Nick Halter and The Minneapolis/St. Paul Business Journal have launched a new tool called Crane Watch (Business Journal Crane Watch) that tracks new developments of over $25 million in the Twin Cities. All of this new development presents the great question of what happens with the property taxes during a new development project?
In Minnesota, when a project is partially complete the market value on the assessment date is equal to the value of the completed project multiplied by the percentage complete. There are four primary considerations for forecasting the assessed value of partially complete project, they are: the as complete market value; the percentage complete; classification; and timing.
As Complete Market Value
Occasionally the value as complete is the same as the cost to build, but that is often not the case. All new developments will have an as complete forecast of value. If the forecast value as complete is the fee simple market value, then the as complete value is already estimated. If the as complete value is a leased fee value, such as in a build-to-suit scenario where the value will be based on the long-term lease in place that amortizes improvements, then the developer should run a fee simple market value to determine the market value as complete. The fee simple value will very likely be less than the leased fee value based on the build-to-suit demands of the end user, since the specific needs of that end user may be very different than what the market wants. Certain build-to-suit improvements may be functionally obsolete upon completion such as a high tech fully automated manufacturing plant designed to manufacture a specific product. If no other user in the market can make use of those improvements then the building has functional obsolescence even though it is new, and the user of that build-to-suit building will be paying higher than market rent based on the amortization of the costs.
The tax court generally relies on the percentage of costs expended, but other considerations may be useful as well. For example, lets say a development is 50% complete in terms of dollars spent, but due to environmental, legal, or other external circumstances the time complete is only 33.33%, then an argument can be made that the percent complete is not limited to dollars spent alone.
Sometimes a new development will change the classification of a property as well. The Opus project pictured above, 365 Nicollet, was classified as commercial land at the beginning of the project and reclassified to apartment after construction began. Commercial land carries a tax rate close to 4%, while the apartment classification will be closer to 2%. Securing the correct classification early in a development like this will save additional money during the course of the development.
The timing for the taxes based on partial completion is often overlooked. Minnesota taxes in arrears, meaning that in any tax year the taxpayer is paying taxes on the value from the prior year. Lets say a development starts on January 1, 2017. On this day the building is leveled and the site is cleared. Then on January 2, 2017 the value should be based on the market value of the land only, because there are no improvements. The tax for the land only value is not due until 2018. Fast forward a year, the project is 75% complete on January 2, 2018. Now the value should be 75% of the as complete fee simple market value. The taxes on this partially completed project will be due in 2019. Finally, the project is completed sometime later in 2018, and because the project is fully complete by January 2, 2019 the taxes on the completed building will be due in 2020.
All together, a project started at the beginning of 2017 will not have taxes on the full market value until 2020. With tight construction budgets these partial value taxes can be a great benefit if monitored. In addition, the benefits of the partial value tax can be sold as a concession or bonus to early tenants because their 2019 taxes will not be based on the full market value.
Just like all property taxes, partially complete values for tax purposes can be negotiated informally or appealed.