Maine Mall tax decision due this week

Nearly $1 million in property taxes are at stake for South Portland

SOUTH PORTLAND — The South Portland Board of Assessment Review is scheduled to vote Thursday on whether the Maine Mall’s owner, Chicago-based General Growth Properties, is due a refund of nearly $900,000 on its 2009 property tax bill.

This is the second appeal by company in as many years. In December 2009, the state Board of Property Tax Review denied the company a $1.4 million appeal on 2006 taxes.

The one thing that seems certain so far about the current appeal – the upcoming July decision is unlikely to end the matter. Whichever party loses is bound to appeal the local decision to state authorities.

“We can count on it,” Paul Cloutier, assessment review chairman, said in May, after eight hours of arguments on both sides failed to yield a decision. “If we decide in favor of the property owner, I’m sure the city will go [to appeal], and if we rule in favor of the city, the property owner will go. Somebody’s going to go. So, it doesn’t stop here.”

Still, the assessment review board will do its due diligence, said Cloutier, stressing that, “the impact on the city budget has absolutely nothing to do with how we might rule.”

Cloutier said attorneys for both sides will send rebuttals to the testimony given at the last hearing, May 23. Each will then be given “a maximum” of 15 minutes for final comments on July 22, before the board begins deliberations.

“The board will digest the information, receive some more, and hopefully be able to sort through it, mull it over, and come back with a decision that day,” said Cloutier.

 

General Growth Properties, reputed to be the second-largest owner of mall property in the United States, is contesting nine of 12 lots it owns on and around the Maine Mall site. 

Not included are the company’s lots that are not considered necessary to support the function of the Mall. These are the Maine Mall Motors site at 269 Maine Mall Road, the vacant lot at 415 Maine Mall Road, where the IHOP and movie theater once stood, and the 7 Philbrook Road location of Jared Jewelry. Also excluded is a sliver of land referred to by city officials as “the spite strip,” which was retained beside Philbrook Road by the original developers of the mall, prior to construction, to prevent road access by any competing development. Today, Hannaford pays a “ground lease” allowing its customers to drive across the strip.

According to City Assessor Elizabeth Sawyer, South Portland values the remaining Maine Mall properties at $242.7 million, using a method of assessment for commercial, revenue-producing property, which is based largely on gross revenue realized in each store. The company claims those properties should only be assessed at $181.7 million, a difference of $60 million.

Based on South Portland’s 2009 tax rate ($14.70 per $1,000 of valuation), the city would have to return $896,465 if it loses the case. The company paid $3.7 million in property taxes to South Portland in 2009. A successful appeal would result in a 24 percent reduction in its tax bill for 2009 and, Sawyer said, will almost certainly guarantee fights over tax rates for 2010 and beyond.

At the heart of the appeal is what the company’s appraiser, David C. Lenhoff of Rockville, Md.-based PGH Consulting, calls an “intangible business enterprise component.”

“The value of the property is related to how much income it can produce,” said Cloutier, referring to rents paid by mall stores. “He’s saying that some of the income is not directly attributable to the real estate.”

“They are not recognizing any of the intangibles, our appraiser does,” said Dave Swinkle, senior director of tax services for General Growth Properties.

What is an “intangible” component? Swinkle explained:

”By paying to get the anchor [stores], creating the tenant mix that we have, and assembling that as a going concern, you create value,” he said. “That hasn’t been recognized by the city.”

In other words, the company claims that some stores in the mall pay a higher rent, based on higher sales than they might otherwise enjoy, due to the company’s management expertise in creating the mix of retailers within the mall complex.

“The other squabble is over the capitalization rate, and that can have a significant impact on what the final valuation is,” said Cloutier.

A capitalization rate is a means used to further divest assessment from a simple comparison of like properties. That’s important in the case of the Maine Mall, Sawyer said, because it is considered a “fortress mall,” unlike any other retail property in the state.

The capitalization rate equals the purchase price of the property divided by its positive net operating income. Turned around, the net operating income can be divided by the capitalization rate, to project a value for the property.

The dispute is the purchase price used to calculate the capitalization rate. In addition to refusing to factor out intangible components, the city uses the actual dollars that traded hands – $270 million in 2003. General Growth Properties believes that, here, too, there was an intangible that should be factored out.

In other words, the company feels the city should discount from its mall revenue a percentage arguably generated by its own management expertise alone, and a sum from its purchase price, due to the management of the previous owner, all of which create business value but, it argues, not property value.

That line of reasoning has hurt the company before. In 2009, it not only lost a similar appeal in Minnesota, but the state tax court there also ordered it to pay an addition $1.8 million in taxes when the judge decided the true value of the Eden Prairie Center mall was higher even than that fixed by local assessors.

“When we purchased the mall, we bought a going concern,” said Swinkle. “We bought more than an old collection of buildings and the land. It was a proven entity. Everybody knows where this mall is and they come to it.”

Although the city takes pains to use assessment approaches that avoid direct comparison to other properties, as it’s arguable the Maine Mall is a one-of-a-kind property, Swinkle said its value is too far removed from abutting lots.

“If you look at the total value of the mall compared to the adjacent properties, there’s a huge gap in the treatment of land value, between the mall and the anchor [stores],” he said.

 “They’ve taken the value of the income stream minus the depreciation of the improvements, and the difference is the land. Well, that makes no sense if I’m standing in the mall and the value is $72 a [square] foot, and if I move over to Sears, I’m now on a piece of land where the value is $18 [a square foot].

“It just does not make sense, and that’s what we’re upset about,” said Swinkle.

Although attached to the Maine Mall, Sears owns its building and land, as does Federated Department Stores, parent company to Macy’s, which also owns the land beneath Borders Books, Longhorn Steakhouse, Pizza Hut and Weathervane restaurant. The land value of all these lots, said Swinkle, is far out of whack to the lots owned by General Growth Properties.

Should GGP succeed in making its argument, the city would have some serious soul-searching to do. Cloutier believes the city would have to take out a bond to cover the near $1 million gap, incorporating payments into future budgets for minimal impact to the taxpayer. However, City Manager James Gailey intimates there could still be some pain come budget time.

“Every taxpayer in the city pays its fair share,” he said. “In the Mall's case, they feel they are over-assessed. If valuation is reduced, the budget is either cut due to the inability to raise funds at an appropriate level, or every taxpayer will brunt the impact and pay more to keep the same level of services.”

Even if the city wins, there are still costs involved. So far, the city has paid out more than $6,000 – at a rate of $150 per hour – to beat back the abatement request, said Gailey. The City Council earlier this year appropriated an additional $50,000 for legal fees.