When big office buildings are sold for big profits, property taxes increase

A rash of big-ticket commercial property sales in the Twin Cities during the past two years sparked optimism in the regional economy and big profits for real estate owners.

There's another effect: Property taxes are rising quickly for businesses all around the region.

Commercial property taxes, unlike those for most residential properties, are passed on to tenants. And a substantial bump in the value of one property can raise the cost of business for a company occupying another one — even if it's across town.

Real estate magnate Sam Zell made a $100 million profit selling the Normandale Lake Office Park, the largest office complex in the state, last November. And the buyer, a partnership led by MetLife, walked away with an income-generating property likely to rise further in the future.

Now, the companies leasing space at Normandale Lake are facing rent increases of 17 percent to 36 percent, depending which building they are in, according to the latest Hennepin County property assessments released in the spring. That's well above the 10 percent jump in valuation of all commercial properties in Hennepin County from 2014 to 2015.

"As a tenant in a long-term lease, we are a hostage and we have to pay the ransom," said Dennis Smith, chief financial officer of Frank N. Magid Associates, a consumer-research company that leases space at 8500 Normandale. That tower's assessed value spiked 35 percent this year.

If the firm's property taxes increase at the same rate, the company will pay $20,000 more for the exact same space with nothing different other than a new building owner. "The fact that it is a surprise means you can't budget it. It comes out of left field," Smith said.

The Colonnade, a 356,000-square-foot office complex along Interstate 394 in Golden Valley, has not made any significant changes to the structure, yet its assessment jumped 45 percent this year. "The Normandale sale was definitely a factor that affected this value," said Jeffrey Wenngatz, senior adviser at Cresa Minneapolis, a real estate firm that works exclusively for tenants.

In the past two years, average gross rents along the I-394 corridor have increased 50 percent, from $16 a square foot to $24 a square foot, said Jim Vos, principal at Cresa.

Government assessors are responsible for appraising every commercial property every year. Hennepin County Assessor Jim Atchinson said his team considers sales, occupancy, a building's raw financials and other factors to determine its value.

"There have been a number of large office buildings sold in the last couple years. One sale doesn't make the market, but four, five, six of these sales will make a difference," Atchison said.

It doesn't look like these sales will cool off anytime soon. A midyear market report by Cushman & Wakefield/NorthMarq of Bloomington found that there are more investors, and more money, chasing Twin Cities properties than there are available buildings.

Even long-term property owners are beginning to consider selling now that such huge prices are being achieved, the report found.

Because there's a lag time between when the property's new assessments are released in March and when the tax bills go out, 14 months later, tenants may be in for a surprise next May as a result of all these sales, Vos said.

"We now know the assessed value. Taxes are likely to go up. Budget for this," he said. "Even if your building isn't one that sold, guess what? Coming soon to a building near you, rising property taxes."