The cost of doing business in Minnesota
By Liz Wolf
There’s no question that Minnesota has among the highest property taxes in the nation – and property taxes are being disproportionally collected from commercial and industrial properties.
Commercial and industrial properties account for less than 13 percent of the total property market value in Minnesota, yet they account for more than 30 percent of all property taxes collected.
“Minnesota’s classification of property taxes places an undue burden on commercial and industrial properties,” says Matt Anfang, executive director of MNCAR.
What exactly is the C/I tax?
Over and above the property tax that a business pays—like any property owner-- to the local city, county and school district, it also pays an additional state property tax that goes to the state’s general fund. This statewide business property tax was enacted in 2001 and automatically increases with inflation each year.
This has caused property taxes for Minnesota businesses to be some of the highest in the country. In fact, they’re ranked second-highest for rural properties and sixth-highest for metro properties. Minnesota business property taxes surpass some neighboring states by more than 200 percent, according to the Minnesota Chamber of Commerce, which has made reducing the state property tax its top initiative during the 2016 Legislative session. The Chamber supports reducing the statewide business property tax levy and eliminating the automatic tax inflator.
(The Chamber is not alone in its efforts. Many business organizations are behind the cause, including the Greater Minnesota Partnership, MNCAR, the Minnesota Shopping Center Association, Greater St. Paul BOMA and BOMA Greater Minneapolis).
Improving Minnesota’s business competitiveness
The goal is to create a more competitive playing field for Minnesota companies by bringing down taxes, and the Chamber is hoping that some tax relief will come during this current session as the state has a $900 million budget surplus. There are about three and a half weeks left in the regular session and property taxes are a hot topic.
Kevin Lewis, executive director at BOMA Greater Minneapolis, says when businesses look at moving to or expanding in Minnesota, they consider the cost of doing business here. The high property taxes can put the state out of the running.
“It’s a disincentive for people to select our area,” Lewis says. “The crux of the issue is this is something that has escalated year by year by year, and so at a certain point what it does is if you have a prospective tenant – and say they’re based in Minnesota – they have the option of going to Illinois or another state where they wouldn’t be subject to this additional statewide property tax.”
And if businesses are located here, the higher taxes can limit what they have available for reinvestment, employee raises or expansion.
Cost is passed on to tenants
Commercial property owners pass along tax costs to tenants as part of their rents.
Lewis says it’s important to recognize that it’s the “tenants that pay the statewide property tax. It’s not the ownership of the building,” he says. “It’s not the management company. It‘s a pass-through to the tenant.”
Lewis also emphasizes that the tax impacts all sizes of companies—and whether they’re profitable or not.
“Some buildings are owner-operated like Target Corp. and Best Buy, but far and away, the largest percentage of buildings are multi-tenants buildings,” he explains. “So you might have a small, 10-person company and they’re the ones paying it. The notion [is incorrect] that we’re trying to roll back the statewide C/I property tax and it’s just a tax break for big businesses. It’s for businesses of all sizes that just happen to be tenants.”
Impact on commercial real estate and brokers
When leasing properties, building owners are faced with shifting more and more rents into taxes and operations, says Anfang.
“The continual burden of C/I property tax increases impacts the net rent capacity,” he says. “Because every tenant in a retail center, office building or industrial property is expected to contribute its fair share of the property’s taxes, the increased burden on business can stifle growth of Minnesota companies as the pass-through cost of taxes has nothing to do with the profitability of the company.”
Anfang also says when a tenant sees their taxes going up, they want to control their expenses by asking landlords for concessions to reduce net rental rates.
“This directly impacts the fees a broker can expect when negotiating a lease between landlords and tenants,” he says.
Laurie Karnes, owner of Land For Sale Inc. in Maple Grove, gives another example of how brokers could be impacted. She says typically on larger properties the terms of the lease are triple-net, meaning the tenants pay the property taxes. “So if property taxes go up, that puts pressure on tenants to try to either renegotiate the deal” or relocate to less expensive space when their lease term is up.
“The landlord may put some pressure on the brokerage fees just to try to make everything work, especially if they have to go find another tenant,” she says.
Jen Helm, senior director at Cushman & Wakefield/NorthMarq, sees the impact of property taxes firsthand when leasing retail space.
The higher the taxes, the less rent that a retailer can pay, she says. The less rent that they pay, the lower the value of the property.
“I’ve seen some spaces with $20 per-square-foot just in operating expenses -- CAM and taxes, with half of that being taxes,” Helm says. “Many retailers, for example, who are paying a minimum of $30 base rent plus another $20 in operating expenses can’t sustain that in a suburban market where they don’t have the density to support it. It’s a trickle-down effect. It eventually all gets passed along to the consumer.”
Helm also says that many retailers don’t come to the Twin Cities market due to the higher cost of real estate taxes.
“They won’t touch Minnesota,” she says. “It’s [even] more challenging for restaurants because we don’t support a tip credit and we have higher property taxes. It’s an extremely expensive operation for them.”
A lot of it comes down to how a property is assessed
Assessors for the most part are fairly consistent, says Craig Patterson, regional manager in the Minneapolis office of Marcus & Millichap. However, there are challenges, especially with new properties.
For example, he says a developer buys a piece of land and puts a building up and because Minnesota’s property taxes are in arrears, there’s a competitive advantage for brand-new buildings because they’re assessed on land only.
“When they do the assessment the following year, and the building is half-completed or half-leased or still empty, there will be some adjustments for that,” he says. “However, when it gets fully assessed and is predominantly occupied, then the property taxes hit pretty hard and it’s a shock for the tenants. So brokers need to be able to explain to their prospective tenants the situation on how the taxes will affect the property moving forward.”
Patterson also gives an example of a property sale. The building may be assessed at $3 million, but if it sells for $5 million the property taxes will increase substantially in the next year or so.
“If a tenant is in the building and in year two of a five-year lease -- and the owner sells the building and the taxes go up by 40 percent – and it’s a triple-net lease – there’s nothing they can do,” he says. “They’re stuck until the lease comes up for renewal.”
He says brokers need to be knowledgeable and understand the tax rate capacity for each market they’re in, how properties are assessed and what components drive the value of a building.
Posted at: 5:18 pm on April 28th, 2016