Title: Walgreen Co. v. City of Madison
Citation: 2008 WI 80
Docket Number: 2006AP001859
State: Wisconsin
Issuer: Wisconsin Supreme Court
Date: July 8, 2008

2008 WI 80 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
CASE NO.: 
2006AP1859 
COMPLETE TITLE: 
 
 
Walgreen Co., 
          Plaintiff-Appellant-Petitioner, 
     v. 
City of Madison, 
          Defendant-Respondent. 
 
 
 
 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
2007 WI App 153 
Reported at: 303 Wis. 2d 620, 735 N.W.2d 543 
(Ct. App. 2007-Published) 
 
 
OPINION FILED: 
July 8, 2008   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
February 26, 2008   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
Dane   
 
JUDGE: 
Diane M. Nicks   
 
 
 
JUSTICES: 
 
 
CONCURRED: 
ABRAHAMSON, C.J., concurs (opinion filed).   
 
DISSENTED: 
        
 
NOT PARTICIPATING:         
 
 
 
ATTORNEYS: 
 
For the plaintiff-appellant-petitioner there were briefs by 
Don M. Millis, Reinhart Boerner Van Deuren S.C., Madison; James 
H. Gilbert, James H. Gilbert Law Group PLLC, Eden Prairie, 
Minn.; and Robert A. Hill, Robert Hill & Associates, Eden 
Prairie, Minn., and oral argument by Robert A. Hill. 
 
For the defendant-respondent there was a brief and the 
cause was argued by Larry W. O’Brien, assistant city attorney, 
Madison. 
 
An amicus curiae brief was filed by Robert Horowitz and 
Stafford 
Rosenbaum 
LLP, 
Madison, 
on 
behalf 
of 
Wisconsin 
Association 
of 
Assessing 
Officers, 
League 
of 
Wisconsin 
Municipalities, City of Brookfield, City of Cudahy, City of Eua 
Claire, City of Greenfield, City of Kenosha, City of Lake 
Geneva, City of Milwaukee, City of New Berlin, City of Oshkosh, 
and Village of Pleasant Prairie, and oral argument by Robert 
Horowitz. 
 
 
2 
 
An amicus curiae brief was filed by David D. Wilmoth, 
Patricia Hintz and Quarles & Brady LLP, Milwaukee, on behalf of 
the Wisconsin Merchants Federation, Inc, and oral argument by 
David D. Wilmoth. 
 
 
 
 
2008 WI 80
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
No.  2006AP1859  
(L.C. No. 
2004CV1564) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
Walgreen Co., 
 
          Plaintiff-Appellant-Petitioner, 
 
     v. 
 
City of Madison, 
 
          Defendant-Respondent. 
 
FILED 
 
JUL 8, 2008 
 
David R. Schanker 
Clerk of Supreme Court 
 
 
 
REVIEW of a decision of the Court of Appeals.  Reversed and 
remanded.   
 
¶1 
LOUIS B. BUTLER, JR., J.   Walgreen Co. (Walgreens) 
seeks review of a published court of appeals opinion1 affirming a 
judgment of the Dane County Circuit Court, the Honorable Diane 
M. Nicks presiding.  The judgment adopted assessments of two 
Walgreens stores located in Madison, Wisconsin, conducted by the 
City of Madison (City) for tax purposes.  Walgreens challenged 
the assessments and sought a refund of taxes paid on the 
properties for 2003 and 2004, but the Madison Board of Review 
rejected 
its 
challenges. 
 
Walgreens 
filed 
a 
Wis. 
Stat. 
                                                 
1 Walgreen Co. v. City of Madison, 2007 WI App 153, 303 Wis. 
2d 620, 735 N.W.2d 543. 
No. 
2006AP1859   
 
2 
 
§ 74.37(3)(d)(2005-06)2 action, and the circuit court and court 
of appeals both upheld the City's assessments. 
¶2 
On review, we must determine whether a property tax 
assessment of retail property leased at above market rent values 
should be based on market rents (as Walgreens argues) or if such 
assessments should be based on the above market rent terms of 
Walgreens' actual leases (as the City argues).  We are also 
asked to address whether the City violated the uniformity clause 
of the Wisconsin Constitution in its assessment of Walgreens' 
properties, and whether Walgreens was barred by Wis. Stat. 
§ 70.47(7) from challenging the 2004 property tax assessments.  
Because the other issues in this case are dispositive, we do not 
reach the uniformity clause issue.   
¶3 
We conclude that the issue under Wis. Stat. § 70.47(7) 
regarding whether Walgreens was barred from challenging the 2004 
tax assessments has been waived and is moot.  As to the issue 
regarding the proper method of property tax assessment, we 
reaffirm the holding of Flood v. Bd. of Review, 153 Wis. 2d 428, 
431, 
451 
N.W.2d 
422 
(1990), 
that 
Wis. 
Stat. 
§ 70.32(1) 
"proscribes assessing real property in excess of market value."  
This holding is consistent with the nationally recognized 
principle that "[a] lease never increases the market value of 
real property rights to the fee simple estate."  Appraisal 
Institute, The Appraisal of Real Estate 473 (12th ed. 2001).  We 
                                                 
2 All subsequent references to the Wisconsin Statutes are to 
the 2005-06 version unless otherwise indicated. 
No. 
2006AP1859   
 
3 
 
also affirm that § 70.32(1) requires adherence to the Wisconsin 
Property Assessment Manual3 (the Property Assessment Manual) 
absent conflicting law.  The Manual is consistent with both 
statutory and case law in this state requiring an income 
approach assessment of a leased retail property's fair market 
value of the fee simple interest to be based on market lease 
rates, not actual contract rates, as long as encumbrances to the 
property do not cause its leased fee value to fall below a 
market rate value.  We conclude that the circuit court in this 
case failed to apply these well-established rules of property 
assessment.  Therefore, we reverse the decision of the court of 
appeals and remand for further proceedings consistent with this 
opinion.   
I 
¶4 
The following facts are taken from the findings and 
uncontested factual descriptions in the circuit court's June 26, 
2006, decision in this case.  Walgreens leases properties 
located at 2909 and 3710 East Washington Avenue in Madison, 
Wisconsin.  In addition to lease payments, Walgreens is also 
responsible for paying the property taxes for those properties. 
¶5 
The lease for each of the properties is for a term of 
60 years, terminable after 20 years.  The lease for the 2909 
East Washington property has a stated monthly rent as of June 
2006 (the date of the circuit court's opinion) at $35,833.33.  
                                                 
3 1 Bureau of Assessment Practices, Wisconsin Property 
Assessment Manual (2007). 
No. 
2006AP1859   
 
4 
 
The lease for the 3710 East Washington property has a stated 
monthly rent of $29,987.   
¶6 
The properties were constructed by a developer at 
Walgreens' direction, pursuant to a uniform business model 
followed by Walgreens.  Under that business model, Walgreens 
rents 
property 
rather 
than 
purchasing 
it, 
working 
with 
developers who find sites for Walgreens' stores at prime 
locations 
in 
heavily 
trafficked 
areas, 
buy 
out 
existing 
businesses located at the desired sites, purchase the property, 
and build and/or develop it with "super adequacies"4 to suit 
Walgreens' needs.  Walgreens' lease payments under this business 
model include compensation to the developer for all such 
financing, 
land 
acquisition, 
construction, 
development 
and 
financing costs, together with a profit margin.  The parties do 
not dispute that the inclusion of such costs into the lease 
terms results in higher than market rate rental payments; as the 
circuit court described it, the rent in the Walgreens leases is 
"higher 
than 
normal" 
in 
part 
because 
"the 
developer 
is 
recovering his development costs on a building that contains the 
superadequacies demanded by Walgreen."  Both of the East 
                                                 
4  The Property Assessment Manual defines "super adequacy" 
as "[a] greater capacity or quality in the structure or one of 
its components than the prudent purchaser or owner would include 
or would pay for in the particular type of structure under 
current market conditions."  Property Assessment Manual G-37.  
Walgreens presented testimony at trial that the super adequacies 
it requires of its property include improvements tailored to its 
needs, such as drive-through stations, specially designed fiber 
optics systems, and high ceilings.  
No. 
2006AP1859   
 
5 
 
Washington properties were developed and their leases based on 
this business model.  
¶7 
The procedural history of this case begins with the 
City's 2003 and 2004 property tax assessments of the two 
properties.  The City's assessment reports for the properties 
describe the "market value" of the 2909 East Washington property 
at $4,618,000 and the "market value" of the 3710 East Washington 
property at $3,860,000 for the years 2003 and 2004.  The 
assessor's reports also contain former assessment values for 
2003 that were revised to match the 2004 valuations, and 
describe 
the 
methodology 
followed 
in 
the 
assessments.  
Specifically, the appraisal report for each property describes 
rejecting the "cost approach" to valuation in favor of an 
"income approach" utilizing a "direct capitalization" method, 
based on actual income, but using market-based expense and 
vacancy estimates.   
¶8 
Walgreens attempted to appeal the 2003 assessments to 
the Madison Board of Review pursuant to Wis. Stat. § 70.47, but 
the Board sustained the assessments after informing Walgreens 
that it could not appear before the Board of Review to object to 
its assessment because Walgreens had failed to comply with Wis. 
Stat. § 70.47(7)(af)'s requirement that it provide necessary 
income and expense information requested by the assessor's 
office.  As to the 2004 assessments, Walgreens appealed to the 
Board of Review, and appeared at a hearing held on September 9, 
2004.  The circuit court in this case described the hearing in 
terms of the Board sustaining the assessments after Walgreens 
No. 
2006AP1859   
 
6 
 
"presented estimated valuations, but did not provide any 
evidence supporting its estimated valuations."   
¶9 
After unsuccessfully pursuing claims against the City 
for excessive assessments, Walgreens filed suit in the Dane 
County Circuit Court under Wis. Stat. § 74.37(3)(d) seeking a 
refund of $150,625.47 plus interest and litigation expenses for 
the alleged excess taxes paid on the East Washington properties 
for 2003 and 2004.  
¶10 At trial, Walgreens and the City presented conflicting 
appraisals of the properties' market values.  As the circuit 
court described it, Walgreens' assessor "appraised the fee 
simple interest in the two properties without consideration of 
the lease, while [the City's appraiser] appraised the leased fee 
interest."5  The appraisals presented by Walgreens described 
                                                 
5 The Property Assessment Manual explains that a fee simple 
is a type of freehold estate, or ownership interest in property: 
Fee Simple – With this type of estate the owner 
possesses all of the rights an individual can have in 
property. 
 
