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?

OxBlue

 

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.

 

 

 

 

 

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)).