Property Values, Real Estate Taxes Downtown – What’s Right? What’s Fair?

business_arguing.gifA digression on the Beef O’Brady’s post has brought up an interesting issue. I ended one of my comments with the statement, “The closest thing to a “simple answer” for downtown retailers would be a program to reduce businesses’ overhead by some sort of commercial property tax relief that can be passed through to tenants. Don’t ask me for specifics, I don’t write policy, but I’m sure there are some good programs out there we could start from.” On other related article checkout this blog about renting apartment an apartment for the first time.

Then Kiffi Summa said,

Some years ago, five or more, the legislature , in response to growing property tax levels, instituted the State General Tax, which is line # 9 on the property tax statement.

If you are only a residential property owner you won’t have a $$ amount on that line; this was done to shift some of the tax burden onto commercial properties. (Legislators listening to SOME voters). This created a HUGE problem for small town commercial districts throughout the entire state, and an added hurdle for small independent businesses.( It added 4-5 K to our commercial taxes that year on one small building). It was as if the legislature didn’t see the impact this would have, statewide.

State senator (and newest Rice Co. judge) Tom Neuville responded,

I have to disagree with Kiffi’s remark at Post 32. I’ve heard you explain the Statewide property tax this way before, and it’s not correct. In 2001, the state eliminated the general education property tax levy and paid for the basic K-12 formula allowance with general fund dollars. This would have resulted in too large of a property tax decrease for commercial/industrial properties, in the opinion of some legislators. So the Statewide property tax was imposed only on commercial/industrial properties,( not residential or farms) at a specific dollar amount, with the money used for other educational aid. In the past several years, the DFL has tried to freeze the levy rate, rather than the dollar amount, so the business tax would increase with market values in the future. The result of the 2001 action was still a net property tax decrease for commercial properties, even with the new state property tax. If a business property tax went up in 2002, it was probably due to increase in FMV by the assessor. The 2001 decrease has been for the most part neutralized by new property tax levies which have been imposed, by local governments and valuation adjustments.

I found this exchange informative, and interesting from several angles. Whether the problem stems from free market forces (i.e. real estate values) or government “interference” (state tax laws) or is made up of other factors, downtown building and business owners have a problem: If they’ve purchased the building in the past ten years or so, chances are that what they take in every month is less than what they pay out in mortgage, utilities, taxes, and building maintenance. If you are looking for the best place to sell a house, visit themunirgroup.ca for more information. This results in rents that are too high for the business volume of most downtown retailers to support. You don’t need to be an economist to see that this is a problem. On one hand, Northfield needs a stronger commercial tax base than it has; on the other hand, the current commercial tax level on the old buildings downtown (which require so much maintenance and are more limited in the kinds of businesses that can locate there) is onerous.

Earlier this week I asked Ross about the National Trust’s Main Street Program – they have an Internet-based “Shop Main Street” program that should be of interest to the businesses here in the historic district. But, because the State of Minnesota hasn’t signed on, we aren’t eligible for some of these things.

Does the EDA have a position on this?
Does the Chamber of Commerce have a position on this?
What would help, and should we care?

19 thoughts on “Property Values, Real Estate Taxes Downtown – What’s Right? What’s Fair?”

  1. Tom: In response: this will not be able to be made clear by me without charts and back and forth discussion , so maybe the best way is to provide some real numbers, off of my tax bills, for the building that Victor and I own at 306 Division.
    I would imagine your explanation of the actual steps is accurate, but what I think we were discussing here is more focussed on impact on small town, local business and building owners.

    In 2001, before the STate General Tax, line #9, the market value on the bill was 223,400. The school levies totalled 1483.35 (.part state enforced, part local).
    In 2002, the first year the SGT first appeared on my bill, the market value increased to 348, 200. The SGT amount was 2270.80. the school levies were 549.78. That year the total tax bill went down approx. $100.

    In 2003, the market value went up to 400,800. The SGT amount was 3043.59. The school levies were 776.60. The total tax bill was $11,010.