It 
is 
the 
fullest 
form 
of 
private 
ownership, 
restricted 
only 
by 
the 
governmental 
limitations previously described.  This estate does 
not recognize any mortgage or lease on the property.  
This type of estate has no time limit on its 
existence, is inheritable, and freely transferable 
during the owner's life by gift or sale.   
Property Assessment Manual 7-3.  In contrast, a "leased fee" is 
defined by the manual as "[a] property held in fee with the 
right of use and occupancy conveyed by lease to others.  A 
property consisting of the right to receive ground rentals over 
a period of time, plus the right of ultimate repossession at the 
termination of the lease."  Property Assessment Manual G-32. 
No. 
2006AP1859   
 
7 
 
using all three primary appraisal approaches discussed in more 
detail in our analysis——the cost approach, sales comparison 
approach, 
and 
income approach——while placing the greatest 
emphasis on the latter two approaches.  In contrast, the City 
appraisal used only sales comparison and income approaches for 
the 2909 East Washington property, while ultimately basing its 
assessment solely on numbers derived from its income approach 
analysis.6  It used only an income approach for the 3710 East 
                                                                                                                                                             
The court of appeals in this case critiqued the parties' 
use of the phrases "fee simple interest" and "leased fee 
interest" and concluded that "[w]ith minor exceptions, we see no 
need to employ such terms in the remainder of this opinion."  
Walgreen, 303 Wis. 2d 620, ¶15 n.5.  We disagree that these 
terms are irrelevant but note that the parties' overemphasis of 
the terms and their differences distracts from the main issues 
in this case.  As explained in a passage of The Appraisal of 
Real Estate cited by both parties and discussed in our analysis, 
both the fee simple and the leased fee interests are relevant in 
determining the value of leased property because the two should 
be compared to determine whether there is a negative or positive 
leasehold value.  Appraisal Institute, The Appraisal of Real 
Estate 81-82 (12th ed. 2001).  Similarly, in a passage that is 
particularly pertinent for our analysis, the Property Assessment 
Manual explains that for purposes of valuing the fee simple 
interest of a leased property, "[i]f the contract rents are at 
market levels, the leased fee interest is the same as a fee 
simple interest.  However, if the contract rents are below 
market levels, the leased fee interest is likely less than the 
fee simple interest in the property."  Property Assessment 
Manual 9-12.  
6 It should be noted that although the parties apparently 
dispute whether or the extent to which the City's assessor based 
its appraisal of the 3710 property on sales of that property 
prior the 2003 and 2004 assessments, it seems evident from the 
record that at least the 1999 sale was taken into consideration, 
as the $4,268,500 sales price exactly matches the 2003 "current 
assessment" of the property's value in 2003.  
No. 
2006AP1859   
 
8 
 
Washington property, after concluding there were no comparable 
property sales.  
¶11 The income approach analyses of both Walgreens' and 
the City's appraisals acknowledged that the property at issue is 
income-producing real estate, the value of which should take 
into account the property's expected cash flow through a 
capitalization technique.  However, the primary difference 
between the appraisal approaches of the parties is that the 
income approach analysis in Walgreens' appraisals analyzed the 
market rent, as opposed to the contract rent, while the City's 
appraisals specified that they were "[u]sing the actual income 
from the [Walgreens property] lease."  As a result of their 
different methodologies, Walgreens' appraisals assessed the 2909 
and 3710 properties as valued in 2003 at $1,980,000 and 
$1,790,000, respectively, and as valued in 2004 at $2,070,000 
and $1,870,000, respectively, i.e., significantly lower than the 
previously described assessments by the City.  
¶12 In a decision dated June 26, 2006, the circuit court 
ruled in favor of the City, issuing the following three 
conclusions of law: 
1. 
Walgreen[s] 
has 
failed 
to 
comply 
with 
the 
procedures in Wis. Stat. § 70.47(a) and (ae) with 
regard to its claims for the 2004 assessments and is, 
therefore, barred by Wis. Stat. § 74.37(4)(a) from 
challenging such assessments. 
2. 
Wis. Stat. § 70.32(1) requires the Court to take 
into account the actual lease terms for the two 
subject properties. 
No. 
2006AP1859   
 
9 
 
3. 
Walgreen[s] has not presented sufficient evidence 
of [a] Uniformity Clause violation. 
¶13 Walgreens appealed.  In an opinion issued on May 17, 
2007, the court of appeals affirmed the circuit court's 
decision.  Walgreen Co. v. City of Madison, 2007 WI App 153, 
¶52, 303 Wis. 2d 620, 735 N.W.2d 543.   
¶14 The court of appeals concluded that the circuit court 
and the City's assessor correctly relied on Walgreens' contract 
rents, rather than on market rent, in assessing the properties' 
full values.  Id., ¶46.  The court of appeals disregarded 
Walgreens' characterization of its monthly payments under the 
lease 
as 
reflecting 
reimbursement 
of 
the 
acquisition, 
development and financing costs and a profit margin for each 
store.  Id., ¶¶36-37.  Instead, the court concluded that because 
the monthly payments are appended to the properties by the lease 
agreement, they are "rights and privileges appertaining thereto" 
within the Wis. Stat. § 70.03 definition of "real property"; 
they directly affect what the properties would sell for in an 
arm's length sale; and they therefore are the proper subjects of 
consideration in an appraisal.  Id.  The court also rejected 
Walgreens' 
assertions of comparable property evidence and 
disregarded Walgreens' argument that the court should have 
adhered to the Property Assessment Manual.  Id., ¶¶38-45.  
Finally, the court concluded that Walgreens had not established 
a uniformity clause violation.  Id., ¶49.  The court of appeals 
declined to address whether the dismissal of Walgreens' 2004 
assessment challenge should be affirmed on the grounds that 
No. 
2006AP1859   
 
10 
 
Walgreens failed to comply with Wis. Stat. § 70.47(7); the court 
of appeals explained that the substantive issues regarding the 
2003 assessments applied equally to the 2004 assessments.  Id., 
¶10 n.2. 
¶15 Walgreens filed a petition for review on June 18, 
2007, and review was granted. 
II 
¶16 We review excessive tax assessment claims brought 
under Wis. Stat. § 74.37(3)(d) without regard to determinations 
made at earlier proceedings.  Nankin v. Village of Shorewood, 
2001 WI 92, ¶¶24-25, 245 Wis. 2d 86, 630 N.W.2d 141.  In such 
cases, we review the circuit court record, not the record from 
the Board of Review.  Adams Outdoor Adver. Ltd. v. City of 
Madison, 2006 WI 104, ¶24, 294 Wis. 2d 441, 717 N.W.2d 803.   
¶17 Although the general level of deference accorded to 
property assessments is that this court, like a circuit court, 
gives a city's assessment presumptive weight, "the assessment is 
presumed correct only if the challenging party does not present 
significant contrary evidence."  Id., ¶25.  Furthermore, "[n]o 
presumption of correctness may be accorded to an assessment that 
does not apply the principles in the Property Assessment 
Manual."  Id., ¶56.  Whether a city has erroneously failed to 
follow statutory requirements in making an assessment is a 
question of law that we review de novo.  Id., ¶26.   
III 
¶18 This 
case 
requires 
us 
to 
identify 
the 
correct 
methodology for assessing leased retail property for purposes of 
No. 
2006AP1859   
 
11 
 
municipal taxation when the leases for such property contain 
monthly payments significantly above the market rental rate in 
part as a result of certain unique business and financing terms 
being incorporated into the contractual lease terms.   
¶19 The power to determine the appropriate methodology for 
valuing 
property 
for 
taxation 
purposes 
lies 
with 
the 
legislature.  See 16 Eugene McQuillan, The Law of Municipal 
Corporations § 44.109 (3d ed., Thomson West 2003).  As such, we 
begin our analysis with a look at the governing statutes, 
reviewed in conjunction with basic principles of real property 
assessment as described by case law, treatises, and the Property 
Assessment Manual.   
A 
¶20 Wisconsin Stat. § 70.32(1) unambiguously provides that 
"[r]eal property shall be valued by the assessor in the manner 
specified in the Wisconsin property assessment manual provided 
under s. 73.03(2a) from actual view or from the best information 
that the assessor can practicably obtain, at the full value 
which could ordinarily be obtained therefor at private sale."  
The Manual, in turn, provides that "[t]he goal of the assessor 
is to estimate the market value of a full interest in the 
property, subject only to governmental restrictions.  All the 
rights, privileges, and benefits of the real estate are included 
in this value.  This is also called the market value of a fee 
simple interest in the property."  Property Assessment Manual 7-
4.  Consequently, a property assessor's task is to identify the 
market value of a fee simple interest as described by the 
No. 
2006AP1859   
 
12 
 
Property Assessment Manual, and which reflects the "full value"7 
that could ordinarily be obtained at a private sale, as 
described by § 70.32(1).  See id. 
¶21 There are three primary methods of property assessment 
set forth by the Property Assessment Manual and generally 
recognized in real estate appraisal law:  the sales comparison 
approach, the cost approach, and the income approach.  Property 
Assessment Manual 7-19 to 7-30; Adams, 294 Wis. 2d 441, ¶¶28-29.  
See also The Law of Municipal Corporations § 44.109 (describing 
the three methods as methods of determining market value).   
¶22 The Property Assessment Manual describes the sales 
comparison approach as involving a comparison of properties 
similar to the subject property and adjustment for differences.  
Property Assessment Manual 7-18, 7-20.  The Manual explains that 
this approach incorporates "the principles of substitution," 
that buyers will not pay more for property than it would cost 
them to acquire substitute property of equal desirability and 
utility.  Id. at 7-20.  
                                                 
7 This court has explained that "[f]or the purposes of 
assessing real property, we have construed the statutory phrase 
'full value' to mean market value.  The terms 'full value,' 
'market value' and 'fair market value' are synonymous and 
interchangeable in the opinions."  Flood v. Bd. of Review, 153 
Wis. 2d 428, 435, 451 N.W.2d 422 (1990)(citing Darcel Inc. v. 
Bd. of Review, 137 Wis. 2d 623, 628, 405 N.W.2d 344 (1987); 
State ex rel. Baker Mfg. Co. v. Evansville, 261 Wis. 599, 608, 
53 N.W.2d 795 (1952); Property Assessment Manual 7-3).  See also 
16 Eugene McQuillan, The Law of Municipal Corporations § 44.109 
(3d ed., Thomson West 2003). 
No. 
2006AP1859   
 
13 
 
¶23 The Property Assessment Manual describes the cost 
approach as also based on the principle of substitution.  Id. at 
7-19, 7-23.  Under the cost approach, the Manual prescribes, an 
assessor adds the estimated land value to the present value of 
improvements (calculated by subtracting accrued depreciation 
from 
the 
reproduction 
or 
replacement 
"cost 
new" 
of 
the 
structure) to arrive at a total property value.  Id.  
¶24 The Property Assessment Manual explains that in leased 
property scenarios, the income approach is often the most 
reliable approach for property valuation, describing the income 
approach as estimating and then capitalizing the net rent a 
property subject could generate.  Id. 7-29 to 7-30, 9-11.8  The 
specific 
steps 
outlined 
by 
the 
Manual 
for 
applying 
the 
capitalized income approach include:  (1) estimating potential 
gross income; (2) deducting for vacancy and collection loss; (3) 
adding miscellaneous income; (4) determining operating expenses; 
(5) subtracting operating expenses to derive net income; (6) 
selecting the correct capitalization method; (7) deriving the 
capitalization rate; and (8) applying the capitalization rate to 
                                                 
8 The Appraisal of Real Estate similarly explains that:  
In the income capitalization approach, an appraiser 
analyzes a property's capacity to generate future 
benefits and capitalizes the income into an indication 
of present value.  The principle of anticipation is 
fundamental 
to 
the 
approach. 
 
