September 2008Published Article

Wisconsin Supreme Court Rejects Assessment Based On Above-Market Contract Rents

American Property Tax Counsel (APTC) National Property Tax Update - Wisconsin

In a major decision rejecting an assessment theory which had been used by assessors across Wisconsin, Walgreen Company v. City of Madison, the Wisconsin Supreme Court unanimously held in July 2008 that property subject to a lease which provides for above-market rent cannot be assessed on the basis of the above-market income stream.

The taxpayer in Walgreen implemented a business model under which it leased the real estate for its retail locations rather than purchasing it. The taxpayer worked with developers who acquired the real estate and then built the stores to the taxpayer’s specifications. The leases contained contract rent payments designed to reimburse the developers’ land acquisition, construction, development and financing costs, and to provide a profit margin for the developers. The contract rent payments thus far exceeded market rent.

The Madison assessor, along with other assessors across the state, assessed the properties based on the above-market income stream under the leases, on the theory that a purchaser of the real estate would acquire the income stream under the leases and thus the income was attributable to the real estate.

The Supreme Court rejected that theory, however, holding that additional income attributable to an above-market lease represents a contract benefit and not increased real estate value. The Court held that a lease can never increase the value of real estate above its fair market fee simple value.

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