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THE SIGNAGE FOUNDATION |
Germantown, TN Study
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Section 6:
Economic Effect In Germantown Of Not Granting This Variance
Throughout this request we have mentioned that the city of Germantown risks economic loss if the variance is not granted. To explain the rationale behind this statement, one must consider how commercial and retail property is valued in order to recognize the economic effect of limiting the visual communication component of a site. By looking at how an appraiser and tax assessor values a site for tax base determination, one can see how a lower business value leads to a lower site value which in turn leads to a lower tax base for the city. A reduction in gross sales for a business also directly affects the business and property values. Lower gross sales also mean less sales tax revenues.
In order to understand just how significant the economic loss of the accessory use (Signage) can be considered, the total taxes we generate needs to be analyzed. There are three tax sources in Germantown. The sales, real property, and personal property taxes. Germantown shares in those regulatory revenues. The taxes are:
| 1) |
Sales Taxes State of Tennessee Germantown TOTAL |
% of Gross Sales per Annum 5.50% 2.25% 7.75% |
| 2) |
Real Estate Taxes Shelby County Germantown |
Per $100 of 25% Assessed Value $2.88 $1.34 |
| 3) |
Personal Property Tax Shelby County Germantown |
Per $100 of 25% Assessed Value $2.88 $1.34 |
In order to understand the significance to the request we are making, several assumptions must be made about the value of the real estate improvements, personal property and gross sales generated by Pier 1 store. Please understand the value used in the real estate improvements are part of the shopping center and would not be sold separately, but the value used in these calculations is consistent with its contributory values as indicated. The other assumptions of value of personal property and gross sales are either taken from our data or completely justified by gross sales volumes.
Table 11 illustrates the information:
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TABLE 11: VALUATION AND ASSESSMENT INFORMATION PIER 1 IMPORTS-GERMANTOWN, SHELBY COUNTY, TENNESSEE |
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| PIER 1, GERMANTOWN VALUATIONS | |||
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$1,200,000 $ 600,000 $ 180,000 |
Gross Sales Real Estate Value Personal Property (Inventory) |
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$1,200,000 x $1,200,000 x $1,200,000 x |
5.50% = 2.25% = 7.75% = |
$ 66,000 $ 30,000 $ 96,000 |
State City TOTAL |
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$ 600,000 x (.25) x $ 600,000 x (.25) x |
2.88% = 1.34% = |
$ 4,320 $ 2,010 |
County City |
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$ 180,000 x (.25) x $ 180,000 x (.25) x |
2.88% = 1.34% = |
$ 1,296 $ 603 |
County City |
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TOTAL STATE TAXES (63.3%) TOTAL COUNTY TAXES (05.4%) TOTAL CITY TAXES (31.3%) TOTAL TAXES PAID |
$ 66,000 $ 5,616 $ 32,613 $ 104,229 |
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| Pier 1, Germantown Valuations - 30% Reduction | |||
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$ 900,000 $ 420,000 $ 180,000 |
Gross Sales (70% of $1,200,000) Real Estate Value (70% of $600,000) Personal Property (Inventory) |
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$ 900,000 x $ 900,000 x $ 900,000 x |
5.50% = 2.25% = 7.75% = |
$ 49,500 $ 20,250 $ 69,750 |
State City TOTAL |
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$ 420,000 x (.25) x $ 420,000 x (.25) x |
2.88% = 1.34% = |
$ 3,024 $ 1,407 |
County City |
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$ 180,000 x (.25) x $ 180,000 x (.25) x |
2.88% = 1.34% = |
$ 1,296 $ 603 |
County City |
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TOTAL STATE TAXES (65.1%) TOTAL COUNTY TAXES (05.7%) TOTAL CITY TAXES (29.2%) TOTAL TAXES PAID |
$ 49,500 $ 4,320 $ 22,260 $ 76,080 |
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An appraiser makes an estimate of fair market value for a property in order to assess a tax rate. In Germantown, where the property tax rate is not less than 1.5% of the fair market value of the property, if the property values decrease by 50%, the property taxes collected by the city also decrease. Fair market value of an income property is partially determined based on what is called the capitalization rate for the property.
Retail property is sold and appraised based on capitalization rates. The appraiser looks at the net income from the property, i.e. what the landlord will net after a lessee pays for the building and land. Based on that income the appraiser determines the value of the property.
As an example, assume that a property will generate $10,000 net to the landlord after he pays for maintenance, management and upkeep as Pier 1's leases do. By the end of the year, the landlord will have collected about $120,000. Using a capitalization rate of 10%, the property is worth $1.2 million ($120,000 x 10). If the net to the landlord falls to $5,000 per month with the same capitalization rate, the property falls in value from $1.2 million to $600,000. With the decrease in property value, the tax collected based on the assessed value decreases by one half.