Techniques 
and 
procedures from this approach are used to analyze 
comparable sales data and to measure obsolescence in 
the cost approach. 
The Appraisal of Real Estate 471.  
No. 
2006AP1859   
 
14 
 
net income to arrive at a value estimate.  Property Assessment 
Manual 9-11.  The Manual emphasizes that "[i]n all of these 
steps the assessor must be aware of what is happening in the 
market.  All of the information needed for the income approach 
is either obtained or verified by what the assessor finds in the 
marketplace."  Id.  
¶25 The Manual further explains the proper methodology for 
assessing retail stores specifically: 
The sales comparison approach is often used to value 
smaller retail stores.  Because smaller retail stores 
may be easily adapted to other retail uses, sales of 
these stores can be used as comparable sales in 
applying the sales comparison approach.  For the 
larger stores and those smaller stores for which there 
are no comparable sales, the assessor should use the 
income and/or cost approaches. 
Property Assessment Manual 9-39.9   
¶26 Turning to the income approach dispute in this case, 
we find particular relevance in the Property Assessment Manual's 
explanation that "[w]hen applying the income approach, the 
assessor must use the market rent, not the contract rent, of the 
property (unless valuing federally subsidized housing . . . [)].  
Market rent is the rent that a property would receive based on 
the current, arm's-length rent commanded by similar properties 
in the marketplace."  Id. 7-29 (emphasis added).  The Manual 
adds that "[t]o value the fee simple interest of a property, 
                                                 
9 This passage can also be found at page 9-30 of the 2005 
version of the manual.  It was not cited by either party or 
lower court, as none of them considered the cost approach as 
applicable or helpful as the income approach.  
No. 
2006AP1859   
 
15 
 
market rent rather than the actual, or contract rent is to be 
used in estimating potential gross income."  Id. 9-12.  
¶27 The Property Assessment Manual does set forth a 
limited exception to the general rule that income approach 
valuation of leased property must be based on market rental 
rates, not the actual contract rents of the subject property.  
That 
exception, 
the 
Manual 
explains, 
corresponds 
to 
the 
relationship between leased fee interest and fee simple interest 
as determined by comparing contract rents to market rates.  "If 
the contract rents are at market levels," the Manual explains, 
"the leased fee interest is the same as a fee simple interest.  
However, if the contract rents are below market levels, the 
leased fee interest is likely less than the fee simple interest 
in the property.  (See the discussion on partial interests in 
Chapter 7)."  Id.  The description in Chapter 7 of the Manual of 
the exception that applies when partial interests result from 
leases encumbered by below-market rates is perhaps the most 
pertinent passage of the Manual addressing the subject of the 
parties' dispute in this case.  It provides: 
To accurately estimate the market value of the full 
interest in leased property, both the lessor's and the 
lessee's 
interest (the leased fee and leasehold 
interest) must be included. 
When a property is sold, the leases generally remain 
intact and must be honored by the new owner.  The 
terms of any existing leases must be reviewed because 
they can have a significant effect on the sale price 
of the property. 
The market value of a leased fee interest in a rental 
property generally depends on how the contract rent 
No. 
2006AP1859   
 
16 
 
relates to the market rent.  If the contract rent is 
at the same level as the market, the leased fee 
interest has the same value as a full interest (fee 
simple interest).  In this case, the leasehold 
interest has no value. 
A leasehold interest may acquire value if the lease 
rate is below market.  In this case, the leasehold 
interest has value due to the below market lease.  
Whenever a leasehold interest has value, the leased 
fee interest is reduced below that of the market value 
of a full interest (fee simple interest). 
If a property encumbered by leases is sold, only the 
owner's interest in the property (leased fee interest) 
is actually transferred.  In this case, the assessor 
must determine if the leasehold interest has any 
value.  If the leasehold interest has value, the value 
of the leased fee interest is reduced below that of 
the market value of a full interest (fee simple 
interest) in the property.  The assessor must be aware 
of the lease terms and structure of any lease-
encumbered property sold to determine if the leasehold 
interest has value. 
Id. 7-4 to 7-5.  
¶28 These passages illustrate the appropriate methodology 
generally used for appraising leased property:  an assessor 
should consider the leased fee interest to be equal to the 
market value as long as the lease rate is not encumbered to the 
point of falling below the market rate.  In such cases where a 
lease encumbrance brings the lease rate below the market rate, 
the assessed value of the property is reduced, corresponding 
with the reciprocal positive leasehold value to the tenant.  In 
such cases where the contract rents are below market levels, the 
leased fee interest, in other words, will not be the same as the 
fee simple interest in the property.  Property Assessment Manual 
9-12.  Because a buyer would not be able to obtain the fair 
No. 
2006AP1859   
 
17 
 
market value at sale in such cases, the Property Assessment 
Manual recognizes that the property should not be valued as if 
such fair market value were actually obtainable.  
¶29 The 
Property Assessment Manual does not contain 
language which similarly requires or allows appraisers to 
increase the market value of the property when the lease rate is 
above the market rate.  In such a case, a buyer would still be 
able to obtain market rental rates, and the lease encumbrance 
does not therefore bring the property under the exception, which 
is limited to cases in which the lease rate is below the market 
rate, making it evident that the market value could not be 
obtained at sale.   
¶30 The City argues, and both lower courts agreed, that 
this clear language in the Property Assessment Manual should be 
disregarded, taking the position that the Manual's methodology 
violates Wis. Stat. § 70.32(1)'s requirement that property be 
assessed based on the full value that could be obtained at a 
private sale.  The City describes the Manual as conflicting with 
the "full value" requirement of Wis. Stat. § 70.32(1) because 
the City views lease contract values as within the scope of the 
rights or privileges "appertaining" to real estate described in 
Wis. Stat. § 70.03's definition of "real property," therefore 
rendering the contract terms a proper focus in assessing full 
value.   
¶31 The City maintains that in conflicts between common 
law and the Manual, common law prevails.  In this case, the City 
concludes that such a conflict exists in this case between the 
No. 
2006AP1859   
 
18 
 
Property Assessment Manual and Metropolitan Holding Co. v. Board 
of Review, 173 Wis. 2d 626, 495 N.W.2d 314 (1993); Darcel Inc. 
v. Board of Review, 137 Wis. 2d 623, 405 N.W.2d 344 (1987); and 
City of West Bend v. Continental IV Fund Limited Partnership, 
193 Wis. 2d 481, 535 N.W.2d (Ct. App. 1995).  In regard to 
Darcel and West Bend in particular, the City contends that those 
cases establish that the terms of long-term arms-length leases 
generally govern property assessments, regardless of whether the 
lease value is below or above the market value.  
¶32 Walgreens, in contrast, argues that the City is 
required by Wisconsin law to base income approach property 
valuations on market rents, not contract rents, as described by 
the Property Assessment Manual 7-5, 9-12.  Walgreens argues that 
the application of the narrow holdings of Darcel, Metropolitan 
Holding, and West Bend to contexts in which the contract rents 
exceed market rents is improper.  Walgreens argues that the 
holdings of these cases should be read as limited to situations 
in which a lease or other encumbrance limits a property's value, 
bringing it below the market value.  If this court affirms the 
lower court decisions and adopts the City's position, Walgreens 
warns, this state's laws would be in conflict with those of the 
majority of states that have looked at this issue and held that 
income approach property assessments must be based on market 
rates, not contract rates.  
¶33 Walgreens does not dispute that its above market rate 
leases can increase the value of its stores to purchasers, but 
it differentiates between property value and contract value, and 
No. 
2006AP1859   
 
19 
 
contends that the increased value is not a real property value 
subject to taxation.  Walgreens warns of the dangers posed by 
commingling contract and real property rights, explaining that 
assessors should not be allowed to ignore their duty to 
differentiate between the market and other elements of the 
contract that are not typical of the market.  Walgreens argues 
that the lessor's rights to the above market value in this case 
are contract rather than real property rights.  
¶34 We agree with Walgreens that the lower courts in this 
case 
erroneously 
failed 
to 
correctly 
apply 
the 
relevant 
statutory language of Wis. Stat. § 70.32(1) and pertinent 
provisions of the Property Assessment Manual, case law, and 
persuasive authorities that address the assessment of leased 
property in consistent terms.  We will proceed to address the 
following interrelated flaws with the approach taken by the City 
and the lower courts in this case:  (1) their erroneous 
extension of the precedents of Darcel, Metropolitan Holding, and 
West Bend, which merely recognize a narrow exception to the 
general rule of valuing property by market value, an exception 
applicable only when market value could not be obtained by a 
purchaser due to encumbrances resulting in lower than market 
value rent terms; (2) their erroneous failure to properly apply 
cases that are on point, such as Flood, 153 Wis. 2d 428, and 
State ex rel. Flint Building Co. v. Board of Review, 126 Wis. 2d 
152, 160-61, 376 N.W.2d 364 (Ct. App. 1985), which address the 
consideration assessors must pay to unusual financing terms, as 
distinguished from actual property value; (3) their failure to 
No. 
2006AP1859   
 
