Source: https://www.aptcnet.com/property-tax-resources/national-property-tax-updates/minnesota-property-tax-updates
Timestamp: 2019-04-20 08:26:47+00:00

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In a recent decision of the Minnesota Tax Court, the taxpayer was successful in reducing its assessed value, based on evidence of the sale prices of other large format stores. In Menard, Inc. v. Washington Co., the 161,640 s.f. store, in Cottage Grove, MN was valued for assessment purposes between $56- $60/sf.
At trial, the parties disagreed how to value the property. The County relied primarily on an income approach that was rejected by the court because it used lease comparables based upon "build-to suit" properties for specific users. The tax court also found the cost approach to be inapt for this older property.
The tax court relied on four sales submitted by the taxpayer's appraiser, discussed the adjustments necessary, and concluded to values between $38 - $41/sf for the years at issue. In rejecting cost-based assessed values, and reiterating that build-to-suit leases may not represent market rents, the tax court added some clarity to the valuation debate over large format stores.
The Minnesota Tax Court has recently issued an opinion dealing with a vexatious issue: the publication of one building’s operating information in a tax court case involving a different, competitive property.
Property owners are sometimes surprised to find out that income and expense information for a building that had its assessed value challenged might show up in an unrelated case involving a competitive property’s appeal. This is what happened in a recent case involving a Minneapolis CBD parking ramp. The assessing jurisdiction and tax petitioner traded appraisals for use at trial. The county’s appraisal used operating information from a competitive parking ramp in support of the county’s income approach. The owner of the property whose data was being used in the proceeding was permitted by the tax court to intervene in the case. In fact, the court encouraged the parties to work towards a stipulation to protect the “innocent” owner’s operating data. However, the parties could not come to an agreement, and the issue of what an appropriate protective order should look like is now in the hands of the trial court.
The case underscores the importance of understanding how data provided to the assessor as part of your case may be used by the government, especially in other litigation where the assessor seeks support for its valuation position. In appropriate cases, the court will accept, and may even encourage, a well-crafted protective order to permit use of the data by the government appraiser without harmful disclosures of proprietary or sensitive information.
The Minnesota Supreme Court overturned two commercial property tax cases on appeal. In Archway Marketing Services v. Hennepin County, involving an industrial building, the tax court decision in the taxpayer's favor was reversed. The supreme court held that the tax court failed to adequately explain why it did not consider the sales comparison approach in the case, especially since a sale of the subject property had occurred in the valuation period. The matter has been remanded for further consideration.
And, the tax court's decision in KCP Hastings v. Dakota Co. was reversed on appeal by the owner of a strip shopping center. On appeal, the supreme court held that the tax court should not have rejected the taxpayer's appraiser's discounted cash flow ("DCF") analysis and that deciding the case solely on the basis of the sales comparison approach was not appropriate.
In both cases, the tax court concluded to values that were outside of the valuation opinions presented at trial. This supreme court noted that these valuation conclusions were not supported by evidence at trial, which was also a factor in the reversals.
Property owners and managers in Minneapolis are bracing for the next wave of value increases, which are expected after a frothy sales market for commercial, industrial and apartment properties. Well-leased properties are trading or being offered at high prices, and that’s no surprise. What has taxpayers concerned are a series of high sales of occupancy-challenged properties. The impact of these transactions on future assessments can be significant in jurisdictions like Minneapolis, where all properties are assessed annually at market value. Some office properties have seen single-year assessed value increases of 25% or more, even if they didn’t transact. Huge tax increases affect the ability of tenants to pay rents at the levels that justify those prices. Overall occupancy cost to tenants is an important factor to consider in challenging property taxes in Minnesota.
The Minnesota Tax Court has weighed in on the loss of value to improvements that are specific to a particular retail user. In a case involving a large home improvement center, the court deducted 25% of a building's cost for functional obsolescence relating to the specific finish and layout of the store, compared to what the market would credit. The issue of "big box" valuation is a divisive one between assessors and some taxpayers, and this is the court's first experience with the controversy. In a separate decision, the court refused to consider renewal leases as evidence of market rents, noting that caution must be exercised when using such transactions. And the court again refused to consider comparable valuation data based on build-to-suit specifications. It's worth noting that both matters are the subject of post-trial proceedings, and are not final. However, the reasoning of these decisions-- that value-in-use does not equate to value-in-exchange-- is based on solid appraisal methodology.
