“Dark store theory” and the future of our cities

“Dark store theory” and the future of our cities

In a piece recently published in CityLab, titled "After the Retail Apocalypse, Prepare for the Property Tax Meltdown,” Laura Bliss spotlights the growing trend of big-box stores finding new ways of, well, majorly screwing over local governments, citizens, and local small businesses. They’re doing by making  use of a legal loophole called “dark store theory.”

"That’s the ominous-sounding term that administrators have given to a head-spinning legal argument taking cities across the U.S. by storm. Big-box retailers such as Walmart, Target, Meijer, Menards, and others are trimming their expenses in a forum where few residents are looking: the property tax assessment process. With one property tax appeal after another, they are compelling small-town assessors and high-court judges to accept the novel argument that their bustling big boxes should be valued like vacant “dark” stores—i.e., the near-worthless properties now peppering America’s shopping plazas.

To hear it from opponents, this emerging legal phenomenon essentially weaponizes an already grim retail landscape. But it’s not always clear who’s right and wrong—dark store theory is a battlefield muddied in the cryptic laws and upside-down logic of commercial property valuation. The potential slam to vulnerable tax bases is tangible, however. If the stores prevail in West Bend, for example, it would reduce property values by millions of dollars, force the city to refund hundreds of thousands of dollars in back taxes, and set back payments on the public infrastructure that the town built to lure these retailers in the first place. That could result in higher taxes for residents, fewer police officers, firefighters, and teachers, and potentially, a mess of public debt.”

What these companies are arguing, in courts, is that their property taxes are too damn high—that in reality their stores aren’t worth anywhere near as much as the City thinks they are. And they’re demanding that cities retroactively refund them for the difference, taking them to court in extensive legal battles that are costly to fight and even costlier to lose. And courts have started siding with the big-box stores.

I’d recommend reading the entire piece because it does a great job of setting the context for this potential disaster for cities. We’ve spoken at length about the ways that our cities have built upon a fragile and extremely short-sighted model: Grow fast, spread out, separate all uses from one another, build a ton of infrastructure (always horizontally and seldom vertically) completely around the car, develop large swaths all at once to a finished state, take out massive debt to do it, and count on continued growth (both new residents and new businesses) to keep funding it forever. You end up with cities that have development patterns that are far more expensive to maintain than the value they generate. It’s the illusion of wealth. It’s what our friends at Strong Towns call the Growth Ponzi Scheme.

It’s not anyone’s fault. Nobody sat down and said, “What’s a good way we could bankrupt future generations, while selling it as prosperity and progress in the present?” We certainly can’t vilify current leaders for decades of cascading poor choices. We’ll always be left to clean up messes that were created through actions (or inaction), witting or unwitting, of those who came before us. The opportunity we have here is to keep a close eye on the feedback we get from these decisions.

Misguided land use and economic development assumptions

There are two parts of this model that I want to focus on, because they’re largely wound up in each other. One is the dominant development pattern that focuses exclusively on cars as the way to get anywhere and everywhere, combined with the assumption that we must separate all elements of life into neat, tidy zones—houseThere are two parts of the status-quo model that I want to focus on, because they’re largely wound up in each other.

One is the dominant development pattern that focuses exclusively on cars as the way to get anywhere and everywhere, combined with the assumption that we must separate all elements of life into neat, tidy zones—houses go here, shops go way over there, etc. It isn’t groundbreaking to point out that this focus on cars and separated uses leads to literally everything being further apart, as every building is surrounded by parking lots. Big box stores were born into this development pattern. As this low-density pattern proliferates and populates, the only type of commercial that can serve it is parking-heavy and generates very low revenue per acre.

The other key part of this model the economic development practice of seeking big, national retailers and routinely offers subsidies and tax incentives for them to set up shop in town. The thinking, it seems, is that these companies will bring jobs (jobs always seem to come from elsewhere) and that the those jobs will bring people, and that once all the dominoes fall just right, the City will really be cruising with all that new tax revenue. But as my colleague Felix Landry pointed out in a recent podcast, that rarely works as imagined. Often it backfires spectacularly.

