Institutional investors may expect an increase in real estate taxes when they acquire assets for historically high prices, but do those sales represent market value for property tax purposes? Moreover, should they be used to value more normal properties for property tax purposes?
Twin Cities commercial real estate has been experiencing substantial investment by real estate investment trusts (REITs), insurance companies, and other national investors. There can be many reasons for this: good market fundamentals, low unemployment, high quality of life, number of bike lanes, the list goes on and on. However, many of these investors are paying near-record and record-high prices for assets in the Twin Cities.
For example, Ameriprise Financial Center sold to a Florida investment firm for $200,000,000 ($163 per square foot); Norman Point II in Bloomington sold to a Chicago investment firm for $52,500,000 (also $163 per square foot); and Excelsior and Grand sold to an Ohio investment firm for $317,589 per unit. Meanwhile, many average office properties sell for less than $100 per square foot, and many apartment complexes sell for less than $150,000 per unit.
There are many reasons national and international investors are acquiring commercial real estate in the Twins Cities and these sales should be analyzed very carefully if they are to be considered for property tax purposes. However, it is not surprising to see many market values below the values indicated by high-priced investment sales, because those sales potentially traded based on investment value.
Sales that garner the attention of national investors will often be institutional-grade properties.
Institutional-grade property is defined as “real property investments that are sought out by institutional buyers and have the capacity to meet generally prevalent institutional investment criteria.”[i]
Investment value is “the value of a property interest to a … class of investors based on the investor’s specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessarily typical of the market.”[ii]
Institutional investment criteria include considerations such as high-credit tenants, low historical vacancy, long-term leases, premium locations, etc. However, the criteria can include more subjective considerations, such as being a 300-plus unit apartment building to balance risk in a portfolio; or, being an office building occupied predominantly by government tenants, because the investment plan defines government buildings as the primary asset type. As a result, when properties that fit certain criteria become available institutional-grade investors may willingly overpay to secure the asset for their portfolios. Accordingly, purchase prices of institutional-grade properties are usually determined based on the investment value rather than general market value.
In Minnesota, all property shall be valued at its market value when being valued for property tax purposes.
“Market value is objective, impersonal, detached; investment value is based on subjective, personal parameters.”[iii]
When subjective parameters come into play, an institutional investor will outbid and out pay traditional investors that are focused on strictly on market-based criteria. Thereby creating a substantial difference between investment value and market value.
Therefore, assessed values should not be based on investment sales, except in the rare situation where the investment sale actually represents market value.
[i] The Dictionary of Real Estate Appraisal, p. 102 (2010 5th Ed.).
[ii] Id., p. 104.
[iii] Simonson v. County of Hennepin, 1997 WL 45311 (Minn. Tax) (quoting The Appraisal of Real Estate, p. 23 (10th ed. 1992)).