    Let’s skip to 2007, for brevity .. In 2007 the Market valuation was 726,000. the SGT was 4896.67. The school levies were 1811.80. ( so now the SGT and the school levies total 6707.47, more than 1/3rd of the total bill). The total tax bill was $18, 612.

    I do not see how small town commercial is not DIS-advantaged by the state’s shift to the SGT, imposed on commercial properties….
    I may be wrong; I’m not a math wizard.

    By the way, Congratulations on your judgeship! You will look straight out of Central Casting with that distinguished white hair and black robe….

  2. Tracy –

    There are several factors that have contributed to rising real estate taxes in the Downtown District. However, the bottom line for building owners is that most, if not all, of them have been experiencing 30% average annual increases every year since 2000.

    It is a serious threat to our authentic downtown and, many believe, to the overall economic vitality of our community.

    – Ross

  3. Ross,
    I heard the downtown is in a TIF district. (I am not sure I stated that correctly). Do you know anything about that? Can downtown buildings get help with property taxes?
    Julie

  4. Hey Julie –

    Oh my gosh, where’s Mac when you need her…

    …or Dixon for that matter.

    Yes, as I’ve read the ancient histories of Northfield there was a TIF district known, at least to some people, as the Downtown TIF District. However, I have also heard that there were a few other TIF Districts that were in or near what the NDDC (look out Brendon, I’m putting on another hat) has long called “Downtown”, the C-1 and C-2 Zoning Districts.

    As I understand it, some of these districts were rather small-scaled and/or near expiring and so they, as well as some of the surrounding areas, were combined into the Master Development District. To oversimplify, based on a hand-drawn sketch, the Master Development District goes a little more west and south than Downtown. For more on this topic, ask Dixon Bond.

    At Tuesday’s NDDC Forum, we learned that the surplus residuals from the Master Development (TIF) District became the source for both the Master Development Fund (available to support economic development throughout the District) and the Streetscape Projects (currently being planned and implemented in Downtown). For more on this topic, ask Kathleen McBride.

    You are, however, groping in the right direction. Indeed, a Downtown District (as we (at the NDDC) have learned from now former State Senator Tom Neuville and League of Cities Attorney Tom Grundhoefer) may be potentially one of the most effective tools for addressing the real and significant threat of ever and substantially rising commercial property taxes.

    I will look for you tonight during Winter Walk to share background and details on this topic.

    – Ross

  5. Given the information, it seems the problem is that property values need to be held down to reflect the limited value of downtown business property. Property owner should not reap the windfall of huge property values and claim poverty when it comes to paying appropriate tax rates.
    There needs to be a recognition, however, that any tax relief given to business owners will hit seniors who have no ability to increase their income to handler higher tax rates, home business owners like me, who can’t even afford office space downtown and many others with legitimate arguments for tax reductions.
    This is a tough balancing act, but it would be more palatable if downtown business owners could show that they’ve exhausted all options for increasing revenue.

  6. See Tracy… you ask an obvious question:

    Does the EDA have a position on this?

    My obvious answer to “you” is: well, in your 6 year term, was it discussed, ever? Now with the advantage of hindsight, you see the value and the appropriateness for the EDA (just one example) to weigh in on this facet (DT Economics) of the local situation.

    While it is complicate as both Kiffi’s and Judge Neuville’s remarks illustrate, the need for understanding the tax code and it’s impact at the EDA level and the City Council’s. The former owner of the Byzantine restaurant, AK Kahyoum (spg?) spoke regarding just this… crazy rising commercial taxes, at the Council’s public hearing on the ’08 budget. The non-responsive Council seemed to glaze over. I guess there’s little else they could do, given their purse strings are tied and that purse is not bursting at the seams.

    Actually, I don’t believe Line 19 has a direct impact on the amount of tax we pay – that’s determined by the code and the market value.

    There’s where the relief lies … in the code with some innovative new provisions.

