National pharmacy submarket and contract rent justifies appraised value.

Author:Mueller, Scott B.
Position:Recent Court Decisions on Real Estate and Valuation - Walgreen Eastern Company, Inc. v. Town of West Hartford, Connecticut
 
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[This is an update of a previous case summary reported in the Winter 2017 edition of "Cases in Brief."]

The subject property consists of a 1.45-acre improved parcel with a build-to-suit Walgreens store. The developer entered into a seventy-five-year, triple-net lease with the plaintiff, Walgreen Eastern Company (Walgreen). The lease granted Walgreen the ability to terminate the lease after twenty-five years and every five years thereafter. The developer subsequently sold the subject property for $6,718,750.

The assessor for the town of West Hartford (Town) conducted a town-wide revaluation and determined that the subject property had a fair market value of $5,020,000 and an assessment value of $3,514,000. Walgreen contested the assessment, alleging that the assessor's valuation was "manifestly excessive and ... disregarded the provisions of the statutes for determining the valuation of the property." Specifically, Walgreen argued that the trial court improperly valued the leased fee interest, rather than the fee simple interest, and used too narrow a highest and best use for the property given its pharmacy nature. At trial, Walgreen presented the testimony of two appraisers who both valued the property at $3,000,000. The Town presented the testimony of the appraiser who had performed the revaluation and an expert witness appraiser who valued the property at $4,900,000, which the trial court accepted as the true and actual value of the property. Walgreen appealed.

At the appeal, Walgreen disagreed with the Town's reliance on the actual rental income under the existing seventy-five-year lease (contract rent) in calculating the true and actual value of the property in 2011 because the lease had been negotiated in 2003 and the property would not command such rates on the date of value. The state supreme court noted that all three expert appraisers and the trial court used the income capitalization approach and the comparable sales approach to value the subject property. Walgreen's experts did not consider the contract rent in their calculations based on the income capitalization approach to value the subject property whereas the Town's expert considered the contract rent.

Walgreen's appraisers determined that the market rent for comparable triple-net retail properties, which included pharmacies anchoring shopping centers, averaged $20 to $22 per square foot. They calculated the freestanding subject property's contractual rent at $33.58 per...

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