A recent article in the Minneapolis Star Tribune notes that some tenants in office buildings that have recently sold have seen their taxes increase by as much as 36%, due to assessment valuation increases following the transactions. Even tenants in buildings that have not sold are seeing their values increase substantially. These increases affect owners too; higher tax loads eat into the rent that tenants are willing to pay for space. Pricey transactions can be influenced by factors that are not properly considered for property tax assessment. Properties with long-term leases with large, credit tenants might not be typical in the market. To the extent that such sales lead to a boost in the assessment of competitive properties, a valuation challenge should be considered.
The Minnesota Tax Court forcefully rejected an attempt by assessing jurisdictions to manipulate capitalization rates derived from sales in two separate cases. The assessors who testified using this unsupported methodology were able to reduce derived cap rates from sales by disregarding actual net operating income ('NOI") in favor of adjustments to NOI that resulted in a lower derived cap rate. In the most recent decision, the Court characterized the adjustments as "improper" and "faulty". The ruling is a major setback for jurisdictions seeking to increase assessed values on the basis of this novel and wrong approach to sales and cap rate analysis.
The deadline for filing an appeal with the Minnesota Tax Court is approaching. Appeals of the 2014 values for taxes payable in 2015 must be filed with the Tax Court by April 30, 2015. Because personal service on several county officials is required by statute, it is dangerous to wait until the last day or two.
Although the backlog of appeals is starting to disappear, it is often 18 months until a case can be resolved, and appeals of more complicated properties may take longer. Many appeals filed in 2013 in the Twin Cities are unresolved. Because Minnesota has annual valuations, a separate appeal must be filed each year.
The Minnesota Tax Court recently issued several opinions resolving cases that had been tried as long ago as spring of 2013. The cases involve two department stores at different malls in the Twin Cities; an ethanol plant in outstate Minnesota; and the shuttered Ford Motor Company plant in St. Paul. The cases have one feature in common: lengthy opinions-- 85 pages for the ethanol plant, and 140 pages for the Ford plant-- and values based on the court's own appraisal work, including an unpublished discounted cash flow analysis in the Ford case. In the department store cases, reductions were ordered for some but not all years tried. In the ethanol case, large increases in value were found by the court. And, in the Ford case, where the county admitted overvaluing the property, the court ordered additional reductions for Ford despite finding that Ford's appraisal analysis was not compelling. The cases, read together, show a court that is willing to make its own appraisal analysis based on inputs from the parties.
A Tax Court judge has ruled there was sufficient evidence to support the methodology, acknowledging the change in procedures in J.C. Penny Properties (Ridgedale), August 21, 2013. The Tax Court recently had the hearing for additional evidence to be presented by appraisers, resulting in a delay of many months for this case and others involving retail properties. In addition, the Tax Court has expanded the amount of back-up material which an appraiser must bring to court on which to be cross-examined. This is expected to increase appraisal costs and make it more difficult to try cases with a relatively few hundred thousand dollars of value at stake. In more positive news, several decisions by the new judges have resulted in reductions for taxpayers.
The statewide three-judge Minnesota Tax Court, an administrative body that handles all tax matters filed in courts in the state, now has a completely new roster. All three judges are newly appointed since last year at this time.
The Court has a backlog of about 4,500 property tax appeals that have stacked up since the economic meltdown in 2008. The Court is trying to implement procedures that will speed the resolution of these matters.
To date, there has not been a single valuation decision issued by the new court on a property tax valuation dispute. Instead, the Court has asked for additional argument, and in some cases, more testimony from experts to uncover the facts needed to decide the valuation issue. Parties are waiting to find out how this court will approach common valuation problems, and the answer may help resolve many of the backlogged cases.
