News and Insights

Virginia Property Tax Decision

Tax Development Dec 21, 2017

Walgreen Co. v. County of Spotsylvania, Virginia [Case Nos. CL13-1151 & CL15-723] – Conflated Issues of Leased Fee Values and Fee Simple Transaction Values

Summary of the Decision

The recent case of Walgreen Co. v. Spotsylvania, Virginia (September 27, 2017) was decided by Judge Ricardo Rigual in the Spotsylvania County Circuit Court. This was a property tax appeal where the primary issues were:

1)     Whether Walgreen sufficiently established a fair market value for these properties which would overcome the presumption that the County’s assessments are correct.

2)     Whether the County improperly used the “investment value” of the leased fee interest rather than assessing the fair market value of the fee simple interest.

3)     Whether there was significant enough disparity between the fair market value and the assessed value that could be considered manifest error by the County.

4)     Whether Walgreen willingly refused to provide the County with requested income and expense and whether that refusal barred Walgreen from obtaining relief.

The Court decided in favor of Spotsylvania County and held that:

1)     While Walgreen sufficiently established an opinion of fair market value for the properties, the difference in opinion was based on ignoring the leases in place, using general retail leases to derive their income approach, and also using questionably relevant sales. These decisions materially undermined Walgreen’s fair market value opinions and did not overcome the presumption that the County’s assessments were correct.

2)     The Court found that the County valued the entire bundle of rights of the properties, which included the leases in place, in determining the fair market value of the fee simple interest. The Court declined to decide whether there was a distinction between the leased fee interest and the fee simple interest; however, the court did say that any erroneous assessment caused by this lack of distinction was caused by Walgreen’s failure to furnish the County with the income and lease information requested.

3)     While Walgreen’s opinions of value were considerably different from the County’s assessments, there was not a significant difference between the County’s expert’s opinions of value and the assessments. The Court relied upon the Supreme Court of Virginia’s language from its decision in Norfolk v. Snyder, quoting: “the value of property is a matter of opinion and there must necessarily be left a wide room for the exercise of opinion,” and ruled that all presented valuations to be within the range of a reasonable difference of opinion.

4)     Walgreen willingly withheld its income and expense information after the County’s repeated requests, causing the County to be unable to compare its market rent figures with the properties’ contract rents. The County was entitled to receive this information pursuant to Virginia Code §58.1-3987 and because of the refusal to furnish this information, Walgreen was not entitled to relief.

Significance of this Decision

This opinion contains a useful and well written summary of applicable real estate assessment appeal case law in the Commonwealth of Virginia and an illustration of what can derail an assessment lawsuit. The opinion also illuminates the confusion that the courts in Virginia have when they conflate the issues of leased fee values and fee simple values. Below are the important insights that can be gleaned from this opinion letter.

  • While the court went out of its way to discuss the merits of the valuation arguments, the most important takeaway of this case is that if a taxpayer does not submit the actual income and expense information at a site during a period that may come under judicial appeal, a taxpayer may be barred from relief pursuant to Virginia Code §58.1-3987. It is important to make sure that during a period where a taxpayer may be cultivating multiple years for a judicial appeal, the taxpayer submit income and expense information to the jurisdiction (either when requested directly or during appeal).
  • Taxpayers and their representatives need to  work closely with expert appraisers. In this case, the court was not persuaded by the sales comparables introduced by Walgreen’s experts because of their differences from the subject properties. The Walgreen’s experts introduced sales of general retail stores; however, the court felt these were not truly comparable because they did not include a single pharmacy. Furthermore, the rents used in Walgreen’s experts’ income approaches were not based on rents from other pharmacies. These issues are intertwined with the next and most important lesson to learn from the subject case.
  • The court’s rejection of Walgreen’s experts’ value opinions all hinged upon what the court determined was the highest and best use of the property, which conflates the issue of leased fee versus fee simple valuations of properties. The court here concluded that the highest and best use for the subject properties was the continued use as a pharmacy.
    • This specific holding is troubling, as the overall characteristics of pharmacies of this type are not extremely specialized and probably should not be controlling when it comes to the highest and best use determination. These pharmacies are of similar size to other retail stores, with the only notable features being refrigerator areas, drive-thru lanes for the pharmacy, and a partitioned area for the pharmacy. Those features could easily be present at numerous other retail stores with different uses.
    • The court rejected these pharmacies being compared to a Ritz Camera store, a Subway, a Verizon location, a Starbucks, an ABC Store, and a Sleepy’s mattress store, although these stores could easily be converted and repurposed into a pharmacy without significant modifications to the properties or capital being spent.
    • Standalone commercial properties with similar characteristics to retail pharmacies can include general stores, automotive part stores, and larger coffee shops. While a drug store may fulfill the “maximal productivity for the properties,” the distinguishing characteristics are not such that the sites would preclude other uses.
    • The court here was swayed by the County’s argument that these were built-to-suit properties and under long-term leases. This is where the court conflates the leased fee/fee simple issue. Are drugstores valuable because of their configuration or because the tenants themselves pay over market on long-term leases to have an established location? This is an unsettled argument that continues to be arguable.  
    • Finally, language concerning a “reasonable difference of opinion,” when it comes to judicial assessment appeals and manifest error has little true meaning. The judge in this case quoted language from other controlling cases that opine valuation is a matter of opinion that must be given much latitude for the expression of these opinions, effectively rendering useless any meaning derived from this test.


Michael Owen
Senior Manager