Tax Court of New Jersey Rejects “Plain Vanilla” Retail Argument when Valuing Freestanding Rite Aid Pharmacy
By Paul T. Beisser
Rite Aid Corporation v. Borough of Roselle
In an unpublished decision issued on April 13, 2017 by Presiding Judge Patrick DeAlmeida, the court upheld the 2009 and 2010 property assessments for a Rite Aid pharmacy in the Borough of Roselle. The subject property is a one-story freestanding building constructed in 2005 as a retail pharmacy. The building is situated on a 2.072-acre lot in the Borough of Roselle. The structure has a two-lane drive-through customer service area and 14,717-sf of ground floor rentable space. During the two-day trial, the experts agreed that retail use represented the property’s highest and best use. Both experts also used the income capitalization approach in deriving their market value conclusions for tax years 2009 and 2010.
Plaintiff’s (Rite Aid) expert opined that leases executed in connection with the construction of pharmacies are not credible evidence of market rent. Instead, Plaintiff’s expert relied on leases of generic “plain vanilla” retail space in structures not built to suit pharmacy tenants. Defendant’s expert relied solely on leases to national pharmacies.
Court’s Determination of the True Market Value
The court found the generic retail lease comparables unpersuasive. While acknowledging that space leased to a pharmacy might subsequently be leased to a non-pharmacy retailer, the court found that Plaintiff’s expert provided no credible evidence that the relatively new structure at the subject property was likely to be leased to a non-pharmacy tenant. Nor did the expert produce credible evidence of market rent to a non-pharmacy tenant in a structure with the characteristics of the subject, including the two-lane drive-through facility.
Defendant’s expert relied on pharmacy building leases with and without drive-through lanes. The expert also identified a distinct market for pharmacy buildings and presented leases for that specific use. The court found Defendant’s expert more credible and used leases of pharmacies with drive-through lanes to arrive at a market rent conclusion for the subject property. The rental income generated by the pharmacy leases was sufficient enough to justify the property assessments for the 2009 and 2010 tax years.
Real Estate Analysts Agree with Rite Aid v. Borough of Roselle Verdict
At Value Research Group, we find this decision most instructive. The court presents a well-reasoned valuation model for built to suit pharmacy structures. A building’s design, material composition and intended use are critical elements in determining the prospective market for any property type.
The complete text of the decision is found here.