case because the Supreme Court agreed with its argument that property assessments should be based on market rents, not the above-market contract rents.

Walgreen Co. prevailed in the case because the Supreme Court agreed with its argument that property assessments should be based on market rents, not the above-market contract rents.

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