20 
 
recognize the rule that it is erroneous to rely solely on the 
income approach in a property assessment, and that it is also 
bad policy to do so in the manner the City assessor did in this 
case, in effect taxing business efforts instead of property. 
B 
¶35 The parties debate whether the lower courts improperly 
failed to apply the proper appraisal methodology set forth by 
the Property Assessment Manual.  As we have described, both 
parties focused on the income approach in their assessments and 
in their briefing.  Consequently, although the Manual describes 
both the income and cost approaches as being the best methods of 
assessing large retail property absent comparable property data, 
we confine the remainder of the analysis to the narrow dispute 
of the appropriate income approach methodology to be used in 
this case.  
1 
¶36 Walgreens maintains that the lower courts erroneously 
failed to apply the Property Assessment Manual, which must be 
followed absent a conflict between the Manual and statutory 
requirements.  The City responds that such a conflict exists, 
with the Manual contradicting both statutory and case law in 
Wisconsin.  We disagree that there is such a conflict justifying 
the City assessors' and the lower courts' refusal to follow the 
Manual's general requirement that market rather than contract 
rates determine the value of leased properties under the income 
approach.  
No. 
2006AP1859   
 
21 
 
¶37 The cases upon which the City relies to illustrate 
such a conflict are those cited in the lower court decisions—— 
Metropolitan Holding, Darcel, and West Bend.  However, each of 
these cases, unlike the present case, involved properties 
encumbered by below market rent, which is a limited exception to 
the general rule recognized by the Property Assessment Manual 7-
4 to 7-5, based on a potential purchaser's inability to obtain 
the market rate value of property due to a lease encumbrance.  
See also Property Assessment Manual 9-12.  The common holding of 
these cases, exempting such properties from the general rule 
that market rent and not contract rent is the proper measure of 
leased property value, does not apply to cases involving 
properties with above market rent. 
¶38 In Metropolitan Holding, 173 Wis. 2d at 628-31, this 
court held that where a federally funded housing complex was 
encumbered by Department of Housing and Urban Development 
restrictions, including limits on rent, type of tenants, and net 
profit per unit, actual rents rather than market rents were the 
proper measure of an assessment.  This case is not on point 
because it was a public housing case, bringing Metropolitan 
Holding within the ambit of the exception explicitly delineated 
by the language of the Property Assessment Manual's requirement 
that assessors must value property based on the market rent 
rather than the contract rent leased property "unless valuing 
federally subsidized housing."  Property Assessment Manual 7-29.   
¶39 Although Darcel and West Bend did not involve federal 
housing, their holdings are also inapplicable to the present 
No. 
2006AP1859   
 
22 
 
case, as they merely reflect the Property Assessment Manual's 
exception to the general rule of valuing leased property by fair 
market rates for leases with rent terms under the market rate.   
¶40 In Darcel, this court held that because the below-
market leases in that case encumbered the mall property, the 
recent sale price of the mall was the best evidence of its value 
rather than fair market rents, which were no longer available to 
purchasers of that property.  Darcel, 137 Wis. 2d at 635-36.  
This court added the explicit disclaimer in Darcel that "[w]e do 
not hold that actual rents will always control an estimate of 
property value," and issued a narrow ruling that an arms-length 
sale 
is 
a preferred method of assessment and "[i]f an 
encumbrance on the subject land would equally subject all 
potential buyers to the same decreased use or rent of the 
property, and the encumbrance was entered into at arms-length 
for a fair market price at the time it was entered, it should be 
considered to lower the full market price of the property."  Id. 
at 636, 640.  Unlike in Darcel, the leases in this case are 
above, not below, market rent, and the City is not requesting an 
assessment based on such an arms-length sale, rendering both the 
holding and the underlying rationale of Darcel inapplicable to 
this case.   
¶41 The 
City's 
reliance 
on 
West 
Bend 
is 
similarly 
misplaced.  In that case, the court of appeals held that the 
value of a mall encumbered by leases at below market rent should 
not be based on market rents.  West Bend, 193 Wis. 2d at 489.  
According to the City, the court of appeals in West Bend did not 
No. 
2006AP1859   
 
23 
 
determine that the contract rents were below market rents 
because it was irrelevant to the analysis.  Rather, the court in 
West Bend concluded that the controlling factor was "the rental 
payments agreed upon under the negotiated lease terms."  Id.   
¶42 However, the court of appeals in West Bend was careful 
to explain that the lease in that case was to be treated like 
the leases in Darcel and Metropolitan Holding, i.e., considered 
as reflecting the value of the properties more accurately than 
market rates, because the leases in all three cases functioned 
as encumbrances which brought the value below the market rate.  
West Bend, 193 Wis. 2d at 488-89 & n.1.  The West Bend court 
explained that in Darcel, "[i]mportantly, the court stated that 
if an encumbrance, such as a long-term lease, would subject all 
potential buyers to the same decreased use or rent of the 
property and it was entered into at arm's length, it should be 
considered to lower the full market price of the property."  Id. 
at 488-89 (citing Darcel, 137 Wis. 2d at 636)(emphasis added).  
The West Bend court was careful to limit its holding to cases 
involving property encumbered by a bundle of rights in the form 
of a leasehold bringing the market value of the specific 
property below market rates.  Id.  
¶43 There is no language in West Bend supporting the 
circuit court's interpretation of that case as conveying a 
recognition by the court of appeals "that the Wisconsin Supreme 
Court has substantially changed the assessment procedure (i.e., 
from the Wisconsin Property Assessment Manual's procedure) when 
any sort of encumbrance significantly alters the value of a 
No. 
2006AP1859   
 
24 
 
property."  Not only did the court of appeals in West Bend not 
convey such recognition but the circuit court's statement is 
also a misinterpretation of what this court has held in regard 
to property assessment involving encumbrances.  Although we have 
certainly ruled that an encumbrance bringing the rent below 
market value must be treated accordingly, as the Property 
Assessment Manual itself establishes, we have not, as the 
circuit court describes, held that as a general rule the 
existence of any encumbrance altering the value of the lease, 
whether increasing or decreasing it, requires deviating from the 
assessment procedures set forth in the Manual.  
¶44 The circuit court's conclusion in this case that the 
"bundle of rights" referred to in West Bend includes inflated 
rent payments is erroneous.  Leases are encumbrances upon a 
property's bundles of rights, not part of the bundle itself.  As 
the Property Assessment Manual explains: 
In Section 70.03, Stats., the definitions of real 
property 
includes 
"all 
fixtures 
and 
rights 
and 
privileges appertaining thereto."  In essence it is 
these rights and privileges that the assessor is 
valuing.  These rights are called the bundle of rights 
and 
consist 
of 
use, 
possession, 
enjoyment, 
disposition, exclusion, or the right not to exercise 
any of these rights. 
It is possible to own all or just some of these 
rights.  The extent of ownership of these rights will 
determine what kind of estate, or interest, one has in 
the property. 
If a person owns all the property rights, they hold a 
fee simple interest (or estate) in the property.  For 
example, partial interests (or estates) in real estate 
can be created by limiting the full bundle of rights 
No. 
2006AP1859   
 
25 
 
through leasing the property.  Partial estates include 
leased fee and leasehold estates. 
Property Assessment Manual 7-1 (emphasis added).  Furthermore, 
the Manual explains, "[a] leasehold estate is used to transfer 
the rights in realty for a limited period of time.  Leasehold 
interest is transferred using a lease for a fixed period in 
exchange for a payment of rent."  Id. 7-3. 
¶45 Rent is not a right in realty; it is what is exchanged 
for an encumbrance upon a right in realty.  As such, a lease is 
not part of the "bundle of rights" described by West Bend, but 
is rather an encumbrance rendering an estate a "partial estate" 
due to the fact an owner does not have full access to the 
property.  See Property Assessment Manual 7-4, 7-5, 9-12.  In 
cases such as West Bend, the lessor is not fully compensated by 
the rent terms for the encumbrance a lease creates upon his or 
her bundle of rights.  In contrast, a lessor may be more than 
fully compensated for an encumbrance through above market rent 
in cases such as the present one, but that does not transform 
the lease from an encumbrance to part of the "bundle of rights" 
appertaining to a property, nor does it transform the rent 
payments 
into 
anything 
more 
than 
compensation 
for 
an 
encumbrance.  Rather, it may just make the property owner a wise 
investor. 
¶46 The language of West Bend is confusing on this point, 
as West Bend appears to consider some lease rights and rental 
payments to fall within the meaning of "bundle of rights," the 
court of appeals stating that: 
No. 
2006AP1859   
 
26 
 
Where property is encumbered by a bundle of rights, we 
must appraise or assess the property at its value 
using the current value of those bundle of rights.  In 
this case, we cannot speculate as to what the lease 
rights might bring on the market, but we must accept 
the rental payments agreed upon under the negotiated 
lease terms.  
 . . . . 
In the present case, the full value of the property, 
including the leasehold, which in this case is treated 
as an encumbrance on the property, was properly 
assessed at what could ordinarily be obtained at 
private sale. 
West Bend, 193 Wis. 2d at 489 (citations omitted)(emphasis 
added).  Even if we accepted this description of rental payments 
as being a "bundle of rights" in some cases, however, it is 
critical to keep in mind that West Bend limits such cases to 
those in which the lease term "bundle of rights" actually 
encumber the property.  
¶47 In this case, the above market lease terms enhance, 
rather than encumber, the worth of a property in the eyes of a 
potential purchaser.  However, just because retail property may 
be income-producing does not render the contract benefits of an 
above market lease equal to a higher property value.  The 
Appraisal of Real Estate at 473.  Even leases with higher lease 
terms may still result in problems outweighing its benefits to 
the property owner, such as the risk of weak tenants or even 
financially capable tenants who are litigious and willing to 
ignore lease terms or break leases.  As such, "[a] lease never 
increases the market value of real property rights to the fee 
simple estate."  Id. (emphasis added).  
No. 
2006AP1859   
 
27 
 
¶48 This is a critical point, and one directly responsive 
to the City's arguments that because leases run with the land, 
an above market rent necessarily increases property value.  The 
surrounding text of this passage explains:   
Because a leasehold or a leased fee is based upon 
contract rights, the appraiser needs special training 
and 
experience 
to differentiate between what is 
generally representative of the market and other 
elements of a contract that are not typical of the 
market.  An understanding of risks associated with the 
parties and the lease arrangement is also required.  A 
lease never increases the market value of real 
property rights to the fee simple estate.  Any 
potential value increment in excess of a fee simple 
estate 
is 
attributable 
to 
the 
particular 
lease 
contract, and even though the rights may legally "run 
with the land," they constitute contract rather than 
real property rights.  Conversely, detrimental aspects 
of a lease may result in a situation in which either 
or both of the parties to the lease, and their 
corresponding value positions, may be diminished. 
Id. (emphasis added).  
¶49 The Property Assessment Manual's similar explanations 
that 
all 
the 
information 
needed 
for 
an 
income 
approach 
assessment can be found in the marketplace, and that the market 
rate determines an income approach assessment unless an owner 
could not obtain at least the market rate at a private sale, are 
consistent 
with 
Wis. 
Stat. 
§ 70.32(1) 
and 
with 
Darcel, 
Metropolitan Holding, and West Bend.  There is no language in 
Darcel, Metropolitan Holding, and West Bend indicating that in 
addition to there being an exception for below market lease 
rates to the general rule requiring market rents to guide income 
approach appraisals, there is a reciprocal exception requiring 
No. 
2006AP1859   
 
