Articles

Published in: Finance & Commerce
December 1, 2011

Commercial property tax increases and the flat economy are hampering development and business investment, developer Kelly Doran says. Increases have pushed real estate taxes up to $13 to $15 per square foot on his retail properties, rates he says are "not sustainable."

Commercial property owners haven't had much to cheer about recently, and the tax bills they opened in November did nothing to change that.

Many of those preliminary bills showed taxes that were climbing, despite flat or declining earnings on the buildings being taxed, according to local government officials and real estate professionals.

One of the big culprits in that growing tax burden was a budget compromise adopted in last summer's special legislative session that ended up shifting taxes onto commercial properties, according to local officials and real estate pros.

Published in: Minnesota Lawyer Magazine
July 18, 2008

"Sensitive Income Data Protected"

Minnesota law requires that property tax filers with income-producing property provide the assessor with actual and projected income and expense information and lease data. The statutes also generally ensure that this sensitive information is to be used only for valid assessment purposes and should not be disseminated publicly.

However, in the fall of 2003, it became clear that there was a gap in the statutory protection scheme that exposed income and expense data to public release if it was more than three years old. A group of concerned property owners and public officials worked together to advocate that this loophole be closed. The result: an amendment to the law that protects income and expense information without a time limitation. In addition, any party requesting legal discovery of income property data of another must notify the affected party of the request. This will help ensure that property owners can appear to object to discover of their protected information. Minnesota Session Laws 2004, Ch. 290, §§12 and 13, amending Minn. Stat. §13.51.

The Minnesota Legislature recently passed an amendment to Minn. Stat. §278.05, subd.6(a), the so-called 60-day rule, Minnesota's mandatory tax appeal discovery law. That statute provides that property tax appeals are dismissed if certain financial information is not provided to assessors within 60 days of the appeal filing deadline. Governor Mark Dayton signed the amendment, which is in effect for pay 2010 petitions, into law. The legislation was the product of discussions between taxpayer lawyers concerned by recent expansive court interpretations of the statute, and Minnesota's assessment community.

Under the amendment, taxpayers are expressly excused from providing leases in the initial production to assessors. Assessors may request leases, but any dispute over their production will now be handled by the tax court under normal discovery rules. Needlessly technical requirements for rent roll production were also simplified. And, taxpayers now have 90 days to make good on the initial production, important in these times of near-record appeal filing in Minnesota.

Minnesota assessors are currently dealing with near-record numbers of tax petitions challenging the annual assessments made in the state. Assessors value property as of January 2, for taxes payable the following year. In stable markets, those that are flat or gently appreciating, with many sale transactions to study, it is easier for assessors to hit the mark on value.

Dynamic, distressed markets, like those in place right now, are more difficult to track. As sales dry up, market value proxies are harder to find. In-place rents might not reflect market leasing, requiring a judgment about what a space might command if renting on the valuation date. Cap rate analysis, once grounded in study of actual sale transaction data, becomes more anecdotal, relying on investor surveys and appraiser opinions. And, assessors, more historians than forecasters, are often a year or more behind the market.

And this is why assessors are facing near-record numbers of tax petitions in Minnesota.

Jurisdiction estimates for pay 2011 taxes have just issued, and the news is not good. Due to widespread cuts in both commercial/industrial and residential valuations, the effective tax rates at which properties are assessed have skyrocketed. Taxpayers are surprised to learn that while their assessed values have dropped , their taxes may have actually increased.

The bad news on tax rates could not come at a worse time for owners. The "jobless recovery" pundits identify does little to fill vacancies in properties. Also, the Minnesota Tax Court, coping with both near-record case filings by property owners, has already had to close for one week this year due to state budget cuts. This compounds the problem for taxpayers, whose overvalued properties need attention.

It is critical to try to resolve cases at the first opportunity. Owners should keep their property tax team informed of leasing and occupancy issues, so no time is lost when matters are finally scheduled.

The economic meltdown of the last few years has sent assessors scrambling to mark down values for commercial and industrial properties. Those efforts have necessarily come up short. The result: near-record numbers of appeals to the MinnesotaTax Court, which handles all property tax disputes. Since filings are required annually, the court calendar is backed up with unresolved matters from earlier years.

As a result, taxpayers who file their case by the April 30 deadline in a payable tax year are not likely to see their matter appear on court calendars for anywhere from 12 to 22 months. Those settings are often continued, as assessors struggle to handle the swollen litigation caseloads, meaning that it can literally be years before a pending tax matter is resolved.

There is an opportunity for jurisdictions to settle matters in the fall, regardless of the court calendar, to avoid the specter of ruinous refunds in the future. Savvy assessors who are open to early settlement benefit the taxing districts, while the taxpayer gets desperately needed relief in a more timely manner.

Recent statutory changes enacted by the Minnesota legislature restored assessors' qualifications to testify in Tax Court proceedings. Tax Court rulings had excluded assessor testimony, based upon statutory language construed to limit assessor valuation to the mass assessment process.

The new language permits assessors to prepare and testify to appraisal reports for properties within their jurisdiction. Since assessors have been testifying in the Tax Court since 1977, the result merely restores the status quo, upset by the decisions excluding testimony over the last year.

One result that may be averted is taxing jurisdictions' wholesale resort to using private fee appraisers in contested cases. Given the costs of such a strategy, there was widespread concern over the ability of cash-strapped counties to hire appraisers across the board in these tough economic times. The amended law handles that concern by endorsing the long-standing practice of admitting assessor testimony in tax court proceedings.

Minnesota law permits property taxpayers to file a petition challenging value, level of assessment, and other claims by April 30, 2010. The filing deadline is absolute, and if missed, costs the taxpayer a chance to challenge its tax assessment.

Public attention has focused on the subprime lending crisis, and the woes in the residential real estate market over the last two years. Only recently has the freefall in commercial values started to manifest in foreclosures, prominent vacancies, and media attention. The assessment community is tuning into the problems in the commercial sector, and significant reductions in value and taxes are now possible. Filing opportunities should not be ignored in this environment.

Assessors and Tax Court officials are bracing for a near-record number of tax petition filings this year. Values that have been held flat, or even cut 5-10% are almost certainly high, with some property sectors estimated to have lost 30% or more of value from just two years ago. Taxpayers should ensure that the April 30 deadline does not pass without a review of their assessment.