In 2001, a series of property tax reforms became Minnesota law. Backed by a wide coalition of multifamily and commercial property owners, the reforms compressed rates these owners paid on their properties and those enjoyed by residential homestead owners.

This reduction in effective tax rate for commercial and apartment properties in the Minneapolis, St. Paul metro area has not always led to lower taxes, though, because assessors have been increasing values. Higher property valuations mean owners may be paying the same – or more – in property taxes, despite the rate reforms. Commercial and multifamily property owners who carefully monitor their property’s valuations each year have tended to see significant decreases in their property tax burdens. For those owners, tax reform had delivered on its promise.

The 2001 reforms set a lower class rate for commercial properties. Multifamily rates were cut even more significantly. The rates have continued to fall, in part because the 2001 reforms also provided that the limited market value law, which shields large portions of residential property valuation from taxation, should be phased out. Over time, as more and more protected residential valuation “burns off” the limited rolls, residential property assumes a more proportionate share of the overall property tax burden.

While there is variation among taxing jurisdictions, the drop in effective tax rates has been significant everywhere. The chart below shows some examples of the declining effective tax rate for commercial and industrial property owners in the Twin Cities. Remember, effective tax rate multiplied by the estimate market value (EMV) equals taxes:

Clearly, the tax reform of 2001 continues to work to reduce commercial/industrial tax rates.

The question remains: is tax rate reduction enough to assure that a business pays the appropriate property tax? The answer is no. An example is illustrative: a suburban office building manager checks the tax statements for the property, and notices that taxes fell for three straight years. Can the manager assume that there is no property tax problem?

If the manager assumes there is no tax problem, this building could suffer competitively.

Most valuation experts agree that in Minneapolis-St. Paul there was a significant downtown in the commercial real estate market during this period. Note the difference in taxes if valuation is reduced to reflect the market conditions on this illustration of suburban rates with a 10 percent reduction in value from the first year carried over three years:

As the example shows, it’s not the taxes, but the valuation of the property that has to be examined annually to ensure that a business is not overtaxed.

Although many property types have recently seen increases in values, the upward climb can still be controlled. To do so, a manager or owner should put in place an effective program that reviews valuations annually. Such a program analyzes the value of property to make sure it is not unfairly high. These are the key factors to consider:

• Market conditions – rents and vacancies for the property type: Assessors must look at market factors within the relevant valuation period. They cannot rely on leases in place if the leases do not reflect current rates.
• Sales activity: Although the metro area has experienced unprecedented high sales prices, these prices, without adjustments, do not necessarily reflect the correct market value.
• Assessments and value reductions for competitive properties.
• Equalization issues that may provide tax relief.
• Case law developments that provide an opportunity for relief.
• Changes in tax laws that may affect property taxes.

An effective property tax program considers these, and depending on the situation, other factors every year. In today’s marketplace, a property with uncompetitive taxes incurs a distinct disadvantage. Since tenants typically care about gross occupancy costs, property owners saddled with a tax overpayment feel the pain in the form or reduced cash flow. Controlling the tax cost is essential to maximizing cash flow.

Property taxes are one of the most significant operating costs for building owners and businesses in Minnesota. Legislative rate reforms have been helpful, but if tax valuations are excessive, a property misses our on the relief.

The best solution is to implement a professional program of regular review of the value assessment, rather than to focus merely on the tax amount due for a property. Businesses and properties without such a program risk losing their edge in today’s competitive environment.

Margaret Ford and Mark Maher are partners in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher PA, which is the Minnesota member of American Property Tax Counsel, the national affiliation of property tax attorneys. Ford can be reached at mford@proptax.cm and Maher at mmaher@proptaxlaw.com.