28 
 
above market lease rates to be substituted for the market rate 
as well.  To the contrary, as this court explained in Darcel, 
the holding in those cases was narrow, limited by the decision's 
focus on encumbrances lowering the property value and its 
express disclaimer that "[w]e do not hold that actual rents will 
always control an estimate of property value . . . ."  Darcel, 
137 Wis. 2d at 640. 
¶50 Wisconsin 
Stat. 
§ 70.32(1) 
requires 
that 
"[r]eal 
property shall be valued by the assessor in the manner specified 
in the Wisconsin property assessment manual . . . ."  It is 
true, as the City points out, that Metropolitan Holding held 
that an exception to the general rule requiring compliance with 
the Property Assessment Manual may exist when the method of 
assessment the Manual suggests would violate Wis. § 70.32(1).  
Metropolitan Holding, 173 Wis. 2d at 633.  However, there is no 
such conflict in this case.   
¶51 The Property Assessment Manual describes a main rule 
requiring income approach evaluations to be based on market, not 
contract rates, along with an exception to that rule for below-
market lease contracts.  See Property Assessment Manual 7-4, 7-
5, 9-12.  To varying extents and in slightly different contexts 
(but 
all 
involving 
below-market lease contracts), Darcel, 
Metropolitan Holding, and West Bend all illustrate the exception 
to that main rule, without undermining or conflicting with the 
main rule itself.   
¶52 The logic underlying the exception for below market 
rents is that the limited ability of owners to purchase property 
No. 
2006AP1859   
 
29 
 
at market value in some cases should be accommodated, rather 
than taxing property at a rate owners cannot afford, because 
they would not be able to receive the market value-based 
assessment amount at a sale.  See Metropolitan Holding, 173 Wis. 
2d at 631-32; West Bend, 193 Wis. 2d at 486-91.  The Walgreens 
appraisals 
in 
this 
case 
illustrate 
additional 
policies 
underlying an income approach based on market rent rather than 
actual income from the Walgreens leases: 
freestanding drug stores are typically developed on a 
build-to-suit basis between a developer, acting as the 
landlord, and the planned tenant.  In these instances, 
the developer is responsible to construct the premises 
to 
the 
specifications 
provided 
by 
the 
tenant.  
Construction costs often include a higher than average 
entrepreneurial 
profit 
to 
guarantee 
against 
cost 
overruns and time delays.  Subsequently, the rental 
rate is an amortization over the lease term of the 
expenses incurred to construct the tenant-specific 
improvement. 
These long-term build-to-suit leases typically do not 
allocate any marketing or leasing expenses.  Also, 
vacancy rates are likely understated because these 
single-tenant properties require a longer leasing 
period to find a suitable tenant. . . .  By factoring 
in these associated costs the resulting rate is most 
often well above the open market rate commanded by 
other similar retail properties in the same area. 
The 
appraisals 
conclude: 
"Similar 
to 
a 
sale-leaseback 
transaction, a build-to-suit lease is really a financing tool 
used by companies to keep capital available for other core 
business purposes.  As such, we will estimate a market rent for 
the subject building rather than rely on the current contract 
rent."  
No. 
2006AP1859   
 
30 
 
¶53 There is no conflict between Walgreens' appraisals, 
the relevant statutes and case law, and the Property Assessment 
Manual's text.  We agree with Walgreens that the circuit court 
erred in failing to apply the general rule described in the 
Manual requiring income approach assessments to base valuations 
on market rates rather than contract rates, with an exception in 
cases in which encumbrances lower the property value below 
market rate.   
2 
¶54 Walgreens further argues that affirming the circuit 
court's decision could result in impermissible reliance on 
extrinsic financial arrangements in assessments.  Relying on 
Flood and Flint, Walgreens argues that artificially increased 
sales prices caused by unusual financing arrangements may not be 
used in property assessments.  Acknowledging that the facts of 
Flood and Flint are distinguishable from those in the present 
case because of the sales and comparable properties involved in 
those cases, Walgreens maintains that the underlying principle 
is the same:  a real property assessment should not be based on 
factors such as unusual financing or above market rent that are 
not normal conditions of sale reflected in the value of a fee 
simple property interest.  
¶55 We agree.  In Flood, this court held that Wis. Stat. 
§ 70.32(1) "proscribes assessing real property in excess of 
market value."  Flood, 153 Wis. 2d at 431.  Although the 
assessment in that case was based on a sale as opposed to a 
lease, the terms of the sale in that case, like the terms of the 
No. 
2006AP1859   
 
31 
 
lease in the present case, included financing terms that 
elevated the price of the property above fair market value.  Id. 
at 430-37.  This court noted that when basing a valuation on a 
sale of the subject property, the Manual advises assessors to 
examine financing terms and to determine whether the sale price 
accurately reflects the market value of real property.  Id. at 
438-39.  This court further noted that its approach was similar 
with that in Flint, where the court of appeals held that in a 
comparable property assessment, the effect of creative financing 
arrangements upon the sale price of comparable property must be 
considered to establish the full value of that property.  Flood, 
153 Wis. 2d at 440 (citing Flint, 126 Wis. 2d at 160).  
¶56 This court deemed it insignificant that Flood was a 
case involving an assessment based on the actual sale of the 
subject property and Flint was a case involving an assessment of 
comparable 
sales; 
either 
way, 
such 
creative 
financing 
arrangements must be considered and distinguished from property 
value through a cash equivalency adjustment.  Flood, 153 Wis. 2d 
at 440.  Flood explained that this approach is consistent with 
Darcel because Darcel recognized that assessors must consider 
all relevant factors when determining full value.  Flood, 153 
Wis. 2d at 440-41.  These cases establish that unique financing 
arrangements are not part of the ordinary conditions in the 
market establishing "full value" within the meaning of Wis. 
Stat. § 70.32(1). 
¶57 Applying the same principles to this case, we conclude 
that 
tax 
assessors 
must 
refrain 
from 
including 
creative 
No. 
2006AP1859   
 
32 
 
financing arrangements under a specific property's lease in 
their valuations of that property.  In establishing that Wis. 
Stat. § 70.32(1) requires a court to consider whether and how 
unusual financing affects a property's market value in a sale, 
the Flood decision brought this state in line with other 
jurisdictions that have held that leases may never be assessed 
as increasing the fee simple market value of real property.  
Flood, 153 Wis. 2d at 440-42.  See The Appraisal of Real Estate 
at 473.  The Appraisal of Real Estate further explains that a 
financing lease may not provide a reliable indication of market 
rent; rents of comparable properties are better indicia "once 
they have been reduced to the same unit basis applied to the 
subject property."  Id. at 500.  
¶58 The Property Assessment Manual explains that "[a]ll of 
the information needed for the income approach is either 
obtained or verified by what the assessor finds in the 
marketplace."  Property Assessment Manual 9-11.  This general 
rule is consistent with Wis. Stat. § 70.32(1)'s requirement that 
the full value must be assessed in terms of "ordinary" 
conditions of sale.  The language of Wis. Stat. § 70.32(1)'s 
requirement that property be assessed at "full value" must be 
read in the full context of subsection (1), which requires real 
property to be assessed "in the manner specified in the 
[Property Assessment Manual] provided under s. 73.03(2a) from 
actual view or from the best information that the assessor can 
practicably obtain, at the full value which could ordinarily be 
obtained therefor at private sale" (emphasis added), and in 
No. 
2006AP1859   
 
33 
 
terms of the exception to the general rule for lease fee values 
below market rates that we have already discussed.  
¶59 The Property Assessment Manual similarly describes 
market value in terms of the price a property will bring in an 
open and competitive market under all conditions requisite to a 
fair 
sale, 
with 
the 
buyer 
and 
seller 
acting 
prudently, 
knowledgeably, and assuming the price is not affected by "undue 
stimulus," under conditions including payment for the property 
"typical of normal financing and payment arrangements prevalent 
in the market for the type of property involved."  Property 
Assessment Manual 7-4 (emphasis added). 
¶60 Thus, the valuation methodology described by the text 
of Wis. Stat. § 70.32(1) and by the Property Assessment Manual 
alike 
reflect 
the 
objective "ordinary valuation" standard 
reflected by a market value approach, not a standard that would 
allow every assessment to fluctuate dramatically depending on 
unusual financing terms in a lease.  Barring other encumbrances 
bringing a property below the fair market value in a case such 
as this, it is the market value and not the above market 
contract rents that must be the value source in income approach 
real property assessments of leased property.   
¶61 In 
this 
case, 
a 
transfer 
of 
lease 
terms 
that 
incorporates 
reimbursement 
of 
a 
developer's 
costs 
at 
an 
amortized rate over a long period through favorable financing, 
resulting in above market rent rates, is not an "ordinary" 
condition of sale, see Wis. Stat. § 70.32(1), nor is it 
reflective of conditions "typical of normal financing and 
No. 
2006AP1859   
 
34 
 
payment arrangements prevalent in the market."  See Property 
Assessment Manual 7-4.   
¶62 Arguing that Flood and Flint are distinguishable as 
cases involving sales-based assessments, the City offers that 
more applicable cases are those in which Wisconsin courts have 
held that under the income approach, a property's business value 
or income-producing capacity that is "inextricably intertwined" 
with the property may be considered among those "rights and 
privileges" appertaining to the property under Wis. Stat. 
§ 70.32(1) and consequently assessed as part of its value.  See 
ABKA Ltd. P'ship v. Bd. of Review, 231 Wis. 2d 328, 344, 603 
N.W.2d 217 (1999); Waste Mgmt. v. Bd. of Review, 184 Wis. 2d 
541, 563, 516 N.W.2d 695 (1994); State ex rel. N/S Assocs. v. 
Bd. of Review, 164 Wis. 2d 31, 55, 473 N.W.2d 554 (Ct. App. 
1991).  Specifically, the City argues that because the income 
approach "necessarily encompasses the question of whether the 
lease value is inextricabl[y] intertwined with the land," in the 
present case, because Walgreens' leases run with the land, that 
lease income is "inextricably intertwined" with the land and is 
subject to valuation.   
¶63 The City fails to take into account the specific 
limitations 
that 
this 
court 
placed 
on 
the 
"inextricably 
intertwined" line of cases in Adams.  In that case, we 
distinguished and recognized the limitations of ABKA, Waste 
Management, and N/S Associates: 
A review of the cases leading up to ABKA 
demonstrates that inclusion of business value in a 
No. 
2006AP1859   
 