    From an EDA perspective, inasmuch as the TIP Strategies Economic Plan identifies the DT as the major EXISTING community component to realize a stronger economic reality for Northfield (That’s my read …) while others are the illusive would-be development of industrial land … not off the chart but clearly off the map, at this point … and collateral values Northfield has, e.g. work to strengthen our relationship with the colleges and their alumni … strengthening the DT may be the most economically viable – the easiest to accomplish … and when the DT is stronger … will have a direct positive impact on realizing the others.

    A exciting and functioning DT seems to everyones advantage as opposed to the “board up” and “vacant” syndrome.

    You also ask: Does the Chamber of Commerce have a position on this?

    That’s a loaded question .. or at least a candid answer might be explosive.

    As a former EDA member, how would you answer that, given the Chamber’s partnership status with the EDA as pertains to the TIP plan? What results could you point to?

    Then, you ask… tongue in check, I’m sure: What would help, and should we care?

    In reverse order: Care? Well … yes!

    How? Paraphrasing George W’s father – “A thousand points of possibility”

    Tax relief would be a step … providing, it is administrated so it realizes its intended end-goal.

    Civic improvements that attract more spending – these might be a library – an ice arena – a medical complex in the northwest industrial zone – a skateboard park in Ames Park – filling our two up-scale DT condo projects – filling the existing industrial land and vacant industrial buildings, etc.

    Harken, the Christmas list appears! Service Master to Coach Crafters – Upper Lakes to College City Beverages – Echo to Cottage Industries – Sketchy Artist to Scandinavian Market Place – Sweet Pee’s to D Butterfield’s – Designer pizza in old Ideal – something to fill the 600 block of Division St – A classy restaurant in Bagel Bros space – A classy restaurant in former cocoa bean – support all the existing DT business – and, more tolerable winters and fewer mosquitos in the summer!

    Returning to TAX relief – for those of you who think it’s such a bad idea, let me direct your attention to the Green Acres Property Tax Program. This program provides for farmland taxed at an ag rate but facing an increasing tax rate driven by conversion of neighboring farmland into housing developments, deferring the tilled acreage’s tax increases (resulting from real estate comps) until sometime in the future when the ag land might succumb to the developers.

    I wish i had better answers to “how”. Maybe the blog will come up with some.

    Victor, the little voice said … “be careful what you wish for”. Not everyone agrees with you.

  7. Just a note: tax relief, if it ever comes, is likely to come on the wings of flying pigs….But it needs to be remembered that IF it came, it would come to building, not business owners and that some of those ARE seniors, living on fixed incomes ( now diminished ) ; building owners would be pleased to reduce the tax portion of their rents (also diminished) in order to help the business owners… and everyone could look for new and innovative recipes for rice and beans!

    cynicism, not sarcasm….

  8. A couple of years ago, I heard from a downtown building owner with extensive real estate experience–both here and in other communities– that after the purchase and rehabilitation of an historic downtown building, he’d spent about $1.1 million. After the renovation, the building was appraised for somewhere in the neighborhood of $800,000-850,000, and this was even before the market tanked. (Not surprisingly, he ran into a number of unforeseen difficulties and complications in getting the building up to code.)

    It still seems incredible to me that for all our talk about valuing our historic downtown, we STILL don’t good programs (local, regional, state, or federal) to provide incentives for preservation.

  9. I suggest you all call Paul Knutson (Rice County Assessor) and challenge the major increase in your property taxes. I have had numerous conversations with him, and he said few people will challenge the increases. I was successful in getting the taxes reduced on the apt. complex I was managing. There is a deadline for the challenge, so look at the date on your bill.

  10. OK, this is scary, but Victor and I may agree on something. My earlier post was a little scrambled, due to grandchild distractions, but I was thinking of the agricultural tax provision that defers some taxes on land until its sold to ease the tax burden of soaring property values. If the downtown property is doubling in value, then maybe some tax can be deferred until a sale of the property. That might make sure the community gets the taxes it needs, but property owners get some breathing room. If a property owner keeps the land for a decade or so, perhaps some of the tax could be forgiven, as a reward for the long-term investment.
    I just don’t think businesses downtown should get lower taxes and then sell for huge gains.