Minnesota's three-judge tax court hears all tax matters in the state. Recently, two of the three positions became vacant and were filled by appointment by the governor's office. The third judge, George Perez, was the subject of an action by the Board on Judicial Standards centering around allegations of misconduct and untimely handling of cases, in violation of state law. The hearing panel found against Judge Perez and recommended a demotion and nine-month suspension. Before that recommendation could be acted on by the Minnesota Supreme Court, the Minnesota Senate unanimously rejected Judge Perez's reconfirmation, which had been on hold pending the investigation into charges.
This means that the governor will appoint a 3rd judge, so that the court will be completely new. Already, the new court has implemented changes that are aimed at clearing out the huge backlog of cases in the system. Stay tuned for more updates on changes in Minnesota's tax hearing body.
Minnesota's three-judge tax court hears all tax matters in the state. Governor Mark Dayton recently announced replacements for two vacancies at the court. Bradford Delapena, a solo practitioner who formerly headed up the Tax Litigation Division for the Minnesota Attorney General's Office, will fill a two-year term. Joanne Turner, an Assistant Commissioner to the Minnesota Supreme Court, steps into a six-year vacancy.
The State of Minnesota Board on Judicial Standards filed a complaint against the Honorable George W. Perez, who currently serves as the tax court's Chief Judge. The complaint alleges misconduct by Judge Perez in failing to issue decisions in a timely manner. It also charges that Judge Perez falsified certifications for time sheets assuring compliance with requirements for timely handling of cases. Other counts alleging misconduct, including making false representations to the Board, are set forth in the complaint. The matter now heads to a public trial before a three-person panel to be appointed by the Chief Justice of the Minnesota Supreme Court.
Minnesota's three-judge tax court hears all tax matters in the state. Recently, two of the judges announced their departure from the Tax Court—Judge Kathleen Sanberg, originally appointed in 2001 by Governor Jesse Ventura, left to join the U.S. Bankruptcy Court. Judge Sheryl Ramstad, appointed in 2003 by Governor Tim Pawlenty, also resigned from the bench. Governor Mark Dayton will appoint replacements: one to fill Judge Ramstad's remaining two year term, and the other to a full six year term, replacing Judge Sanberg.
The departures exacerbate delays in bringing filed cases to trial, already a significant problem due to the volume of petitions filed in the wake of the real estate meltdown. The vacancies also promise to create interest in a court that had not welcomed a new member in nearly ten years. Valuation disputes for assessment years impacted by the recession are coming to the top of court calendars, and taxpayers will watch with interest the reaction of the new jurists to these cases.
As Minnesota property owners battle to survive the severe downturn that accompanied the recession, they may be wondering when their property tax cases, filed anywhere from one to three years ago, will finally be resolved. While many assessors have heeded market signals and taken values down, the reductions are usually too little and at least a year late. Many assessors have not had experience with this type of cyclical downturn, and did not move values down as quickly as they should.
Aggrieved owners have filed tax petitions in near-record numbers. Assessors with limited resources cannot process these cases quickly, and the delays spell more trouble for cash-strapped owners. Flexibility in structuring settlement deals can help owners advance cases more quickly. Relief can be shifted to minimize refunds with jurisdictions sensitive to that issue. Understanding the timelines for assessment and tax levies is critical in fashioning such agreements.
Filing a petition in the Minnesota Tax Court challenging the 2011 value for taxes payable in 2012 must be done by April 30, 2012. In Minnesota this can be done without going through the administrative appeals during 2011. Some counties still have many of the petitions for taxes payable in 2010 and 2011 unresolved, and an additional petition must be filed to cover the taxes payable in 2012 as each petition is only allowed to cover one tax year. Because Minnesota has annual assessments, it is important to review every property every year. As we have noted, tax rates for taxes payable in 2012 are increased from last year, sometimes significantly, due to an unforeseen shift by last year's Legislature. The shrinking tax base also remains a factor increasing the tax rates, making a review of the value even more important.
Valuation notices are just being sent showing the 2012 value for taxes payable in 2013. For some assessors, this is the best time to discuss the 2012 value as there is no cost to make a change, so these values should also be reviewed now.