35 
 
property assessment should be the exception, not the 
norm.  See ABKA, 231 Wis. 2d at 344 (cautioning that 
for income to be included in an assessment it must be 
attributable primarily to the nature of the property); 
Waste Mgmt., 184 Wis. 2d at 565 (inclusion of business 
value "permissible only in very limited circumstances 
under § 70.32(1)").  Only business value related 
"primarily to the nature of" the property may be 
included; 
business 
value 
attributable 
to 
another 
source 
must 
be 
excluded 
from 
real 
property 
assessments.  ABKA, 231 Wis. 2d at 344; Waste Mgmt., 
184 Wis. 2d at 566, 570 (requiring income attributable 
to labor and skill to be factored out). 
In ABKA, Waste Management, and N/S Associates, 
the courts confronted the question whether business 
value was attributable primarily to the underlying 
real estate or to the business skill and acumen of the 
property owner.  In all three cases, the courts 
determined 
the 
value 
was 
attributable 
to 
the 
underlying real estate.  Integral to the analysis in 
these cases was the conclusion that the income 
appertained to the real property under Wis. Stat. 
§ 70.03, and therefore, was a proper element to 
include in the real estate assessment under Wis. Stat. 
§ 70.32(1).  See ABKA, 231 Wis. 2d at 344; N/S 
Assocs., 164 Wis. 2d at 55. 
The conclusions in these cases depend upon the 
definition of real property in Wis. Stat. § 70.03, 
which 
includes 
"all 
buildings 
and 
improvements 
thereon, and all fixtures and rights and privileges 
appertaining thereto[.]"  (Emphasis added.)  Thus, in 
ABKA the management income derived from adjacent real 
estate could be included in the assessment because the 
physical proximity and interdependency of the real 
estate meant the income was a privilege appertaining 
to the subject real estate, rather than the product of 
the owner's skill and business acumen.  Likewise, in 
Waste Management, the right to generate income from 
the landfill appertained to the nature of the real 
estate rather than the labor and skill of the owner.  
Finally, in N/S Associates the right to receive rental 
income appertained to the nature and location of the 
mall rather than to the unique qualities of the mall's 
ownership. 
No. 
2006AP1859   
 
36 
 
Adams, 
294 
Wis. 
2d 
441, 
¶¶80-82. 
 
This 
"inextricably 
intertwined" question is not, as the City describes, a necessary 
question under the income approach, but is rather a narrow 
exception to the general rule that business value should not be 
included in real estate assessments.  Id., ¶80; Waste Mgmt., 184 
Wis. 2d at 565.  Furthermore, the City has not established, as 
required for the "inextricably intertwined" principle to apply, 
that all of the value it assigned to Walgreens' retail 
properties related "primarily to the nature of" the real 
property itself, as opposed to being attributable to the labor, 
skill, or business acumen of the developer, Walgreens, or other 
factors.  Adams, 294 Wis. 2d 441, ¶¶80-82.  Additionally, 
because of the general rule requiring strict construction of 
taxation statutes, statutory language authorizing the taxation 
of real property does not consequently extend to authorize 
taxation of other subjects, such as privileges.  The Law of 
Municipal Corporations § 44.41.10.  
 
¶64 As the City itself has frequently emphasized in this 
case, "an assessor must have the ability to discount, even 
disregard, factors that do not really bear on the value of a 
property."  Adams, 294 Wis. 2d 441, ¶53.  In cases involving 
lease terms that reflect not just property value but also 
unusual financing and business arrangements that do not really 
bear on the value of the property, therefore, Adams is in accord 
with Flood and Flint in requiring assessors to disregard such 
factors, 
which 
should 
not 
be 
considered 
"inextricably 
intertwined" with the land.  
No. 
2006AP1859   
 
37 
 
¶65 If we were to expand the law in the direction the City 
requests, property assessments would in essence become business 
value assessments, with assessors improperly equating financial 
arrangements with property value.  This is in contravention of 
the general principle that real property assessments should not 
be based on business value.  Waste Mgmt., 184 Wis. 2d at 565.  
Rather, the valuation of the fair market value of property for 
purposes of property taxes is by its nature different from 
business, or income tax assessment.  "[A]n assessor's task is to 
value the real estate, not the business concern which may be 
using the property."  Id.  
¶66 Here, Walgreens' leases contain contract rights that 
are not inextricably intertwined with the bundle of property 
rights ordinarily considered at a property sale.  Such contract 
rights——including compensation to the developer for all such 
financing, 
land 
acquisition, 
construction, 
development 
and 
financing costs, together with a profit margin——are not directly 
reflective of property value (although confusingly labeled 
"rent") and are severable from the rights or privileges 
"appertaining" to real estate as described in Wis. Stat. 
No. 
2006AP1859   
 
38 
 
§ 70.03's definition of "real property."10  See Adams, 294 Wis. 
2d 441, ¶¶80-82; Flood, 153 Wis. 2d at 440-42, Flint, 126 Wis. 
2d at 160-61. 
¶67 The City's assessor, S. Steven Vitale, testified that 
his income approach methodology involved reviewing and analyzing 
comparable retail rentals to determine the market rent for 
                                                 
10 In this case, Walgreens' appraiser provided evidence the 
circuit court could have considered in an analysis isolating the 
lease terms corresponding with market value from the creative 
business and financing terms.  For example, Trial Exhibit No. 5, 
labeled "rent analysis," itemized the source of estimated values 
or costs corresponding with rent payments.  Such items included 
costs of the developer, including the cost of purchasing the 
land, a building cost, site improvement costs, architectural and 
engineering fees, legal fees, loans and other miscellaneous 
fees, and interim financing.  Walgreens' representative, John 
Murphy, testified that it is the developer, not Walgreens, who 
finances 
the 
demolition, 
development 
and 
construction 
of 
Walgreens' stores, with Walgreens reimbursing the developer for 
such financing as part of its lease terms.  In addition, the 
Property 
Assessment 
Manual, provides forms for commercial 
landlords and tenants to itemize property expenses either 
incorporated by lease terms or extrinsic to the lease, such as a 
supplemental lease questionnaire that asks what the lease covers 
and provides opportunities for the lessor or lessee to elaborate 
what part of the lease terms correspond with something other 
than "land" or "land and building" and to list other expenses 
incorporated by the lease terms.  Property Assessment Manual ch. 
9 forms 1-3.  However, the need to analyze such factors in the 
Walgreens' leases is not the same in this case as in Flood and 
State ex rel. Flint Building Co. v. Board of Review, 126 Wis. 2d 
152, 376 N.W.2d 364 (Ct. App. 1985), in that "[a]ll of the 
information needed for the income approach is either obtained or 
verified by what the assessor finds in the marketplace."  
Property Assessment Manual 9-11.   
No. 
2006AP1859   
 
39 
 
Walgreens' properties.11  Vitale further testified that the 
appraisals were conducted according to the language of the 
Property Assessment Manual, which requires that "[w]hen applying 
the income approach, the assessor must use the market rent, not 
the contract rent, of the property" and "[t]o value the fee 
simple interest of a property, market rent rather than the 
actual or contract rent is to be used in estimating potential 
gross income."  Property Assessment Manual 7-29, 9-12. 
¶68 When asked to account for the difference between the 
high leased fee value assessed by the City and the lower fee 
simple value in his assessment, Vitale explained that the City 
may have accurately measured what a property would sell for, but 
that his calculation was of the fee simple value of the 
property, which is necessarily lower than what it sells for 
because the total value of a Walgreens property is a hybrid of 
an investment commodity and a fee simple property.  Vitale 
described a Walgreens lease as analogous to a corporate bond 
                                                 
11 Vitale also explained that his assessments subtracted 
from the effective gross income of the properties' operating 
expenses, including in a "Stabilized Operating Statement" a 
market-derived vacancy and collection loss factor, operating 
expenses, administrative, legal, and accounting expenses, and 
replacement costs, to arrive at a net operating income.  Vitale 
then applied a direct capitalization method, which he described 
as "dividing the projected net operating income by an overall 
rate of return to arrive at a market value indication via the 
income approach," with the Walgreens properties' capitalization 
rate derived by dividing the net income of the property, 
described above, by the sales price.  Vitale explained that with 
fluctuations in the market, capitalization rates will fluctuate 
as well.  
No. 
2006AP1859   
 
40 
 
with real estate behind it, explaining that the real estate fee 
simple value itself is consequently less than what a Walgreens 
property sells for with all the rental income included.  The 
circuit court accepted Vitale's findings as credible and 
"presented in a clear and carefully documented manner," with his 
testimony and reports "suggest[ing] attention to detail and 
reasoned conclusions."  
¶69 In addition to the specific evidence in the record 
that could assist the court in establishing the market value of 
Walgreens' properties, there is abundant guidance in the 
Property Assessment Manual and in The Appraisal of Real Estate, 
which are replete with reminders that what really matters in 
income approach evaluation is the fair market rent, not the 
particular terms of the subject lease.  The Appraisal of Real 
Estate additionally provides specific guidance in how to assess 
market rent, with the actual lease contract not being the 
determinative 
factor, 
emphasizing 
instead 
that 
"[w]hen 
sufficient, closely comparable rental data is not available, the 
appraiser should include other data, preferably data that can be 
adjusted.  If an appraiser uses proper judgment in making 
adjustments, a reasonably clear pattern of market rents should 
emerge."  Id. at 501.   
¶70 It is uncontested that the inclusion of an amortized 
reimbursement of the developers' costs into the lease terms in 
this case resulted in higher than market rate rental payments, 
with the circuit court recognizing such "higher than normal" 
rents as being related to "the developer . . . recovering his 
No. 
2006AP1859   
 
41 
 
development 
costs 
on 
a 
building 
that 
contains 
the 
superadequacies demanded by Walgreen."  This acknowledgment 
indicates that the court recognized that the market rate is both 
ascertainable and that development costs are severable from the 
lease terms that correspond with property values. 
¶71 Without commenting on the weight of any evidence 
offered, we further observe that Walgreens provided evidence of 
assessable fair market value by describing comparable rents.  
The list of comparable rentals provided by Walgreens' assessor 
included multi-tenant and single tenant commercial properties 
ranging from around $9 to $17 on a triple net basis; the 
assessor also provided testimony describing those comparable 
retail rentals.  
¶72 With such guidance and information available for a 
market-based income approach assessment, there is no need to 
rely solely on Walgreens' actual lease terms, let alone legal 
authority to do so.  By appearing to rely solely on income 
stream as equating to property value, the City appears to be in 
contravention of this court's admonishment in Adams that 
assessors should not rely solely on the income approach to 
assessment.  In Adams, this court stated: 
In this case, we think that we would nullify the so-
called Bischoff rule if we permitted the City assessor 
to reject all approaches and factors other than an 
income approach.  We think it extraordinary that the 
assessor rejected out of hand such factors as cost, 
depreciation, 
replacement 
value, 
and 
insurance 
carried. 
No. 
2006AP1859   
 
