Minnesota’s deadline to file an appeal for taxes payable in 2017 is April 30, 2017, which means it’s time for commercial property owners, tenants, managers, etc., to decide if a tax appeal is appropriate. This post answers a few questions that I am frequently asked.

  1. My taxes are really high, should I appeal?

Property taxes are based on the real estate value, so the first question before deciding to file an appeal is actually, is my value too high? If you don’t have a good sense for the value of your property then you should have a property tax professional take a look at your situation. I provide free reviews for any commercial property taxpayer, and so do many other property tax professionals.

If you are well versed in the market for your property and have a good understanding of the value, or have a recent appraisal, then compare your analysis against the assessed value on your tax statement. If your analysis or appraisal, is similar or higher than the assessed value, then you probably don’t want to appeal. If it is lower, you may have a case for an appeal. At this point you should contact a property tax appeal attorney to discuss the potential for a successful case.

Additionally, most commercial properties are owned by LLC’s or another class of entity. It is important to note that Minnesota only allows individuals to personally file an appeal on property they own in their own name. So, if your property is owned by a company you will need a property tax appeal attorney to handle the filing.

  1. Is a tax appeal litigation?

Technically, a tax appeal is litigation. However, in most cases traditional litigation actions, such as discovery, motions, hearings, etc., never occur. Most appeals have a more transactional process. For example, an appeal is required in order for the assessor to adjust the value, but the matter may still be entirely resolved through negotiations and can be very friendly. In my practice, one of my core philosophies is to maintain quality respectful, and when possible, friendly, relationships with assessors. A good working relationship with the assessor is important for working through the challenging issues of the appeal.

In short, while an appeal can lead to a trial, it generally does not require full blown litigation.

  1. Will an appeal now cause higher taxes in the future?

Assessors have a duty to value real estate at its market value. As a result, any retaliatory increase to a non-market value would be illegal. I have never experienced an assessor raising values in response to an appeal being filed. However, the legitimate concern is whether or not an appeal will reveal information to an assessor that could cause a value increase in the future. For example, let’s say an assessor believed that the average market rent for a specific property was $10 per square foot, but then during the appeal they find out that the average market rental rate for the property is actually $15 per square foot. The assessor may not be able to ignore this fact going forward, and the result could be a higher valuation based on the higher rent. In fact, this is one of the many things that I look for when I conduct preliminary reviews for potential appeals, and it is one of the reasons that I always recommend talking to me or a property tax professional before filing an appeal.

In conclusion, if you feel your commercial real estate taxes are too high, ask me or a property tax professional to take a look.

 

Real estate buyers who purchase property from banks sometimes get the property for a price that seems below market. Assessors frequently dismiss these sales as “bank sales” and therefore irrelevant for property tax valuation. However, these apparent discounts can be the result of actual distress or market influences, rather than because the bank was under duress to sell.

The Minnesota Tax Court squarely addressed this issue in Zephyr Group LLP v. County of Washington. The subject – a former Denny Hecker car dealership – was acquired by a financial institution after the bankruptcy of the previous owner. The property was then listed and marketed for almost four years with offering prices incrementally dropping from $1,800,000 to $600,000. The subject finally sold for $600,000. Since the assessed value was approximately $2,300,000, the buyer filed an appeal.

Subject Property
Subject Property

On appeal, the county disregarded the sale because it was “lender mediated.” The court however, disregarded the county’s analysis because of its failure to consider the sale.

A long standing rule in Minnesota Tax Court is that a sale of the subject property near the date of assessment is the “best indicator of value” and it should be “given great weight, especially when [it] was an arm’s length transaction.”

Nonetheless, the tax court is always cautious to use only the sale price of the subject, because “one sale does not make a market” and other evidence may show that the sale price is above or below market.

In Zephyr, the court found that the subject was an arms’ length transaction, because it was sufficiently exposed to the market, sold between two unrelated parties, and the lender was not under any regulatory or other pressure to sell for a below market. Because it was arms’ length and took place near the date of assessment, it was the best indicator of value.

Accordingly, a bank sale can be an arms’ length, market transaction; and therefore, the best indicator of value entitled to great weight in property tax valuation.

 

Home improvement retailer, Menard’s, successfully lowered the value of its Moorhead store in tax court. When it pressed its position based only on sales of similar properties, the court replied that valuation is not that narrowly focused.  The appeal covered years 2011 through 2014 and the original value was $11,200,000 for each year. At tax court, Menard’s sought a value as of $4,000,000. The tax court’s final value decision was as follows:

Appraisal Year County Assessor County’s Appraiser (Vergin) Menard’s Appraiser (MaRous) Tax Court Order Tax Court Amended Order
2011 $11,200,000 $12,000,000 $4,000,000 $7,432,100 $7,516,600
2012 $11,200,000 $12,300,000 $4,000,000 $7,585,800 $7,681,300
2013 $11,200,000 $12,500,000 $4,000,000 $7,219,000 $7,331,300
2014 $11,200,000 $12,700,000 $4,000,000 $7,393,600 $7,556,200

Menard’s appealed the tax court’s decision because it wanted the Minnesota supreme court to rule that only the sales comparison approach should have been considered, instead of the sales comparison and cost approaches to value.

Menard's Moorehead - Entrance

The court has long held that review of the tax court’s decisions is very limited and it will only overturn a valuation if is clearly erroneous. Menard’s contended that the tax court’s job was done when it determined that the sales comparison approach provided a reliable indicator of market value. However, the court has already ruled that approach out when it said some years ago,

“appraisal is an inexact valuation determination” and an “estimate of value”

Lewis & Harris v. Cty. of Hennepin, 516 N.W.2d 177, 180 (Minn. 1994) (emphasis added). The court has also stated that whenever possible the tax court should apply at least two of the approaches to value, and value indications derived can serve as useful checks on each other. Overriding weight can be given to one approach over another and the tax court has the discretion to determine what weight it will assign to each approach.