For the countless cities and towns that have found themselves more and more dependent on rapid growth and the sugar rush of temporary cash flow they bring, it’s understandable that they wanted to do whatever it took to bring in a Walmart or a Meijer. They needed growth and revenue to keep funding the existing growth, and these corporate giants were promising that, all in an instant. They positioned themselves (and continue to do so in cities across the continent!) as valuable economic development, something the cities needed to be competitive and prosperous. They were also filling a need that came about as small, locally-owned businesses shuttered (something the proliferation big corporate stores helped bring about).

The tragic reality is that so many cities have given tax incentives so that these corporations would build enormous structures (surrounded by seas of parking) that weren’t intended to last more than a couple decades. Sure, they got a few years of use out of them, but when those corporations’ models told them it was time to move ten miles down the road, they didn’t hesitate to do so.

What’s at stake in big-box handouts

The problems with local governments courting and enabling big boxes are many, but I just want to list a few:

  • They push out or extinguish locally run businesses who can’t compete with the scale and sometimes-lower prices of a big-box store. In addition, zoning codes that encourage them (and require exorbitant amounts of onsite parking) also make it less likely that a local business can afford property. Walkable, mixed-use neighborhoods naturally encourage more local business (including startups), while large-format development and strip malls favor "formula" businesses.

  • The big-box corporations often get big tax incentives and economic development subsidies to set up shop. They sell themselves as an economic development investment for the city. The reality is that these stores, with their enormous building and parking footprints, do not generate anywhere near the tax value per acre that walkable development does. They are a temporary rush of cash, but they are not a good deal for the City, even without tax abatements.

  • Not only are they not a good deal for cities while they are at their most productive, but when big boxes close, they’re a disaster. Again, these structures are built extremely cheaply, and they are not intended to flex and remain useful beyond the short period of time the company occupies them. So when a Walmart or any other of these stores closes, it leaves behind a shell that is hardly worth anything. The structures are not suitable to many uses, and their vastly oversized parking lots are a real liability. The vacated lots could be put to better use if they were part of a more compact, walkable neighborhood—the parking lots could flex into useful development—but the fact that they already (most likely) exist as islands alongside other similarly un-walkable properties, and along dangerous stroads, means that there is very little chance they will flex into something useful and revenue-generating. Cities end up left with a major liability and an eyesore that communicates “this place is dead.” Small-scale development, on the other hand, is much more resilient in the face of business closure (and less captive to the whims of these out-of-town companies). The buildings can easily flex as the economic reality shifts. With big boxes, there is no such respect for the future. It’s “slash-and-burn development."

  • And now, this “dark store” debacle. Not only have many cities traded the opportunity for productive, flexible, and less land-intensive development in exchange for a few years of big revenue. Not only have they almost certainly accepted (whether they believed it would be the case or not) the legacy of a near-useless box on an empty parking lot. But now, and for the past few years, these companies are saying, “come on now, we were never nearly as valuable as you thought or we sold ourselves to be. And you owe us for that, on top of the disposable vacant building and parking lot you’re about to be left with.” Cities are in danger of having to hand over millions to these chains who are planning to leave in a few years anyway (and many already have had to pay, leading to cuts in services and increases in taxes for citizens and small businesses). And as some have pointed out, the companies probably aren't wrong. They really are as bad and low-value a neighbor as they’re now insisting in the courts that they always were.

The mask is off now

I understand the difficult place many communities find themselves in: there are no more local grocery stores, hardware stores, corner stores, so where else but the national chains are citizens supposed to shop for their daily needs?

There’s a hard lesson from the dark store lawsuits. These companies are outright telling you, telling the world, what has always been true: they are fool’s gold, they are an immensely poor use of valuable land, they have no respect for your community, they do not intend to be a long-term neighbor. They are, it seems, using cities and towns, their land, their population, and they will leave when they think they’ve gotten enough out of them.

