Airport Concession Fees Are Not Rent in Property Taxation

In a groundbreaking ruling, the Minnesota Supreme Court affirmed a tax court decision requiring tax assessors to exclude the airport’s concession fees from rent-based valuations for property tax purposes. The case offers a flight plan to lower taxes at many of the nation’s transportation hubs and underscores the importance for all taxpayers to exclude business value from taxable property value. Larkin Hoffman’s property tax appeals team, led by shareholder Tim Rye with the assistance of shareholder Bryan Huntington, represented the concessionaires Enterprise and Avis in the historic case. Reprinted with permission of Heartland Real Estate Business, a France Media publication. Every major airfield collects fees from food-and-beverage providers, retailers, banks and other businesses that provide goods or services on airport property. Concessionaires, or those who pay the concession fees to the property owner, commonly pay these charges in addition to rent owed for the real estate where they operate. Many of these businesses are also responsible for property tax that passes through to tenants in a commercial lease. The cases leading up to the March 29 state Supreme Court decision involved two car rental companies that challenged their 2019 tax assessments, claiming the assessor’s office had overstated their property values by including concession fees in its income-based valuation. High-flying fees Both Enterprise Leasing Co. of Minnesota and Avis Budget Car Rental pay a concession fee equal to 10 percent of gross revenues in addition to real estate rent for their operations at Minneapolis-St. Paul International Airport. The tax assessor for Hennepin County had historically valued the auto rental providers for property tax purposes by Including concession fees in its income-based approach to valuation. The auto rental companies challenged the valuations on their 2019 taxes in the Minnesota Tax Court. Law firm Larkin Hoffman, which represented both taxpayers, argued that concession fees are not rent and thus should not be included in the income approach for property tax purposes. The rental agencies prevailed in tax court. The court found that concession fees are not real estate rent and that the county substantially overstated market values by including the fees in its calculations. Correcting the assessor’s calculation reduced Enterprise’s value from about $34.9 million to $21.1 million, or 39 percent less than the initial assessment. Avis’ property value dropped 39 percent as well, from approximately $20.6 million to $12.5 million. The county appealed the tax court’s decision to the Minnesota Supreme Court, arguing that concession fees are rent that must be used in the income approach. The court affirmed the lower court’s decision, however, holding that “the concession fee is not rent for purposes of the income approach.” Fee-simple principles The rental agencies’ case stood on fundamental precepts of fee-simple valuation. Minnesota is a fee-simple property tax state, meaning valuations for property tax purposes must value all property rights as though they are unencumbered. Additionally, the leased-fee interest, or landlord’s rights subject to contractual terms, should not be used for property tax valuations. Per the state Supreme Court, rents attributable to specific leases are disregarded except to the extent they represent market rent. It follows that business income should not be included in valuations for property tax purposes. Taxpayers doing business at airports across the country often pay concession fees or other charges based on their revenues or business performance. Many states, like Minnesota, require those same properties to be valued on a fee-simple basis, which should neutralize any impact of business value. In representing the rental car agencies at all stages of their appeal, Larkin Hoffman stressed the importance of these valuation concepts and how the very definition of