  11. Good advise Lisa!

    I, too, challenged a huge (164%) property tax increase on my farm and it was brought down to a 27% increase. It doesn’t hurt to challenge and if more people did perhaps the message would come across more clearly.

    Julie

  12. Julie, sounds like you almost “bought the farm”

    Remember when I wrote: Victor, the little voice said … “be careful what you wish for”. Not everyone agrees with you.

    A lo and behold along with the Christ child’s coming there’s another Christmas miracle, agreeing with VICTOR.

    But Anne, you then added:

    “My earlier post was a little scrambled, …… I was thinking of the agricultural tax provision that defers some taxes on land until its sold ….. If the downtown property is doubling in value, then maybe some tax can be deferred until a sale of the property. That might make sure the community gets the taxes it needs, but property owners get some breathing room..”

    Actually, succinctly stated as you have Anne, that’s what Green Acres is, as I understand.

    So what we rally have here is not so much an agreement, but an who’s idea was first, question. Dueling Ideas! You can have it. Run with it. Sell it. blog it. Write articles in Real Estate journals… Herald the idea: Northfield pushes the envelope of historic DT survival – works with state legislators to provide needed tax relief!

    Well lets all join hands and sing Beautiful Savior.

    ‘Nother note: Ya’ll, were you DT last night? Every Thursday night should be like that.

    Is it true the Key Kids put out the luminaries all over the DT? That and good spaghetti too, all in one week.

    Wouldn’t this be cool. Next winter, just walking across the new Mill Pond foot bridge to Ames Park, we can all take a bit of time from Division Street, to watch skateboard demonstration on the new Skateboard Park facility. And also take an occasional sleigh ride ( I think they call then Cutters) around the park grounds. I think the NDDC’s working on that co-op venture with Kenyon where they have their Cutter Days in February.

    There’s reason enough to contribute to the matching $10K grant the Skateboard coalition just received. Did I read that on LG or some other place? Anybody know more about it?

    vs

  13. Curt,
    I saw that on the news. It will be interesting to see how the gov’t authorities will handle it. According to a couple interviews of the citizens of the area they are only concerned if they end up “paying” for the mistake. I can’t blame them!

    Julie

  14. Anne, you said

    “Property owner should not reap the windfall of huge property values and claim poverty when it comes to paying appropriate tax rates.”

    There are two ways I can think of for a landowner to capitalize on the windfall of huge property values (and thereby pay those pesky increased taxes).

    The first is to raise the rent (which is no fun if your building is being relied upon by low-income tenants who cannot just turn to their bosses and get raises. If the tenants are a business, I guess they can just raise their prices and hope their market share stays constant (study just a little economic theory to know that does not happen)).
    The second is to chase the “greater fool” who will pay more than the rent is worth to buy a property hoping to turn it again soon, making money not on value-added, but rather on speculation. A sort of pyramid scheme.

    This is why I contend that the value of a building/property for property taxation purposes should only be changed at time of sale. Unless your objective is to force sales of property in pursuit of more tax revenue, because some property owners (residential and commercial) cannot afford to pay increased taxes just because they have a large “paper profit”. There are economists who argue that this is the real reason we have property tax at all, to enforce Adam Smith’s invisible hand. You anticipated this when you later wrote:

    “If the downtown property is doubling in value, then maybe some tax can be deferred until a sale of the property.”

    Meaning that you are capturing some of the increased value against the future sale of the building. Two serious issues there:

    The owner could find themselves “upside down” due to tax increases, that is, after paying deferred taxes they might not be able to pay off the mortgages from the proceeds of the sale, especially if they have refinanced to pull capital out of the building (and paid tax on that profit associated with the change in basis value, I presume). Remember, the value of commercial property to a buyer is based on the potential income stream value, not on the fact that the building used to be worth a lot more before the market turned south.
    Cities need tax money now, not at some time in the future, should they have to bond for infrastructure maintenance just because properties are not turning over fast enough?

