The city has withstood an appeal of its win in a groundbreaking case that could raise the tax assessments of every chain drugstore in the Capital Region.
The Appellate Division of state Supreme Court Thursday upheld a ruling that the city can use a different valuation method that could double the assessment of the CVS pharmacy at 1204 Eastern Ave.
The decision means that when the city reassesses CVS next year, it could hike the property’s value from $2.02 million to $4 million.
But the court’s sweeping decision also affects most drugstores in the state, paving the way for massive assessment increases. The court ruled that municipalities can assess drugstore properties based on income the landlord receives for renting to those companies.
At issue is the fact that most chain drugstores do not own their property. Instead, pharmacies agree to an unusual lease arrangement in which they promise to pay rent each month for decades, no matter what happens to their store. They also agree to pay all taxes and maintenance.
The leases are incredibly valuable, since the landlord never stands to lose rent if a business shuts down. When one of the so-called “triple-net leases” is placed on the market, they are routinely purchased for millions of dollars.
CVS and many other pharmacies in the region have appealed their tax assessments on the argument that the leases should not be considered in the total value of the property. In the Schenectady case, CVS owner Brooks Pharmacy appealed its assessment and said the city should only look at traditional property values: the value of the land and the building.
The Eastern Avenue CVS building cost $2.4 million to build in 2000, so Brooks Pharmacy argued that its current assessment should be $1.34 million based on current property values, not $2.02 million.
City officials, however, noted that the owner of the land clearly felt it was worth far more than $2 million. Shortly after CVS signed a triple-net lease in which it promised to pay $27,000 a month and all taxes and maintenance until 2023, the landlord sold the land and the lease for $3.6 million. Less than a year later, the land and lease were sold again, this time for $4.1 million.
City officials said those sales should be considered when determining the true value of the property.
“There is a market for these lease arrangements,” Corporation Counsel L. John Van Norden said. “We argued you cannot separate the lease — the income stream — from the land.”
The courts agreed, with the city winning in state Supreme Court in January 2007 and then again Thursday after CVS appealed to the Appellate Division.
The city spent $15,000 to $20,000 on the case, making it one of the most expensive tax appeal cases in Schenectady’s history, Van Norden said. He said it was worth every penny.
“There’s a lot of taxes coming out of that property,” he said. “And we could have lost with all of the other pharmacies. Many other drugstores in the Capital District have been bringing these tax challenges to their assessment, and in this case, they were seeking a significant reduction.”
Assessor Patrick Mastro said the city will definitely increase the CVS assessment next year because of the decision, though he declined to say whether it would go up to the $4 million figure cited by the city’s expert in court.
“We’ll have to analyze it this year,” Mastro said. “It will increase.”
He can’t increase the assessment this year because the tentative assessment roll deadline has passed.
Van Norden expects that the decision will also bolster the city’s case against Eckerd’s, which wants an assessment reduction for its closed store at the corner of Brandywine Avenue and State Street.
“The fact that the store goes dark has nothing to do with that income stream because Eckerd’s keeps paying that lease,” Van Norden said. “So we don’t care if that store is operational or dark. That does not change the value of the property to the underlying owner.”
To win the CVS case, the city spent $10,000 to hire Jeff Rothbard, an expert on triple-net leases. He is on retainer for the Eckerd’s case as well.
“Bringing in this expert was critical,” Van Norden said.
Without such experts, similar cases in the area had been decided in favor of the pharmacies. Appeal after appeal had been sent to the Appellate Division, and when that court delayed its decision two weeks ago, Van Norden said he was hoping for an all-encompassing decision that put an end to the controversy.
He got his wish.
“This is a big, big deal,” he said. “Eckerd’s has to give some thought to this.”
Brooks Pharmacy and Eckerd’s, now owned by Rite Aid, declined to comment.