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?

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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.

Percentage Complete

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.

Classification

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.

Timing

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.

 

 

 

 

 

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.