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Property taxes: Commercial owners nicked for state budget deal

Published in: Finance & Commerce

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.

The Legislature and the governor replaced a longtime property tax credit on low- and moderate-priced homes that was paid by the state with a new initiative that aimed to achieve the same tax protection for those homeowners. The compromise instead removed part of the value on low- to moderate-priced homes from local tax rolls, said Larry Martin, a lawyer and commercial real estate specialist in Chaska.

That residential "exclusion" continued a benefit to moderate-income Minnesotans, but it left a hole in local tax bases that commercial properties are being called on now to fill, Martin said.

"What I've been seeing in tax bills around the metro are increases ranging from 5 to 10 percent on commercial-industrial properties" that held their value over the last two years, Martin said.

"I haven't seen many calculations — it's very complicated — but my understanding from local assessors is that a significant piece of that increase is driven by the tax shift," Martin said.

Two local city officials provided those calculations for their communities. St. Louis Park City Assessor Cory Bultema said the shift would increase local commercial property tax bills by 3.5 to 3.7 percent. Combined with increased spending by schools and a decrease in the city's overall tax base, he said commercial property owners would pay about 7.6 percent more in 2012.

Homeowners are facing average hikes of 3.5 to 3.8 percent on their tax bills, Bultema said. The burden of the increase is greater on commercial properties because they are taxed at a rate near 4 percent, while homes are taxed in the vicinity of 1 percent. A portion of each home's value is also taken off the tax rolls because of the new exclusion.

In Minneapolis commercial owners are looking at exclusion-related increases of about 3.5 percent, said City Assessor Patrick Todd. (Minneapolis school district officials have said their portion of the levy will probably decline slightly when they complete their budget, lowering the overall rate.)

Those increases are especially painful because they come on the heels of several years of climbing rates, driven by declining tax bases that forced higher rates to meet local spending needs.

Mark Maher, another local real estate attorney, pointed to a Minneapolis property owner who has seen rate increases in each of the last four years; rates climbed from 3.6 percent in 2009 to a proposed 4.32 percent for 2012.

Tax rates have been going up every year in Minneapolis and most jurisdictions because of declining home and commercial property values.

"That's a lot of pressure on commercial-industrial property owners," Maher said. The weak economy has pushed occupancy and lease rates down. "It's essentially a blood bath out there," he said.

Developer Kelly Doran said that the cumulative effect of those increases and the flat economy creates one more roadblock for development and business investment.

Doran has been building mixed-use multifamily projects in the last several years, with first-floor retail components, but he said the tax increases make any new mixed-use projects almost impossible for his company.

"Those increases pushed real estate taxes on our retail properties up to $13 to $15 per square foot," Doran said. Those costs are passed on to the small businesses that lease those spaces, and "that's just not sustainable for them," Doran said.

Martin pointed to a similar concern. "The complaining I hear more than any other is that this shift couldn't have come at a worse time," he said. "It adds a financial burden, especially to mom-and-pop business owners, at a time when they can least afford it."

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