a concession requires its exclusion from calculations of taxable property value. A concession is a “franchise for the right to conduct a business, granted by a governmental body or other authority,” according to the Dictionary of Real Estate. Accordingly, if a concession fee is a payment for the right to conduct business and not for the right of occupancy, then it is a business revenue. The county argued that because the rental agencies’ concession agreements included the phrase for “use of the premises,” then the concession must only be for the real estate. However, the tax court found that the concession fees was consideration for access to the airport car rental market rather than the real estate. The tax court reasoned — and the Supreme Court affirmed — that the concession fee was not for the real estate because: Concession fees were also paid by off-airport rental car companies, indicating that the fee is a business revenue rather than rent; Inclusion of the concession fee in the income approach would inflate the value to 10 times greater than the cost approach, which would be clearly unreasonable; and Inclusion of concession fees in the county’s income approach distorted other inputs. It is well-established that a fee-simple property tax valuation should exclude business value. Now, Minnesota courts have also acknowledged that when a concession fee is for the privilege of accessing the airport market rather than for the real estate, that fee represents business value. To prevent erroneous inclusion of business value, and since airports are special-purpose properties, the court gave primary weight to the cost approach. With this decision, Minnesota’s highest court has confirmed that concession fees are not rent for real estate and instead represent business value that should be excluded from the income approach. For taxpayers in any jurisdiction that taxes property based on its fee-simple value, the recent decision is a reminder to ensure that assessors are excluding business value when calculating taxable property value. For businesses that also pay concession fees in addition to rent, the Minnesota case may provide an impetus to learn how those fees affect their own property values. And if those inquiries spur taxpayers to appeal their assessments, then the Minnesota case law may provide a valuable example and support for their arguments. Given the precedent this case has set, Larkin Hoffman’s property tax assessment team is strongly committed to making sure other vendors at the Minneapolis airport and airports around the country are being assessed fairly.  Please reach out or fill in our property tax intake form to find out if we can help you. Tim Rye is a litigator who advises clients on real estate valuation and property tax appeals. He advises on all aspects of the property tax appeal process, including reviewing properties for potential success on appeal, filing appeals and all statutory disclosures, researching market data, preparing analyses for negotiations, negotiating resolutions, and litigating appeals if necessary. Tim represents a broad range of clients, including real estate investors, owners, developers, property and asset managers, corporations, and individuals with real estate holdings. Bryan Huntington represents his clients in the enforcement of their property rights. His clients include developers, landowners, contractors, builders, surety companies, condominium owners, landlords and tenants. Bryan represents landowners and contractors in litigation and negotiation adversarial to governmental subdivisions (counties, cities, townships, etc.) and government agencies, including matters involving eminent domain, inverse condemnation, zoning, administrative law and payment disputes. He litigates contract disputes and is passionate about obtaining justice when misrepresentations are made during a real estate transaction about the conditions of real property.  Bryan is also a Rule 114 qualified neutral (mediator) in Minnesota.