    You then wrote:

    “I just don’t think businesses downtown should get lower taxes and then sell for huge gains.”

    I could not agree more, and would like to see short term capital gains rates applied against a longer time (rather than just raising the rate). Tax what you don’t want, subsidize what you do. Taxing worked well for new power plants, which we effectively tax to death by encouraging huge NIMBY battles every time someone wants to build one. Subsidizing worked even better when we subsidized poverty so well with the poorly executed ADFC program that we ended up getting more poverty rather than less.

    In another post, in a similar vein, I dichotomized the downtown property owners into those who are speculating on the rising values of the market while others are treating their properties as income streams. Figure out which kind you want (both have strengths and weaknesses) then build tax policy accordingly. I, personally, prefer the former, who build value for society rather than feeding on the greed of the greater fools.

  15. Recently, the NDDC posted on this topic and the Northfield News published it as a guest column: The Economic Dangers of Ever- Rising Downtown Property Taxes

    Since 2000, these building owners have experienced annual average tax increases of 30%. Think about it, their property taxes have risen 30% each year for the past seven years.

    Ross – in your comments to the NDDC post, you teased us with mention of a plan and said you’re ready to share. Do tell! Can Locally Grown scoop the NDDC? 🙂

  16. As the old axiom says, one of the things we all can be confident of is that property taxes will increase. I think Tom’s analysis of the state general tax on C/I property is correct. I also believe that Kiffi’s issues are related to increasing market values of her property. When the market value increases all taxes increase accordingly. The Assessor is charged to have all properties within an established level of true value each year. As many of your note, we are all seeing significant increases in market value of our commerical property. The quesion for right now is “are the values accurate?” Value on one of my properties was increased 30% this year….with absolutely no property improvements made.

    It is also important to know that there will most likely be attempts to increase the state general tax on C/I property this legislative session. There were bills last year that propopsed raising it from the present 10% rate to 12% and 15%. The Governor did not support that effort and it died, but I”m sure it will be back. Minnesota is facing a $350 million shortfall right now. I’m guessing this shortfall may increase to $800 million (or possibly $1 billion) when the February economic forecast is released. One can keep spending plans in place and raise taxes….or reduce spending to match revenue…or possibly some combination of both. But I would expect to see efforts to increase the C/I state general tax rate from this legislature.

    Might be good to get our area legislators to give a presentation on C/I taxes at the next NDDC meeting. I trust they have thoughts about this. At least they can tell us how they would vote if an increase is proposed.

  17. The NDDC has made some great strides in addressing the property tax issue, working with state and regional officials. See Ross’s blog post on the subject for more details.

    I also think we should lobby state officials so that Minnesota becomes a state partner in the National Trust for Historic Preservation, so that we can take advantage of benefits including its Main Street programs.

  18. Tracy’s comments about the National Trust for Historic Preservation are worth looking into. I know at least part of the downtown is eligible for historic tax credits and other programs tied to the Act. If there are things that the city can do to help historic property owners we should invesitgate them.

    Another thing that should be discussed is leases. I don’t know how many downtown owners use triple net leases, but it is a good way to keep your tenants involved in the tax issue. If tenants have no tie to the tax bill they don’t really get active in the issue. Having more allies in this issue is the name of the game.

    Some may remember….especially Tom Neuville….when commerical tax rates in Minnesota were higher than they should or could be to keep business healthy. The legislature enacted (1998?)an across the board 10 percent reduction on commercial taxes. This was a reaction to well presented information.

    As I said in my earlier post, we do need to stay vigilant about what the legislature is planning. In 2007 there were several plans to increase commercial tax rates. The people behind those bills are still there…and may be there after November 4th.

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