No doubt so many cities across the country are feeling stabbed in the back as they deal with this. No doubt many of them hoped that getting a store like Target or Meijer or Walmart would be a big step forward for them and their citizens. They don’t need to be told that they got a bad deal that will have long-term negative effects on them and their citizens. The point is not to throw well-meaning city leaders under the bus for following the same model that they saw their neighbors using, seemingly successfully at the time.

The point is that there is now even more reason for not making these bad deals. There is ample evidence that for so many reasons, and at so many points along the way, these deals hurt people. If you’re a city that’s growing, and you’re tempted to court one of these stores (for probably very legitimate reasons), you need to know that there is different, more time-tested way to grow and develop. It’s done incrementally (which isn’t to necessarily say at a snail’s pace), it’s done at the scale of a human and not of a car, it’s done with smart bets and minimal debt, and it’s done in a way that people can grow to love—meaning it’s intended to be around and evolve over generations.

Where to go from here

How can we make sure to avoid the scenario we’re seeing play out? Well, to avoid turning this post into a textbook, I just want to suggest a few:

  • Zoning matters, a lot. Zoning codes and land use plans that prioritize the car, intentionally separate uses, and favor large lots over small do immense damage to the long-term viability (fiscal, social, economic, and environmental) of a city. Many cities are still using outdated zoning codes that are designed to prohibit the types of development that are fiscally productive and socially valuable. Likely, these same cities have officially stated visions of being fiscally sustainable, socially inclusive, environmentally responsible, and the like. But the land use plan and zoning ordinances are getting in the way of development that would truly generate those outcomes.

  • Design matters, too. Felix Landry and I spoke about this on a recent podcast, lovable places are lasting places. And places become lovable over time—meaning they need to be built to last, and built at a scale that humans are comfortable in. These big-box sites are built with a single purpose: to be the cheapest way of housing cheap goods for a couple decades at most, until they aren’t needed (by the company) anymore. Cities need to be proactive about their land use and zoning so that the patterns are more viable, and they also need to be proactive in holding builders to high standards (especially anything that is built at a large scale).

  • We need to be thinking differently about economic development. The prevailing model—as demonstrated by the circus surrounding the Amazon HQ2 contest—is still heavily based on corporate handouts that don’t generate actual return for municipalities and that often aren’t even a decider for where companies decide to locate. Often, they just compete with their neighbors in an “economic arms race,” creating no real productivity for the region but certainly leaving behind many losers. (h/t Daniel Herriges for the links) There is a different approach, however. Cities can make investments in their citizens, in the places their citizens inhabit, in historic buildings that need some love (if they’re lucky enough to have them) and would make a great home to new businesses or residences, or in the business ideas of the many would-be entrepreneurs that live in the community but lack some basic resources. These are bottom-up, small bets that help generate a more diverse and resilient economy than a formula store-based economy ever could. And the cool thing is there are great examples to learn from all over the country. Economic gardening is a catchy name for an approach we think is worth taking, and the Edward Lowe Foundation provides plenty of good case studies. The Institute for Local Self-Reliance is another excellent resource. (We’re also fans of their podcast, Building Local Power. A recent episode details some of the ways the City of Phoenix became an active champion of local business.)

Whether your city is small but facing a big wave of growth, or ‘mature’ and stagnating, there really is no better time to start making moves that will build a more resilient, diversified, people-serving local economy. It won’t be as straightforward as the status-quo approach, but it will be more rewarding, more lasting, more exciting. And hey, a byproduct of the extra work might just be a whole lot of unexpected relationships forming across the community. When you start focusing on being the best ‘you’ you can be, as Kevin Shepherd likes to say, it becomes clear that all you have to work with is all you have. And when I think about it, that’s kind of liberating.

(The top image is from Brave New Films)

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