42 
 
Adams, 294 Wis. 2d 441, ¶55.  The Bischoff rule, in turn, 
provides that "an assessment with respect to real estate should 
not be based on income alone."  Bischoff v. City of Appleton, 81 
Wis. 2d 612, 619, 260 N.W.2d 773 (1978).  See also Waste Mgmt., 
184 Wis. 2d at 558; State ex rel. IBM Corp. v. Bd. of Review, 
231 Wis. 303, 312, 285 N.W. 784 (1939).  
¶73 These cases are consistent with the admonitions in the 
Property Assessment Manual that the income approach (or, 
alternatively, the cost approach) should only be favored over 
the sales comparison approach if there is no available data of 
comparable properties.  Property Assessment Manual 7-18, 9-38.  
See also The Appraisal of Real Estate 83-84.  The City's 
approach, focusing on contract rent rather than market rent, not 
only contravenes the methodology of the Manual, but it conflicts 
with a case relied upon by the City, Darcel.  In Darcel, this 
court explained that "[w]hen an assessor is assessing the value 
of leaseholds, he is not justified in simply comparing the 
'bottom line,' that is, what is the rent charged on the leases.  
If the assessor wishes to establish comparable leaseholds, he 
must examine other elements about the lease . . . ."  Darcel, 
137 Wis. 2d at 634.   
¶74 Basing an assessment solely on the income stream 
derived from a lease leads to an absurd result of necessarily 
rendering property that is not income producing "practically 
valueless for taxation purposes."  Bischoff, 81 Wis. 2d at 619 
n. 6 (citation omitted).  As such, if a business goes bankrupt 
and breaks the lease on a retail property, the value of the 
No. 
2006AP1859   
 
43 
 
property would default to zero under such an approach.  In 
addition, if property is assessed solely by the terms of a long-
term lease, the value of the property would remain stagnant for 
long stretches of time, regardless of changing property values 
in the surrounding community.  Furthermore, basing assessments 
broadly on actual lease rates rather than fair market value 
would 
result 
in 
extreme 
disparities 
and 
variations 
in 
assessments.   
¶75 Finally, it is not clear that the City even followed 
the income approach methodology it claims to prefer.  For 
example, 
the 
City's 
appraisal 
report 
for 
the 
3710 
East 
Washington property described the "current assessment" value of 
that property as $4,268,500 as of January 1, 2003.  The same 
report states that it applies the income approach because 
although 
"[t]here 
is 
a 
recent 
sale 
of 
the 
subject 
property. . . [t]his sale should not be used as the only 
indicator of value for the subject property."  However, the 
appraisal report submitted by the City at trial appears to 
contradict this statement, with the 2003 current assessment 
value of $4,268,500 happening to be exactly the same amount for 
which that property sold in 1999.  
IV 
¶76 Finally, we address the circuit court's dismissal of 
Walgreens' claims regarding the City's 2004 property valuation 
based on what it described as Walgreens' failure to provide the 
Board of Review with statutorily required evidence under Wis. 
No. 
2006AP1859   
 
44 
 
Stat. § 70.47.  The dismissal essentially granted the following 
affirmative defense raised by the City in its answer:  
Plaintiff's Claims for Excessive Assessment are barred 
by Plaintiff's failure to comply with the procedures 
for objecting to assessments under Section 70.47, Wis. 
Stats.  Plaintiff failed to specify the information 
used by Plaintiff to arrive at Plaintiff's estimate of 
fair market value for the two subject properties as 
required under Section 70.47(7)(a) and (ae), Wis. 
Stats.  
¶77 In 
its 
decision, 
the 
circuit 
court 
quoted 
the 
following provisions of Wis. Stat. § 70.47(7)(a) and (ae), 
adding the emphasis indicated in subsection (ae): 
(a) . . . No person shall be allowed in any action or 
proceedings to question the amount or valuation of 
property unless such written objection has been filed 
and such person in good faith presented evidence to 
such board in support of such objections and made full 
disclosure before said board, under oath of all of 
that person's property liable to assessment in such 
district and the value thereof. . . .   
. . . .  
(ae) When appearing before the board, the person shall 
specify, in writing, the person's estimate of the 
value of the land and of the improvements that are the 
subject of the person's objection and specify the 
information that the person used to arrive at that 
estimate. 
(Emphasis added by circuit court.)  The court's decision 
indicated that it considered the information Walgreens provided 
at the Board hearing overly conclusory and lacking in sufficient 
data that could constitute relevant evidence, in contrast with 
the carefully documented and detailed information Walgreens 
presented to the circuit court.  
No. 
2006AP1859   
 
45 
 
¶78  Walgreens 
argues 
that 
it 
presented 
sufficient 
evidence to satisfy Wis. Stat. § 70.47(7), with a Walgreens 
representative providing through his testimony a good faith 
opinion of the Walgreens properties' value.  In the alternative, 
Walgreens argues that the City waived this issue.  In support, 
Walgreens cites a court of appeals decision holding in part that 
by conducting a hearing, accepting assessment evidence, and 
rendering a decision, a board of review waives its right to 
object to a taxpayer's failure to comply with §70.47(7).  Fee v. 
Bd. of Review, 2003 WI App 17, ¶¶8-10, 259 Wis. 2d 868, 657 
N.W.2d 112.  Walgreens argues that Fee applies in this case 
because 
the 
Board 
accepted 
its 
evidence 
related 
to 
the 
assessment without objection or motion to dismiss from the City.  
¶79 In response, the City argues that the Board could not 
waive the requirement of a full proceeding to hear the evidence 
because 
it 
could 
not 
determine 
the 
sufficiency 
of 
the 
presentation until Walgreens tried to make its case, and there 
is nothing legally requiring a municipality to make such an 
objection before the Board.  However, in what is in effect 
itself another type of waiver, the City also argues that the 
issue regarding sufficiency of the evidence to the Board is moot 
and there is no need to address it.   
¶80 We agree with Walgreens that Fee applies to this case; 
the City makes no effort whatsoever to distinguish the case or 
address any flaws of Fee's analysis.  We also agree with the 
City that this issue is moot.   
No. 
2006AP1859   
 
46 
 
¶81 In this case, as in any property assessment challenge, 
we review de novo the legal determinations of the circuit court, 
not of the Board of Review.  See Adams, 294 Wis. 2d 441, ¶24.  
As the circuit court acknowledged, "[t]he general standards 
governing this action are not difficult to state.  A Wis. Stat. 
§ 74.37(3)(d) action is essentially de novo, i.e., the Court may 
take evidence not presented to the Board of Review and rely upon 
such 
evidence 
in 
determining 
the 
proper 
valuation 
of 
a 
property."  Even more pertinently, the circuit court recognized 
that, under Nankin, 245 Wis. 2d 86, ¶¶24-25, a court makes its 
determination without regard to any determination made by the 
Board of Review.  Under Fee, any noncompliance with Wis. Stat. 
§ 70.47 by Walgreens became moot when the issue was waived by 
the Board.   
V 
¶82 In sum, this case is governed by the clear language of 
Wis. Stat. § 70.32(1) requiring that real property "shall be 
valued by the assessor in the manner specified in the Wisconsin 
property 
assessment 
manual," 
and 
by 
the 
similarly 
clear 
provisions of the Manual which, in turn, require that "the 
assessor must use the market rent, not the contract rent," and 
provide that "[a]ll of the information needed for the income 
approach is either obtained or verified by what the assessor 
finds in the marketplace."  Property Assessment Manual 9-11.  
The City has failed to demonstrate how this general rule 
requiring 
market 
rent 
based 
income 
approach 
assessments 
conflicts with Wis. Stat. § 70.32.  The City's citation of cases 
No. 
2006AP1859   
 
47 
 
such as Darcel, Metropolitan Holding, and West Bend, which do 
not apply where contract rents exceed market rents, fails to 
illustrate a conflict between case law interpreting § 70.32 and 
the Manual, and there is nothing in the text of § 70.32 itself 
illustrating such a conflict.  
¶83 The main rule for income approach assessments of 
leased property is that the property must be assessed in terms 
of market rents unless, as is the case with encumbrances created 
by lower than market value rent, a buyer would not be able to 
buy the property at the market rate.  In such cases, the fair 
market value of the fee simple interest cannot be equated with 
the leased fee interest.  Property Assessment Manual 7-4, 7-5, 
9-12. 
 
Darcel, 
Metropolitan 
Holding, 
and 
West 
Bend 
are 
consistent with this rule, recognizing the narrow exception for 
below-market rents and other encumbrances that bring a leased 
property's value below the market rate.  Such is not the case 
here.   
¶84 In conclusion, we reaffirm the holding of Flood, 153 
Wis. 2d at 431, that Wis. Stat. § 70.32(1) "proscribes assessing 
real property in excess of market value."  We recognize that 
this holding is consistent with the nationally recognized 
principle of property assessment that "[a] lease never increases 
the market value of real property rights to the fee simple 
estate."  The Appraisal of Real Estate 473.  Consequently, it is 
the Manual's explanation that it is only when contract rents are 
at market levels that the leased fee interest is the same as a 
fee simple interest; "[h]owever, if the contract rents are below 
No. 
2006AP1859   
 
48 
 
market levels, the leased fee interest is likely less than the 
fee simple interest in the property."  Property Assessment 
Manual 9-12.  In such cases, therefore, the contract rents do 
determine the fair market value of the fee simple estate. 
¶85 Wisconsin Stat. § 70.32(1) requires adherence to the 
Property Assessment Manual absent conflicting law.  The City 
assessor in this case improperly failed to apply the provisions 
of the Property Assessment Manual requiring that income approach 
assessments of the fair market value of a fee simple interest 
must be based on market rate rents rather than contract rents, 
absent the existence of an encumbrance bringing the leased fee 
value below actual market rates.  The circuit court and court of 
appeals similarly erred in failing to apply these well-
established rules of property assessment, and in affirming the 
City's flawed assessment.  We reverse the decision of the court 
of appeals and remand for further proceedings consistent with 
this opinion.  
¶86 By the Court.—The decision of the court of appeals is 
reversed, and the cause is remanded to the circuit court for 
further proceedings consistent with this opinion. 
 