In the past legislative session, political gridlock over how to address a budget deficit led to a shutdown of state agencies, including the Minnesota Tax Court, for 20 days.
Part of the eventual solution to the crisis was the elimination of a homestead tax credit paid by the state to reduce property taxes for low and moderately valued homes. It was replaced with a value exclusion that effectively took a substantial amount of assessed residential value off the tax rolls.
The change shifted the tax burden for that lost value to commercial property owners, who in some cases have seen tax rates rise 3.5% or more solely due to this issue. Because values for commercial and residential properties have been declining, there is additional upward pressure on tax rates as well. Some jurisdictions are forecasting 7% to 9% tax rate increases overall, a real hit on taxpayers in these tough economic times.
As one of the accounting tricks used to settle the 2011 budget deficit in Minnesota, the state of Minnesota is no longer paying some of the property taxes for each homeowner (non-rental property used as a homestead). This will result in higher taxes in 2012 for each homeowner even if the annual valuation went down somewhat, and put greater pressure on cities, counties and school districts to hold down rate increases. Assessors will have yet another reason to keep values of houses as low as possible, as a greater share of the tax burden will be picked up by homeowners.
This shift could put pressure on assessors to keep values higher for commercial-industrial and apartment values, especially as the Minneapolis-St. Paul area has seem some institutional transactions that would appear to indicate an improving market. Of course, these buildings usually have above-market occupancies and rents, and should not be used to value the general market. However, as always, assessors put more weight on these sales than on sales at lower values, so it is important to review carefully the 2011 values for taxes payable in 2012.
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.
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 Minnesota Tax Court, which handles all property tax disputes. Since filings are required annually, the court calendar is backed up with unresolved matters from earlier years.
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.
Minnesota commercial and industrial properties were recently greeted with forecasts for 2010 taxes at higher effective tax rates. For some jurisdictions, this is the second consecutive year of rate increases, after 7 or 8 years of tax rate drops.
Rates are climbing for a variety of reasons. Chief among these are: reduced growth in the tax base, due to lack of development and new construction; significant valuation reductions in residential properties that shift the burden to the commercial sector; big valuation cuts in the commercial sector, putting upward pressure on rates; a transfer of funding responsibility for many programs from the state to local governments; and the potential withholding of local governmental aids from the state to the localities as part of budget-balancing measures.
A Minnesota Tax Court judges recently ruled that an assessor was not qualified as an expert, and could present appraisal evidence at trial. The court reasoned that the assessor did not have the appraisal licensure necessary to ensure compliance with the Uniform Standards on Professional Appraisal Practice ("USPAP"), required under state law. As a result, the county could not present any appraisal evidence in the case.
The ruling has, predictably, set off shock waves in the property tax area. Other judges of the tax court have or will soon consider similar arguments in cases where the assessor was prepared to testify to an appraisal. If assessors can't testify in tax court, fee appraisers would have to be retained in those cases, potentially a huge expense to taxing jurisdictions.
Any resolution, whether by appeal or legislative action, would likely not occur before sometime in 2010.
Minnesota's Tax Court recently rejected use of the cost approach for a 1.1 million square foot corporate headquarters in suburban Minneapolis. Over $120 million was spent to expand the campus by nearly 500,000 s.f. the year prior to the assessment. The outlay included over $62M spent on a 350,000 s.f. office center, considered by all parties to be a functionally ideal design. The court agreed with the taxpayer that the $120M expenditure, along with another $20 million spent over the next two years to update existing buildings, did not equate to market value going forward.
The court also rejected use of the income approach for this owner-occupied property, because there were no meaningful rent comparables. The court settled on a sales comparison approach that yielded values of $73M- $85M for the three years at issue, a significant reduction in value from the assessment.
Many owners saw red when Minnesota's truth in taxation statements arrived late last fall.
Owners wanted to know: why hadn't values been reduced to mirror the market decline evident by the end of 2008? The reason in most cases is that the assessor values the property as of January 2, 2008 for the pay 2009 taxes. Assessors argue that in early 2008, the market freefall was not apparent.
