More is Less

Why you should have bought the IDS Center

[Editor's note: A correction ran concerning this story; see end of article.]

Last week, when the Minneapolis City Council held its annual Truth in Taxation hearing, there was little carping from the homeowners about their rising property tax bills. For the most part, the hundred or so people who crammed the chambers spoke out against the proposed reductions to the Minneapolis police force. A few speakers even volunteered that they would be happy to pay more taxes, just so long as the city keeps cops on the beat. Given the ubiquity of double-digit property tax hikes, that was a bit surprising.

How to explain this? It may be that the majority of Minneapolitans are just an unusually civic-minded bunch when it comes to public spending. Perhaps they were in a fatalistic mood, having concluded that higher taxes are the inevitable consequence of rising property values, reductions in state aid, and big government inertia. Or maybe there were just too many good things on TV to bother trudging downtown on a cold, wet night.

Whatever the case, it's a good bet that homeowner ire would have been greater if more people had compared the trajectory of their tax bill with that of some of the most prestigious and valuable properties in the entire city. Consider, for instance, the IDS Center. In 1999, the assessed value of the landmark skyscraper was pegged at $155 million. In the intervening years, the number steadily declined, and by 2003, the building's value was estimated at $114 million.

Of course, says acting City Assessor Valerie Thompson, there were plenty of good explanations. After 2001, she notes, the downtown real estate market slumped dramatically--the result of a glut of big new buildings coming on line, a spike in office vacancy rates, and a broad economic slowdown that had businesses hesitant to expand.

But then a funny thing happened.

Last month, news broke that the Chicago-based John Buck Co. would purchase the IDS Center for a reported $220 million--nearly twice the skyscraper's assessed value. In Thompson's view, the city's lower assessments reflected market conditions at the time they were calculated. "Assessors are basically historians," she offers. "They don't look at a crystal ball and foretell the future. They try to follow trends in the market, and after 9/11 those trends were pretty gloomy."

Maybe so. But even in the supercharged residential real estate market, a doubling in market value in the course of a single year would be regarded as a freakish occurrence. In the commercial real estate market, however, it is business as usual. This begs a question: Is the city getting as much money as it should from its commercial and industrial landowners?

The answer is complex, says Myron Orfield, a professor at the University of Minnesota Law School and metropolitan planning expert. One problem, Orfield notes, is that it's much more difficult to assess the value of commercial real estate than to assess the value of residential real estate. In the home market, comparable properties sell frequently; therefore, it is easy to determine what a home is worth. Large commercial buildings--especially distinctive or unusual ones like the IDS Center--sell much less frequently, so there are fewer grounds for comparison.

But there are other factors, too. Unlike the average homeowners, the owners of the big commercial buildings--mainly large institutional investors--are extremely aggressive in challenging assessments. As a matter of routine, many, if not most, of these investors contest their property tax bills in the Minnesota Tax Court.

Chicago-based Equity Office Properties, for instance, spent three weeks in court with the city this summer, challenging assessments on one of its premier downtown holdings, the gleaming, five-year-old U.S. Bankcorp Center. While the 30-story building is near full occupancy--and while EOP paid approximately $174 million for it in 2003--the company argued that the building's 2000 assessed value should be reduced from $114 million to $86 million. A decision on the case is pending.

Ironically, such challenges to the city's assessments come at a time when the owners of commercial and industrial properties are being asked to pay a smaller and smaller portion of the overall property tax bill. In part, that is a product of a change in state law, enacted by the legislature in 1999 at the behest of business interests, which permanently reduced tax rates on commercial and industrial properties. As a result, homeowners, who paid approximately 32 percent of Minneapolis property taxes in 1997, are expected to shoulder 53 percent of the burden next year.

In Orfield's view, the decision to cut commercial-industrial rates--which had bipartisan support and was championed by Minneapolis DFLer Dee Long--was a clear error. While business interests were correct in their complaint that property taxes were higher in Minnesota than in other states, the downtown Minneapolis real estate market was still very competitive in the late '90s. Overall cost-per-square-foot--the ultimate bottom line--compared favorably with costs in other metropolitan markets, says Orfield. Coupled with the state's relatively low corporate income tax, he adds, the commercial real estate market in the city was competitive--a fact borne out by the relatively robust condition of the downtown corridor.

The eye-popping $220 million fetched by the IDS Center, meanwhile, is expected to have an effect on the city's assessments of the value of downtown real estate. At the very least, it should serve as impressive evidence that the IDS building itself is worth a little more than $114 million. Make that a lot more.

Correction published 12/22/2004:
Last week's story about property taxes in Minneapolis ("More is Less" by Mike Mosedale) stated incorrectly that former State Rep. Dee Long championed the rate reductions for commercial-industrial properties that were enacted in the 1999 legislative session. Long, who supported more modest cuts in previous years, left public office in 1998. City Pages regrets the error.

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