New Podcast Series: Land Use and Real Estate Issues Affected by the COVID-19 Crisis

Welcome to Larkin Hoffman’s new series of podcasts discussing issues affected by the COVID-19 crisis. Our senior attorneys will address corporate, employment, real estate, construction, franchise, bankruptcy, insurance, litigation, and other matters in this series. The podcasts are 15 minutes long and can be heard at your convenience. Over the next few weeks, there will be several podcasts on developing matters. In this first podcast, Bill Griffith and Tim Rye discuss land use and real estate issues affected by the pandemic. In particular, they address: The pandemic’s impact on value for property taxes The timing of property tax payments, appeals and extensions The timing for potential tax relief due to value changes or appeals Economic stimulus – Minnesota Essential Investment Bill Low interest loans, government guarantees, bonds, debt restructuring Other forms of relief, such as utility payments, payroll reimbursement Everyone is managing issues arising from COVID-19. Larkin Hoffman attorneys are engaged daily with clients to remove barriers critical to their ongoing operations, and perhaps even their survival.

Minnesota Property Tax Update

Businesses and real estate of all types are being disrupted and upended by the COVID-19 pandemic. As this pandemic changes the landscape on a daily basis, we will keep you informed of important property tax issues along the way. Currently, there are three upcoming property tax issues in focus: First Half Property Tax Payment: Due May 15, 2020 Property Tax Appeal Deadline: April 30, 2020 Local Boards of Equalization and Open Book Meetings: April 1 – May 31, 2020 First Half Property Tax Payment House leadership has indicated they are working on a series of COVID-19 measures, including abatement of penalties for late income and property tax filings or payments, and preventing evictions and foreclosures during the pandemic. Senate leadership has indicated they are on board with waiving tax deadlines and penalties. This issue is very important to many of our clients and we will provide an update when the form of relief becomes more clear. Property Tax Appeal Deadline Larkin Hoffman’s Government Relations and Property Tax teams, with support from other Twin Cities tax attorneys, have been communicating with Governor Walz, Majority Leader Gazelka, Speaker Hortman, the tax committee chairs in both the Senate and the House, and the Department of Revenue to advocate for extending the April 30th property tax appeal deadline. The governor, Senate and the House have all indicated they are working to address this issue. Local Boards of Equalization and Open Book Meetings The Department of Revenue (DOR) issued a memo on March 18, in response to COVID-19, to all local boards of appeal and equalization, city and township clerks, county and local assessors providing guidance on preparing for and convening local board meetings. DOR directs each assessor’s office to work closely with local boards to create meeting procedures and policies that comply with statutory requirements. The memo also provides Current Guidance on Virtual Meetings. Minnesota requires meetings to occur sometime between April 1st and May 31st, a timeline which is very likely to be affected by the pandemic. The Larkin Hoffman Government Relations team is engaged daily with key state government decision-makers to gain assistance and remove barriers critical to our clients’ ongoing operations, and perhaps even their survival. We are available to assist you on issues ranging from influencing the governor’s executive orders to requesting waivers from state government requirements to revising legislation that will become law. For more detailed information and other resources contact attorney Tim Rye.

When to Consider a Property Tax Appeal

Developers, real estate investors and business owners are appropriately focused on creating profit and high rates of return. Managing property taxes may not be a terribly high priority. However, property taxes are usually the most significant real estate expense incurred by real estate users and have a direct impact on profitability and rates of return. So, when should developers, investors and businesses consider a property tax appeal? Property taxes in Minnesota are based on the fee simple market value of the subject property. Generally meaning, the amount that could be achieved in a sale between a willing buyer and willing seller without any special benefit or deduction applied due to specific tenancy or lease terms. The short answer to the question in the title of this post is, if the market value is likely less than the assessed value then you should consider an appeal. It is not practical or economical to have an appraisal prepared every year just to test the assessed value. You can have property tax lawyers like those at Larkin Hoffman conduct a review anytime – Larkin Hoffman offers free property tax reviews – or the following may serve as indications for when to take a deeper look. Purchase for less than the assessed value Refinance and the financing appraisal concludes to a value lower than the assessed value There is substantial deferred maintenance or significant capital expenditures are needed The Subject is contaminated The property is special use The Subject went through a significant renovation or new construction The property was under construction on the date of assessment Subject is suffering from high vacancy or not yet stabilized The market around the subject has changed, such as increasing vacancy, decreasing rents, crime, etc. Assessed value is rapidly increasing and little has changed for the Subject The above list is certainly not exhaustive, but for the developer, investor, and business owner with little time to consider property taxes, the list can be a good cheat sheet for when to consider calling a property tax lawyer. While valuation is the most important factor for determining and adjusting property taxes, the assessment cycle and appeal deadlines are nearly as important. For example, the deadline to appeal the Pay 2020 value is April 30, 2020. As a result, the following is an outline of the assessment and appeals process. 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, 2019 is for taxes payable in 2020. Valuation notices March – April Counties mail notices of valuation in the year of assessment. For example, valuation notices sent in March and April 2019 are for the 2019 assessment payable in 2020. 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 2019 Board of Appeal and Equalization is for the 2019 assessment payable in 2020. 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 2019 truth-in-taxation notices provide the proposed taxes payable in 2020. 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, 2020 is the last day for counties to mail the statements for property taxes payable in 2020. 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, 2020 is for the 2019 assessment for taxes payable in 2020.* 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 for that tax year, the value cannot be changed.

How Does the Sale of a Property Affect Its Assessed Value?

