Commercial property tax appeals go through roof

Owners of apartment, retail, office and industrial buildings who have seen their properties' market values fall, but not their taxes, are trying to do something about it: More are challenging assessments they believe don't reflect the depressed state of the commercial real estate market.

For owners such as Larry Homstad, there's a lot at stake: His $112,303 tax bill is his single biggest expense on some small buildings he owns at E. Hennepin Avenue and Stinson Boulevard. Homstad's recent appeal of a $3.2 million valuation was denied by Hennepin County, and he said he might be forced to sell the property, a former General Mills research facility that now serves as a small business center.

In Minnesota Tax Court, where commercial properties account for the vast majority of cases, the number of appeals has almost doubled from last year, according to Chief Judge George Perez. In Ramsey County, commercial property appeals are up this year by more than 40 percent, according to Assessor Stephen Baker.

Hennepin County doesn't separate figures for residential and commercial properties, but Assessor Jim Atchison said that overall appeals to state tax court totaled 1,891, up about 52 percent. That's the highest level since 1994.

The appeals to tax court likely understate the extent to which property owners are challenging assessments, said Herb Tousley, a senior vice president of Coldwell Banker Commercial Griffin Companies. That's because many appeals are settled at the city or county level, he said. CBC Griffin has handled more than a dozen appeals in the metro area, getting value reductions from 5 to 22 percent.

Although some commercial property owners routinely appeal assessments every year, Tousley said an increasing number of his clients this year are appealing for the first time.

Perez agrees. "Our court is very sensitive to a downturn in the economy," he said. In the current economy, assessors' valuations have had trouble keeping up with the rapid decline in the market. This year's tax bills, payable in May and October, are based on valuations from January 2008.

Assessors also consider a commercial property's income-producing capacity when valuing it, looking at measures such as vacancy rates and rents. Those benchmarks have dropped considerably for all types of properties in the real estate market meltdown, according to research by several area real estate firms.

A recent report by Bloomington-based NorthMarq said the average vacancy rates for Twin Cities area office and industrial properties are the highest since 2004, while average rents for retail properties are the lowest since 2002. Speculative land values in some areas are down by as much as 80 percent since 2007, NorthMarq said. Another recent report by GVA Marquette Advisors said the average vacancy rate for area multi-unit properties was the highest since 2005.

NorthMarq Vice President Diane Kern said clients these days are asking assessors to consider other factors, like unpaid abandoned leases or deferred maintenance on buildings, that may more accurately measure properties' financial distress.

A tax bill nearly halved

The Penn Lake Shopping Center in Bloomington has seen its vacancy rate soar to 75 percent in the last year, partly because of the dismal retail economy but also due to a recent rezoning that is making it all but impossible to attract and keep tenants, said owner Bob Levine. His family built the center in 1959.

Homstad said he doesn't think he'll go to tax court to appeal the recent decision that left his valuation unchanged. When the market was at its peak a few years ago, some foreign investors who wanted to develop housing expressed some interest in his 6.5-acre site. But their interest and any from other potential buyers has evaporated in the market downturn, leaving Homstad wondering what kind of price the property could get if he puts it on the block.

Homstad said he had only appealed a valuation one other time since buying the property 20 years ago. He said he didn't realize the assessor's office would be able to state its reasons for valuing the property at $3.2 million after he first made his case to the county's Board of Appeal and Equalization.

"The assessor said what the property should bring [if sold]," Homstad said. "That's not the same as what it would bring in today's market."