The Swartz Report: A Closer Look at the Valuation of the Country Club Plaza

Don SwartzPost written by Donald Swartz, President and Principal at Swartz + Associates, Inc. | Lover of Chiefs, Royals and golf | Avid “Cruiser” | Poker Enthusiast

Recently the Kansas City Star published an article about the valuation of the Country Club Plaza for property tax purposes. The article focused on the 2016 purchase of the Plaza by an entity co-owned by Taubman Centers, Inc. and Macerich Company, who acquired the property from Highwoods for a price around $660 Million.

2017 is a reassessment year in the State of Missouri and Jackson County initially increased the valuation on the collection of parcels from approximately $123 million in 2016, to a value of $375 million. The owners, arguing the new valuation was not fair and equitable, appealed the valuation and received a revised valuation of $145 Million.

Does this seem fair and reasonable? 

On the surface, one would think, “Absolutely NOT! This property should be valued at the purchase price of $660 Million.”  However, things are generally not as they appear and I believe this is no exception. Certainly, the companies who acquired the Plaza are knowledgeable and have a great understanding about real estate. During their due diligence, one would have to believe they reviewed all leases currently in place as well as the market for our area.

One of the biggest issues in valuing an income-producing property is the determination of the capitalization rate, or in other words, the expected return on the investment. If an investor was seeking a 5% return on their investment, net of expenses, and the income is $30,000,000, an investor would be willing to spend $600,000,000 in order to secure that return (or $600,000,000 x .05).

What if another investor expected a 6% return on the same investment? Is the property still worth $600 Million? Let’s do the math – $30,000,000 divided 6% yields a property value worth $500,000,000. In this situation, the difference in 1% return on investment reduces the potential value of a property by $100,000,000!  What if the yield is 7%?  Now the value is reduced to ~ $428,500,000.

You can see on this basic illustration how complex the valuation of this type of property can be. There’s also the issue of reviewing the leases currently in place.  This is known as “leased-fee” income. Missouri law dictates values for property tax purposes should be based on “fee simple” income and not “leased fee” income. This is accomplished by reviewing market rental rates as opposed to specific leases in place relating to the property.

In-place leases can be reviewed as well as being helpful in establishing value, but if the leases are getting ready to expire or are long term, they may not necessarily be indicative of market value. Finally, there’s the component of what is fair and equitable. If the Plaza valuation is considerably higher than a similar property, the Plaza is potentially at a competitive disadvantage. The tenants would be responsible for a larger property tax bill, equating to higher rents and charging higher prices to consumers to cover the expense. This is a very tricky issue.

Of course the counter argument could be, “It’s the Plaza. There’s nothing comparable in Kansas City and rents should be higher…”  This could be true, however, I believe consumers do have options available that weren’t in existence when the Plaza gained international fame. Suburban malls definitely provide alternative shopping to the Plaza and on-line shopping is a threat to all “sticks and bricks” retailers.

My guess is these were all points of consideration when the county ultimately determined the valuation for 2017. In the end, the county determined the value of the property for property tax purposes should be roughly 22% of the purchase price. This tells me the major factor in the valuation must be the fair and equitable component. If Kansas Citians believe the valuation placed on the Plaza is too low, the county must look at increasing retail shopping centers throughout Jackson County before they can simply raise the valuation of the Country Club Plaza.

As always, I appreciate your thoughts and comments.

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