There is still hope for relief. The question of when market softness became apparent is sector and property specific. Properties with vacancy issues that were emerging or knowable in early 2008 are still ripe for appeal. Leasing and tenant problems that are not apparent to the assessor should be shared with the owner's property tax professional.
A pay 2009 tax petition must be filed by April 30, 2009, so owners and managers should act now.
For the first time since 2001, commercial effective tax rates are climbing. Taxpayers are finding out not only that are their properties hit with higher rates, but are also assessed at all-time highs. This is especially troubling, given the recession and its undeniable impact on property values.
Assessors may not be reacting to the market changes quickly or strongly enough. Assessments are usually tied to market sales of comparable properties, and with the credit freeze, transactions have virtually stopped. This is a normal precursor to sharply lower asset values for real estate. By the time this trend is fully appreciated by assessors, properties will be coping with taxes due from prior incorrect valuations.
It's important that owners and managers react to the market shift by protecting their interests. The appeal deadline in Minnesota, April 30, is approaching. No commercial taxpayer should ignore that remedy this year.
The Massachusetts Appeals Court recently held that in the case of Stanley P. Roketenetz, Jr. v. Board of Assessors of Lynnfield 72 Mass. App. Ct. 907 (2008) that the taxpayer must allow the assessors to physically inspect a property under an appeal for abatement of property tax. Failure to allow such access gives the Appellate Tax Board the authority to dismiss the taxpayer's appeal. The taxpayer argued that this inspection violated the Fourth Amendment to the United States Constitution, which prohibits unreasonable searches. The Court held that the Fourth Amendment did not apply to the discovery process of a property tax appeal unless there was evidence that the tax assessment was a subterfuge to gain access to the property. The lesson here is that if the assessors request it, you must provide access to the property under appeal. If you refuse to allow the assessors to inspect the property, your appeal will probably be dismissed.
Although Minnesota's legislative session made some minor changes to the laws relating to appeals of income-producing property, a change to the "death penalty" provision was not passed. Information must be provided to the assessor within 60 days of the filing deadline or the petition is dismissed. There is no opportunity to cure this failure, so the taxpayer must wait and challenge the next year's assessment.
The legislature was asked to change the penalty to something less automatic, requiring a motion by the county and a decision by the Tax Court. This might have resulted in fewer dismissals, as the Minnesota Tax Court is currently taking a very mechanical approach and dismissing a number of petitions each year. However, opposition from the assessors helped stop this change.
Taxpayers must be careful to comply with the statutory requirements if a property is subject to a lease, even if the lease is between related parties and regardless of the relation between the actual rent and market rent.
Minnesota law permits property taxpayers to file a petition challenging value, level of assessment, and other claims by April 30, 2008. The filing deadline is absolute, and if missed, costs the taxpayer a chance to challenge its tax assessment.
Minnesota has a strict disclosure law that requires production of an income-producing property's operating statements and rent information within 60 days after the filing deadline. If the deadline is missed, the petition will be dismissed.
The recessionary pressures evident today are having an impact on the institutional investment market. There is evidence of upwards pressure on cap rates, and transaction activity has largely dried up. In addition, some assessors are focusing on residential values, given the freefall in that market, and may not be tuned into the problems facing commercial properties. Filing opportunities should not be ignored in this environment.
In a recent decision, the Minnesota Supreme Court ruled that leases may be subject to mandatory production under Minn. Stat. §278.05, subd. 6(a), the "sixty-day rule". This statute requires the production of income and expense information and other data within 60 days of the tax petition filing deadline of April 30. The penalty for non-compliance is dismissal of the petition.
The decision—Irongate Enterprises v. St. Louis County—noted that the taxpayer responded to the county's request for leases for the 15 tenants in the property by inviting the assessor to travel to California, where the leases were kept, to review them. The Court took a dim view of this tactic in affirming the tax court's dismissal of the case.
The case is a reminder to deal forthrightly with reasonable assessor requests, remembering the ultimate goal of securing a fair assessment for the property.

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