We estimate that 33,670 customers will utilize our facilities annually if we reach $1,200,000 in volume. In the highest volume month there will be an average of 4,380 customers and in the lowest volume month this figure declines to 1,750. An average month yields approximately 2,805 customers. We are also a nearly ideal traffic generator in that our flow of business is relatively even, as shown in the previous table; while many retailers do nearly 50% of their business volume during the Christmas season, this holiday season accounts for a little more than 20% of our volume. Pier 1, is a primary destination oriented business that will generate business for other stores in the surrounding area. Because we are not primarily impulse oriented, we can in effect, help other stores in our capacity as a traffic generator. As we generate other shopping trips, Germantown gains in both real property tax revenues and sales tax revenues and please note this business is brought to Germantown through our national, regional, and local advertising scheme.
Once a city has decided to zone a property and allow a business to be established, it is their best interest to see that the property functions in its maximum economic capacity while not directly conflicting with such goals as aesthetics and traffic safety. If the property is functioning to its capacity, the city should have corresponding economic growth with a broad tax base providing for ample revenues to fund infrastructure, city management, school systems, etc.
Assuming we get to $1.2 million in annual sales, have merchandise in the store on the shelves worth $180,000 and there is a fair market value of the property of $600,000, you will find that our tax rate is based on 40% of the actual market value multiplied by $1.34 of assessed value per $100. This revenue goes directly to Germantown. This figures calculates to $3,216. Given the local sales tax revenue 0.011%, approximately $13,200 per year would be directed to the city's coffers from this Pier 1 alone. This is by no means the total return to Germantown because the multiplier effect on other stores must be considered; our destination oriented clients will pay sales tax on purchases made in other stores located near the Pier 1 and visited on an impulse basis. This is the base the city needs to realize they must maximize to realize their own general plan goal to make the land use planning as optimally effective as possible in an economic sense. If we are not able to increase our gross sales, the economic hardship we face will also fall to your bottom line. Because we will not be able to use the space to its maximum capacity, with retailing's high fixed costs and cyclical sales volume, if we cannot control both aspects, we will not survive in your municipality.
Consider the fact that if we at Pier 1 reach our goal of $1.2 million annually, after we take an annual discount of $48,000 for capital improvements we will be realizing approximately a 9% return on our investment. That is our total yield on cash flow. It is important to note that this is not profit, but rather the total cash flow on the store. It is also interesting to consider the fact that the state of Tennessee has a 7.375% sales tax plus a property tax of 1.6%. In effect what this means when all is said and done, is that the state of Tennessee, its counties and municipalities, collect 9% of that same gross. In other words, the state of Tennessee actually realizes a an equal profit out of the typical retail user that than the retailer itself. If, given an environment such as this, you are attempting to promote economic growth and not create urban sprawl and the other things that result from inconsistent planning, it becomes mandatory that the state recognize their role as partner in this venture and must allow us to use our marketing tools in a reasonable manner to promote and protect health, safety, welfare and general economic growth of the community. Finally, it must be noted that when we have a major partner taking a profit share equal to or greater than ours, they must offer us a stable, risk free environment or we cannot afford to remain in business in such a community or state.
If our store loses profits, the city loses tax revenues. Germantown will lose the most in this situation. The amount of capital being manipulated if Germantown were required to replace the sales tax contribution alone. A bond of $140,907.04 annualized at 8% over twenty five years or a $119,816 bond at 10% annual interest for 25 years would have to be purchased to make an equivalent yield to the sales tax returns for Pier 1 alone. If the real property is added to the net present value of the annual payment of $16,416 at 8% for 25 years it becomes $175,237.12. There are even more remarkable tax revenues to be considered when it is realized that these are the most profitable type of revenues for the city in that neither the school nor other infrastructures are depleted by retail activities.
We assume the city of Germantown fully understood that when you opened retailing in your town and allowed us and similar businesses into the town, you wanted us there to maximize property use. We entered the town and came into conformance with the plan and we are not having a self-imposed hardship with the lack of signage. We are merely asking you to implement your Code properly for the benefit of our store and for Germantown.
We know that even with our large advertising expenditures, the Germantown store is functioning 25% less than the volume that it should based on projections. We are concerned that with the economic projections for the Christmas season, the volume will further decrease below projections. What is the effect of this on our landlord and on Germantown?
We have a 5% gross lease which means that we pay 5% of our gross sales or a minimum of $6,000/month to our landlord. That rent will never kick into the override because our gross will never exceed the projected $1.2 million/year based on current performance. As a result, the property will always stay below the assessed value that it could have because its rents will not come in to a higher category. Based on current rents to the landlord, with a capitalization rate of 10, the property is worth $720,000. If gross sales increase, the rent increases and the property value increases.
In analyzing Germantown's general plan and zoning plan, our request is consistent with the intents of both. Germantown seeks to optimize the return from local retail space to prevent urban sprawl and deterioration. A goal such as this was made by forward thinking individuals who realized that considerable amounts of money could be lost to the city in terms of property values if requests such as ours are not granted. Denying our request would be tantamount to direct opposition to the goals stated in Germantown's general plan.
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