We frequently get asked about how an assessment will change after an acquisition at a price higher than the assessed value. The answer of course is, it depends. Assessors use sales ratio studies for the review and equalization of values. A sales ratio shows the relationship between the assessors Estimated Market Value (EMV) and the sales price of a property. The sales ratio formula is: Sales Ratio = Assessor’s EMV/Sale Price Assessors use sales ratio studies to plan an upcoming assessment, to evaluate an existing assessment, and to identify inequities. However, before the sales ratio study can be of any use an assessor must analyze the sale transaction. Assessors will verify the sale transaction to adjust the sale for non real estate components such as furniture, fixtures, and equipment, but they will also determine whether the sale should be rejected from the study. There are many reasons for a rejection, such as: Related party sale Government sale Partial interest transaction Prior interest sale, such as a lease with an option to buy Payoff of a contract for deed Forced sale or foreclosure Sale-leaseback transaction Allocated sale price; or Not typical market If the sale is rejected from the sales ratio study then the sale is unlikely to have a significant impact in the future assessment of the subject property. If the sale is a market transaction, good for the study, it may have some impact in the future valuation, but there is still a good chance that the sale will not result in the value being set at or near the sale price in the immediate future. The Minnesota Department of Revenue defines sales chasing as “[t]he practice of making any substantive change in the value of a recently sold property, while not also reviewing and applying the same criteria to properties that have not sold.” The practice of sales chasing can cause invalid findings in ratio studies. For example, if assessors chase sales then the ratio studies will show that the assessments are generally in line with the sales, and those that are unsold will not be adjusted to be in line with the market. In a rising market, sales chasing can cause the study to arrive at an inaccurately low value, and in a declining market sales chasing can cause the study to arrive at erroneously high values. Accordingly, sales chasing causes issues when applying mass appraisal techniques and is harmful to equal and fair assessment practices and is discouraged. Therefore, it is unlikely that assessors will immediately adjust the assessed value to a value at or near a sale price that is higher than the assessed value. If there are many sales occurring at prices higher than the assessed values then the sales ratio study will show that the assessed values are below market. To illustrate, if the sales of a specific class of property in a specific area in a given year have a median sale price 30% higher than the assessed value then the ratio would be 0.7692 (i.e,. $1,000,000 EMV ÷ $1,300,000 Sale Price) or 77%. In Minnesota, assessors are to aim for ratios within 90% of the sales. Based on this illustration, instead of sales chasing, the assessors would put the sales in the study and likely increase all properties in that group by 13% the following year (13% + 76% = 90% sales ratio target). In a rising market, like we have experienced over the last few years, we generally see assessors increase values year over year rather than chase the sale. As a result, the assessment may eventually reach the sale price, but it can take a few years. While it is possible that an assessor could decide to chase a sale, our experience evaluating these types of sales supports the methodology described above. Nonetheless, we always recommend taking a close look at the market activity, assessment patterns, ratio studies, and property specific factors to evaluate the risk of increasing assessments following a sale.