Finally, the court emphasizes that none of its decisions narrow the view of the inexact science of real estate appraisal to such a degree. As a result, for property tax valuation, the methodology should try to avoid being so narrowly focused.

The court also weighed in on the highest and best use determination and the depreciation analysis for the Menard’s property. If interested in the finer points of the valuation issues, here is the full November 9, 2016 decision for Menard, Inc. v. County of Clay.

Commercial property taxpayers have a lot to worry about and focus on to keep their properties running well, and aside from payment due dates, property tax dates probably are not on the radar. However, if a valuation is too high or taxes are a major concern, knowing important dates might be useful. Most lists provide the dates in a chronological order based on the calendar year, but because Minnesota taxes are paid in arrears, that order can create confusion. The following is a list of important property tax dates in order from the initial valuation/assessment to the appeal filing deadline.

Minnesota Property Tax Dates from Assessment to Appeal

Description Date Notes
Date of assessment January 2 Each assessment is the basis for the property taxes payable in the following year. For example, the assessment on January 2, 2016 is for taxes payable in 2017.
Valuation notices March – April Counties mail notices of valuation in the year of assessment. For example, valuation notices sent in March and April 2016 are for the 2016 assessment payable in 2017.
County Boards of Appeal and Equalization June Boards of Appeal and Equalization hear informal/administrative appeals of assessments in the year of assessment. For example, a 2016 Board of Appeal and Equalization is for the 2016 assessment payable in 2017.
Truth-in-taxation notices November 10 – 25 Truth-in-taxation notices provide taxpayers with the proposed taxes based on preliminary budgets. They are mailed in November for the taxes payable in the following year. For example, the November 2016 truth-in-taxation notices provide the proposed taxes payable in 2017.
Truth-in-taxation meetings After November 25 Truth-in-taxation meetings are held by the taxing authorities to present the budgets and hear comments from taxpayers. After the comment period is complete the taxing authorities will finalize the budgets, and therefore, the taxes.
Property tax statements March 31 (last day) This is the date for the year taxes are payable. For example, March 31, 2017 is the last day for counties to mail the statements for property taxes payable in 2017.
Property tax appeal deadline April 30 All property tax appeals must be filed by April 30 in the year the taxes are payable. For example, April 30, 2017 is for the 2016 assessment for taxes payable in 2017.*
First Half Taxes Due May 15 First half property taxes are due.
Second half taxes due October 15 Second half property taxes are due.

* Minnesota’s property tax appeal deadline is a hard deadline.  If an appeal is not filed by April 30 for that tax year, neither the tax court nor the county can go back and change the value.

The Minnesota Department of Revenue has a more lengthy list that includes additional dates, such as homestead and exemption application deadlines.  The Department of Revenue’s list is chronological based on the calendar year and can be found here.

Institutional investors may expect an increase in real estate taxes when they acquire assets for historically high prices, but do those sales represent market value for property tax purposes? Moreover, should they be used to value more normal properties for property tax purposes?

Twin Cities commercial real estate has been experiencing substantial investment by real estate investment trusts (REITs), insurance companies, and other national investors. There can be many reasons for this: good market fundamentals, low unemployment, high quality of life, number of bike lanes, the list goes on and on. However, many of these investors are paying near-record and record-high prices for assets in the Twin Cities.

For example, Ameriprise Financial Center sold to a Florida investment firm for $200,000,000 ($163 per square foot); Norman Point II in Bloomington sold to a Chicago investment firm for $52,500,000 (also $163 per square foot); and Excelsior and Grand sold to an Ohio investment firm for $317,589 per unit. Meanwhile, many average office properties sell for less than $100 per square foot, and many apartment complexes sell for less than $150,000 per unit.

Ameriprise Financial Center
Ameriprise Financial Center

There are many reasons national and international investors are acquiring commercial real estate in the Twins Cities and these sales should be analyzed very carefully if they are to be considered for property tax purposes. However, it is not surprising to see many market values below the values indicated by high-priced investment sales, because those sales potentially traded based on investment value.

Sales that garner the attention of national investors will often be institutional-grade properties.

Institutional-grade property is defined as “real property investments that are sought out by institutional buyers and have the capacity to meet generally prevalent institutional investment criteria.”[i]

Investment value is “the value of a property interest to a … class of investors based on the investor’s specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessarily typical of the market.”[ii]

Institutional investment criteria include considerations such as high-credit tenants, low historical vacancy, long-term leases, premium locations, etc. However, the criteria can include more subjective considerations, such as being a 300-plus unit apartment building to balance risk in a portfolio; or, being an office building occupied predominantly by government tenants, because the investment plan defines government buildings as the primary asset type. As a result, when properties that fit certain criteria become available institutional-grade investors may willingly overpay to secure the asset for their portfolios. Accordingly, purchase prices of institutional-grade properties are usually determined based on the investment value rather than general market value.

In Minnesota, all property shall be valued at its market value when being valued for property tax purposes.

“Market value is objective, impersonal, detached; investment value is based on subjective, personal parameters.”[iii]

When subjective parameters come into play, an institutional investor will outbid and out pay traditional investors that are focused on strictly on market-based criteria. Thereby creating a substantial difference between investment value and market value.

Therefore, assessed values should not be based on investment sales, except in the rare situation where the investment sale actually represents market value.

[i]               The Dictionary of Real Estate Appraisal, p. 102 (2010 5th Ed.).

[ii]               Id., p. 104.

[iii]              Simonson v. County of Hennepin, 1997 WL 45311 (Minn. Tax) (quoting The Appraisal of Real Estate, p. 23 (10th ed. 1992)).