No.  2006AP1859.ssa 
 
1 
 
¶87 SHIRLEY S. ABRAHAMSON, C.J.   (concurring).  Although 
the parties' dispute is complex, the dispute hinges upon a 
simple question regarding the goal of property tax assessments 
under Wis. Stat. § 70.32(1), namely whether the statute requires 
an assessor valuing leased real property to estimate the market 
value of a fee simple interest in the leased property, or 
instead to estimate the market value of a leased fee interest in 
the leased property.   
¶88 Walgreen Co. states that the court's decision in this 
case "will establish whether Wisconsin is a fee simple or a 
leased fee assessment state."1  The City of Madison (the City) 
refers to this issue as the "gravamen" of its disagreement with 
Walgreen Co.2  The parties' briefs predominantly address this 
basic point of dispute.3  
                                                 
1 Walgreen Co.'s Reply Brief and Supplemental Appendix.  
2 City of Madison's Response Brief and Appendix at 13.   
3 See Walgreen Co.'s Initial Brief and Appendix at 16-21; 
City of Madison's Response Brief and Appendix at 6-10; Walgreen 
Co.'s Reply Brief and Supplemental Appendix at 1-10.   
Walgreen Co. states the primary issue presented as follows:  
Whether Wis. Stat. § 70.32(1) required the City [of 
Madison] to assess the fee simple interest of the two 
Walgreen properties using the income approach based on 
market rents (as well as other factors) or whether the 
City could assess the leased fee value of the 
properties considering only an income approach based 
upon contract rent, not market rents. 
Walgreen Co.'s Initial Brief and Appendix at 2 (emphasis added). 
The City of Madison states in its brief to this court that 
it accepts Walgreen Co.'s statement of the issues presented.  
City of Madison's Response Brief and Appendix at 2. 
No.  2006AP1859.ssa 
 
2 
 
¶89 The answer to this question depends on the statutes of 
the state.  In principal, either approach may be used.     
¶90 The majority opinion restates the issue on review as 
follows: "whether a property tax assessment of retail property 
leased at above market rent values should be based on market 
rents (as Walgreen argues) or if such assessments should be 
based on the above market rent terms of Walgreen's actual leases 
(as the City argues)."4  The majority opinion's statement of the 
issue obscures the parties' basic disagreement about the goal of 
property tax assessments under Wis. Stat. § 70.32(1).  
¶91 Nevertheless, 
the 
majority 
opinion 
answers 
the 
question the parties pose.  Citing the Wisconsin Property 
Assessment Manual, the majority opinion declares in the very 
first paragraph of its lengthy analysis that Wis. Stat. 
§ 70.32(1) requires an assessor valuing leased real property to 
estimate the value of a fee simple interest in the leased 
property.5     
¶92 After answering the parties' question in a single 
paragraph, the majority opinion proceeds to explain the means by 
which the value of a fee simple interest is determined.  The 
parties do not dispute, however, how best to calculate the value 
of a fee simple interest (or the value of a leased fee interest) 
in leased real property.  Although the parties' assessors 
employed different assessment techniques in the instant case, 
this difference is attributable to the parties' disagreement 
                                                 
4 Majority op., ¶2. 
5 Id., ¶21.   
No.  2006AP1859.ssa 
 
3 
 
about the basic goal of the assessment——whether the value of a 
fee simple interest or the value of a leased fee interest in the 
property should be assessed.   
¶93 The City does not suggest that Walgreen Co. fails to 
estimate the value of a fee simple interest in the property when 
Walgreen Co. uses market rents, and Walgreen Co. does not 
suggest that the City fails in its stated goal of estimating the 
value of a leased fee interest in the property when the City 
uses contract rents.  The parties seem to assume, at least for 
purposes of this appeal, that each arrow strikes the target at 
which it is aimed. 
¶94 The court of appeals’ decision, the City of Madison's 
brief, and the brief of the amicus curiae (representing various 
municipal 
entities 
and 
associations 
and 
the 
Wisconsin 
Association of Assessing Officers) make the following persuasive 
argument based on both the accepted definition of fair market 
value of real property and what happens in the real world:  
Property is assessed at the amount the property would sell for 
as a result of arm's-length negotiations in the open market 
between an owner willing to sell and a buyer willing to buy.  A 
buyer generally would pay more for real property that has a high 
stream of income from a lease than for property with a lower 
stream of income from a lease.  Because the sum at which a 
property will be bought and sold is dictated in part by the 
No.  2006AP1859.ssa 
 
4 
 
income from a lease attaching to the property,6 the actual income 
stream from the lease should be capitalized to reach the 
assessed value of the property.     
¶95 The court of appeals, the City, and the amicus curiae 
rely on Wis. Stat. § 70.32(1)'s language stating that real 
property 
shall 
be 
assessed 
"the 
full 
value 
which 
could 
ordinarily be obtained therefor at private sale."  They appear 
to interpret this language as referring to the full price that a 
lessor-owner of the property could obtain in exchange for the 
lessor-owner's rights in the property, including the lessor-
owner's rights and obligations under a lease running with the 
land.   
¶96 The Wisconsin Property Assessment Manual supports 
Walgreen Co.'s position.  The Manual states that "[t]he goal of 
the assessor is to estimate the market value of a full interest 
in 
the 
property, 
subject 
only 
to 
governmental 
restrictions. . . . This is also called the market value of a 
fee simple interest in the property."7  The Manual apparently is 
based on the concept that a lease very favorable to the lessor 
does not increase the fair market value of the real property; 
any potential increased value in excess of the value of a fee 
simple 
interest 
in 
the 
property 
is 
attributable 
to 
the 
                                                 
6 "When a property is sold, the rights of the tenant are 
usually not extinguished.  The existing leases remain intact and 
must be honored by the new property owner."  Wis. Dep't of 
Revenue, 
Wisconsin 
Property 
Assessment 
Manual 
7-2 
(2007) 
(hereinafter Manual).   
7 Id. at 7-4 (emphasis in original).   
No.  2006AP1859.ssa 
 
5 
 
particular lease and constitutes the value of contract rights 
rather than real property rights.8 
¶97 I find the City's argument persuasive, but Wis. Stat. 
§ 70.32(1) provides in pertinent part that "[r]eal property 
shall be valued by the assessor in the manner specified in the 
Wisconsin property assessment manual provided under s. 73.03(2a) 
from actual view or from the best information that the assessor 
can practicably obtain, at the full value which could ordinarily 
be 
obtained 
therefor 
at 
private 
sale" 
(emphasis 
added).  
Implicitly, 
the 
Manual 
seems 
to 
interpret 
Wis. 
Stat. 
§ 70.32(1)'s 
language 
about 
"the 
full 
value 
which 
could 
ordinarily be obtained therefor at private sale" as referring to 
the full price that could be obtained for both the lessor's and 
lessee's real property rights, and not as referring to the price 
that could be obtained for either the lessor's or lessee's 
contract rights under a lease agreement.  In examining the 
Manual, as the statute instructs, I find that in addition to 
providing that the assessor must estimate the value of a fee 
simple interest in the assessed property, the Manual expressly 
contrasts a fee simple interest in real property with "partial 
interests" such as a (lessor's) leased fee interest or a 
(lessee's) leasehold interest in the property.  According to the 
Manual, "[t]o accurately estimate the market value of the full 
[i.e., fee simple] interest in leased property, both the 
                                                 
8 See Appraisal Institute, The Appraisal of Real Estate 473 
(12th ed. 2001). 
No.  2006AP1859.ssa 
 
6 
 
lessor's and the lessee's interest (the leased fee and leasehold 
interest) must be included."9  
¶98 The court is not bound by the Manual.   The "common 
law which accurately reflects the state of the law, and the 
language of § 70.32(1), STATS., not the [Manual], control."10   
                                                 
9 Manual, supra note 6, at 7-4.   
The Manual states that "[l]eases create partial property 
interests 
known 
as 
the 
leased 
fee 
and 
the 
leasehold 
interests. . . . The property owner is said to hold the leased 
fee interest.  The tenant, or lessee, has what is known as the 
leasehold estate."  Manual, supra note 6, at 7-2.   
See also The Appraisal of Real Estate, supra note 8, at 83 
(defining a "leased fee" interest in property as "[a]n ownership 
interest held by a landlord with the rights of use and occupancy 
transferred by the lease to others" and defining a "leasehold" 
interest in property as "[t]he interest held by the lessee (the 
tenant or renter) through a lease transferring the rights of use 
and occupancy for a stated term under certain conditions").   
According to The Appraisal of Real Estate, the value of a 
fee simple interest in leased property may or may not be 
equivalent to the value of a leased fee interest in the 
property.  See The Appraisal of Real Estate, supra note 8, at 82 
("If the rent and/or terms of the lease are favorable to the 
landlord (lessor), the value of the leased fee interest will 
usually be greater than the value of the fee simple interest, 
resulting in a negative leasehold interest.  If the rent and/or 
terms of the lease are favorable to the tenant (or lessee), the 
value of the leased fee interest will usually be less than the 
value of the value of the fee simple interest, resulting in a 
positive leasehold interest.").    
10 City of West Bend v. Cont'l IV Fund Ltd. P'ship, 193 
Wis. 2d 481, 487, 535 N.W.2d 24 (Ct. App. 1995).  See also 
Metro. Holding Co. v. Bd. of Review of Milwaukee,  173 Wis. 2d 
626, 632-33, 495 N.W.2d 314 ("[C]ompliance with the Manual is 
not a defense when the method of assessment suggested by the 
Manual results in a violation of sec. 70.32(1), Stats.").   
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¶99 I am not persuaded that the case law contradicts the 
Manual.11  I therefore join in the mandate.  I write separately 
to explain the rationale of the City's argument and my approach 
to the instant case. 
 
                                                                                                                                                             
Wisconsin Stat. § 73.03(2a) makes clear that the decisions 
of the Wisconsin courts are binding upon the Department of 
Revenue as it prepares and publishes the Manual, not the other 
way around.  Section 73.03(2a) provides in relevant part that 
the Department of Revenue shall amend its manuals from time to 
time to reflect, inter alia, "court decisions concerning 
assessment practices."   
11 Neither of the two principal cases upon which the City 
and the court of appeals rely addresses the question whether the 
assessor's task under Wis. Stat. § 70.32(1) is to estimate the 
market value of a fee simple interest or a leased fee interest 
in real property.  See Darcel, Inc. v. Manitowoc Bd. of Review, 
137 Wis. 2d 623, 405 N.W.2d 344 (1987); City of West Bend v. 
Cont'l IV Fund Ltd. P'ship, 193 Wis. 2d 481, 535 N.W.2d 24 (Ct. 
App. 1995). 
No.  2006AP1859.ssa 
 
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