Meet Minnesota Tax Court’s Newest Judge: Tamar N. Gronvall

Governor Dayton appointed Tamar N. Gronvall to the Minnesota Tax Court for a six-year term, which began in January 2017 and will expire on January 2, 2023. Before her appointment to the Tax Court, Ms. Gronvall was General Counsel in the Office of Legal Services at the Minnesota Department of Commerce, where she led a team advising the agency in areas of consumer protection, banking, insurance, energy, insurance fraud, contracts, and employment law. She also was a Manager of Tax Litigation, Bankruptcy and Education Division of the Office of the Minnesota Attorney General. Judge Gronvall has an extensive history in public service, government, commerce, litigation, and tax. Here are a few of Judge Gronvall’s initial rulings as a Tax Court Judge: Macy’s Retail Holdings, Inc. (Downtown Minneapolis Parking Ramp)-Petitioner v. County of Hennepin-Respondent and InterPark Holdings, LLC-Intervenor, File Nos: 27-CV-13-6683, 27-CV-14-6579 (Minn. T.C. June 2, 2017) Type of Decision: Evidence, Protective Order, Procedural Summary: Macy’s objected to parts of the County’s appraisal that included third party non-public data through a Motion in Limine The parties stipulated to allow InterPark to intervene in Macy’s Motion in Limine for the purposes of protecting InterPark’s data that it had provided to the City of Minneapolis. The Court held a hearing on the issue and encouraged the parties to work to stipulate to a protective order to protect InterPark’s information. Macy’s and InterPark were able to agree and stipulate to the protective order terms, but the County did not agree. Macy’s and InterPark filed the proposed order and the County asked for direction from the Tax Court on how to object to the proposed protective order. The Court permitted the County to submit written objections. Comment: Judge Gronvall encouraged the parties to work together to collaborate on a solution for the protective order and was willing to provide procedural guidance to the County. University Court LLC v. County of Hennepin, File No: 27-CV-15-07947 (Minn. T.C. June 2, 2017) Type of Decision: Discovery Summary: The County served Interrogatories and Requests for Production of Documents and University Court did not respond within the required 30 days. The County requested to meet and confer with University Court. University Court asked for an extension, which the County allowed. When the extension expired the County asked again for discovery responses, but received no response from University Court. The County then filed a Motion to Compel. University Court filed no response and did not appear at the hearing. The County’s motion to compel was granted with expenses and attorney fees. Comment: This is a straight forward failure by a party to comply with discovery and Judge Gronvall handled it according to the rules. Moral of the story, if you don’t respond you will probably lose. Macy’s Retail Holdings,Inc. (Downtown Minneapolis Parking Ramp) v. County of Hennepin, File Nos: 27-CV-13-6683, 27-CV-14-6579 (Minn. T.C. June 19, 2017) Type of Decision: Discovery Summary: The County sought to compel discovery of information regarding offers to purchase or sell the property. The County’s Motion to Compel was granted. Although Macy’s had received multiple letters of intent or expressions of interest, it claims that because those documents either expressly or impliedly disclaimed contractual liability they did not constitute offers. The Court found that the County satisfied the procedural requirements to compel discovery, and that the the letters of intent were responsive to the County’s request for information on all offers. In other words, in this case letters of intent are offers. In addition, even though the purchase agreement was finalized after the close of discovery Macy’s was required to supplement its discovery responses. Comment: Judge Gronvall followed the procedural rules for considering the motion to compel and concluded in the County’s favor that the letters of intent are offers, and discovery responses must be supplemented after the close of discovery even if the information was not created until after the close of discovery. Macy’s Retail Holdings, Inc. (Downtown Minneapolis Parking Ramp)-Petitioner v. County of Hennepin-Respondent, and InterPark Holdings, LLC-Intervenor, File Nos: 27-CV-13-6683, 27-CV-14-6579 (Minn. T.C. July 28, 2017) Type of Decision: Evidence and Protective Order Summary: Macy’s Motion in Limine to exclude portions of the County’s appraisal that included third party nonpublic data was denied. The expert reports were temporarily sealed and if InterPark alleges that the parties’ expert reports include proprietary or sensitive information it may file a motion to permanently seal the relevant portions. In short the County redacted nonpublic information in its discovery responses, but included the information in its appraisal. Macy’s objected on discovery grounds. The Court found that, among other things, Macy’s was not prejudiced, so its motion to exclude portions of the County’s appraisal was denied. The Court also protected InterPark’s third party information and provided an avenue for further protection for InterPark if any is needed. Comment: Judge Gronvall decided this issue in favor of the County, but did place significant weight on the whether Macy’s was prejudiced by the failure to disclose in discovery, which Judge Gronvall found it was not. This is consistent with many decisions of the Tax Court to include evidence rather than exclude. In addition, Judge Gronvall’s willingness to protect third party information is a positive sign for taxpayers that provide information to assessor. Final Thoughts Judge Gronvall has shown in her early rulings that she follows discovery rules closely, has preferred to include more evidence rather than less, encourages parties to work together, and protects third parties. The decisions can be found here.

What happens with property taxes during a new development project?

Do your commercial real estate taxes seem too high? Is it time to appeal?

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. 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. 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. 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.

A Bank Sale of the Subject Property can be the Best Indicator of Value for Property Tax Valuation

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 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.

Property Valuation is an Inexact Science

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. 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.

Minnesota Property Tax Dates from Assessment to Appeal Filing

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.

Investment Value or Market Value: Analyzing Sales for Property Tax Assessments

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 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)).