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Property Taxes

By Jim Mayland, Research Manager

Jim Mayland

2006 was a great year for investment sales. In fact, 2006 set a record for both sales volume and sales prices. These prices were driven higher by the declining cap rates of the past five years.

So, what does all of this 2006 good news mean for these new building owners in 2007? Not as much as everyone fears. The buildings that sold in the early part of 2006, and sold for higher than estimated value, will possibly see an increase in their property taxes this year.

Index vs. Mortgage and Cap Rates

Source: Real Capital Analytics

The real change is going to come with the 2008 taxes. By then most of the city assessors will have had a chance to get the updated, sometimes inflated, definitely higher values in their books. These higher numbers will undoubtedly translate into higher taxes in 2008 and beyond.

And what about the buildings that have not been for sale? Will they be punished for the lower cap rates by having their estimated values increased? Time will tell for sure, but if history is any indicator, building values seem to increase en masse, not based just on their last sale price, but also based on their occupancy and upgrades.

Compare these potential tax increase with the annual study completed by the National Association of Office and Industrial Properties (NAIOP). According to the 2006 NIAOP study, Minnesota businesses pay the highest property tax costs per worker in our region, as can be seen in the chart below.

Property Tax Cost Per Worker

Source: NAIOP 2006 Comparative Tax Study

As you can see, Minnesota’s property tax cost per worker is 18% higher than South Dakota, 49% higher than Iowa, 75% higher than Wisconsin, and 3 times North Dakota. And this is all before the record sales that were recorded this past year.

After speaking with some knowledgeable industry experts here at Colliers, it is estimated that on average the property values will increase by double digits for sure, most likely in the 15% range. The property taxes, though, will only increase by about 10% on average.

What tax valuation increase do these increased values translate into on a per square foot (PSF) basis? Well, in the Minneapolis CBD the average tenant would look to pay an increase of around $0.30 PSF. While that doesn’t seem like much, the increase for an average 10,000 SF tenant could be around $250 per month or $3,000 per year. Industrial tenants would likely see about half that increase in the average office warehouse space with estimates of $0.15 PSF or for the average 10,000 SF tenant it would be $125 per month and $1,500 per year.

While the increase isn’t as dramatic as the increase in gas prices of the past few years, it is still a cost that must be taken into account for Minnesota businesses, whether they currently are located here or are just considering relocating here.