At a time when home values have been soaring in the Northland, many owners of commercial properties are describing a quite different phenomenon.
“No doubt the residential market is booming and doing great things. But the absolute inverse has occurred for commercial properties because of the pandemic,” said Sandy Hoff, president F.I. Salter Co. Inc., a Duluth-based property management firm.
“There’s downward pressure on rent and income. There’s increased vacancy in many, if not all situations. And long term, the property owners with diminished revenue haven’t been able to invest the amount of money they need in maintenance. So, there’s a lagging effect that will occur, where they’re going to have to catch up in the future,” he said.
Yet, many owners of commercial properties saw little reflection of hard times in the assessed values recently assigned to their holdings by St. Louis County. Instead of the falling values some would have expected, many assessments held steady or even increased.
In all, 66 property owners in St. Louis County filed petitions in tax court to challenge the assessments assigned to their holdings this year. And the vast majority of those contested cases involve commercial properties.
The number of petitions this year isn’t unusually large compared with years past, said Mary Garness, St. Louis County’s director of public records and valuation. She noted that last year, 62 taxpayers challenged their valuations.
But the sheer value of the property in question has grown quite a bit, indicating the higher stakes at play as these cases work their way through tax court in the coming months. Garness said the county received petitions for 155 parcels with a total assessed value of more than $251.6 million for taxes payable in 2020, versus this year, where petitions were filed regarding 174 parcels with a total assessed value of more than $353.1 million — 40% more than the previous year.
Garness said she's unsurprised by those numbers, however, as assessors continue to revalue commercial properties in western Duluth and downtown.
Some of the litigants argue that their property is worth less today than it was before the COVID-19 pandemic struck. Take Miller Hill Mall, for example.
Simon Property Group L.P. petitioned against what it views as an excessive valuation. St. Louis County maintains that the estimated market value of the mall should hold steady at $35.3 million.
Simon corporate communications staff did not respond to the News Tribune’s request for comment on the matter. But the pandemic and the departure of a couple high-profile anchors, Sears and Younkers, have clearly taken a toll on shopping traffic at Miller Hill Mall.
Garness said big-box stores have filed a number of petitions, as well. That list includes Fleet Farm, Menards, Lowe's, Kohl's and Gander RV & Outdoors.
Bill Burns, a Duluth attorney handling a number of tax court petitions, said: “The big-box demise has obviously put a lot of pressure on the value of those facilities.”
Burns represented the owner of the vacant Shopko building at 801 W. Central Entrance that the county assessor’s office had valued at $5.56 million, successfully reducing the estimated market value to $4.17 million in February, only to have the structure sell in April for just $3 million.
He’s also representing the owner of the vacant Spirit Valley Kmart building, who has petitioned to have the property revalued.
Burns said assessors are unfortunately misguided by listing prices at times.
“What you’re trying to sell a property for sometimes becomes the assessor’s idea of what the value is. But value really is determined by buyers, not sellers,” he said.
Garness acknowledged that valuing such structures is not an exact science but said: “We try to stay pretty consistent with the big boxes, in terms of the value per square foot.
“You try to do your best to determine value based on sales, based on the quality of the structure and other qualitative and quantitative factors," Garness said. "But until there’s an actual sale or there’s more detailed information that we derive, it’s hard. It’s difficult.”
“When our process is based on sales ratios, and let’s say there are only a handful of sales, we have to make our best estimation of value based on the information we have,” Garness said.
She noted that the county had about 2,700 sales of residential property to reference, putting assessors on fairly firm ground in that sector.
“But when you get into some of those commercial properties and industrial valuations, where you don’t have a lot of sales, you’re using a lot of qualitative factors and structural components to complete valuations," Garness said.
Hoff agreed sales information is lacking in the largely stagnant commercial market.
“There has not been near the commercial activity," he said. "Commercial values are stable or decreasing. And there certainly is uncertainty as to what the future commercial demand will be for office space. Will people return to the office or will they continue to work from home?”
Garness said if people do continue to work remotely, the market for office space could continue to erode and with it much of the local commercial tax base.
She said assessors aren’t always privy to valuable facts, however.
“Businesses aren’t always willing to share a lot of information. We’re not always able to do interior inspections. We’re not always able to get financial information. And the only time we get that is through an appeal process, unfortunately,” she said.
Retail isn’t the only sector taking issue with St. Louis County’s recent assessments.
Garness noted “some significant increases to the apartment classification,” that prompted a number of landlord petitions, as well.
Starting in 2020, county assessors began to revalue apartment properties using income and expense models to estimate the rate of return they would likely generate, and the new method has led to some significant upward adjustments.
Kingsley Heights Apartments in Duluth went from having an estimated market value of $870,000 in 2019 to a proposed nearly $1.55 million in 2020, for the purpose of determining taxes payable in 2021. That’s an increase of 78%.
“We were very surprised to see how much they’re going up,” said Nancy Cashman, executive director of Center City Housing Corp., which owns Kingsley Heights and a number of other Duluth apartment properties that seek to provide affordable housing.
“It makes it harder and harder for us to operate the properties and continue to keep rents low,” she said.
With the moratorium on evictions that has accompanied the pandemic, Cashman said about 30% or more of tenants’ rent has gone uncollected this past year.
“It’s just kind of a multiple whammy. One, our rents are not super high to begin with. Two, we’re not able to collect all the rents. Three, we’re not able to respond to that. And then four, the valuation of our buildings are going up, so it’s just costing us more,” Cashman said.
Burns, who is representing Center City and other landlords appealing the county’s increased assessments, warned the situation could price some renters out of the market.
“Obviously, valuations are escalating. That escalates the taxes, and it pushes the rent,” he said.
Burns also predicted the valuations could discourage the development of more rental housing, even at a time when the city is in need of a larger inventory.
“I think it’s going to put a real kibosh on Duluth’s attempts to broaden the rental housing market, because lumber is double what it was a year ago, and people look at projected taxes. So, it’s going to have a negative economic effect in the community,” he said.
Ready to review
Garness said county assessors welcome the opportunity to review valuations and consider factors that might not have been evident to staff at the time.
“COVID-19 has certainly had an impact for example on the hotel/motel industry and other commercial properties, especially office spaces in the downtown area," she said. "So, I think it indeed warrants us to take a second look at the property valuations that we’ve determined. And through this petition process, we will learn a lot more from those property owners, because we’ll get financial information that will help us understand income streams. We may also be able to get into those properties where we haven’t been able to do a visual inspection yet.
“If we get better information, then we’ll get better values in the end,” Garness said.
Hoff said he understands the challenge facing assessors.
“Of course market value and the assessments are based on historical sales data. So, in a sense they’re a rear-view mirror analysis. However, it’s the appraiser’s job, whether it’s the county or an independent appraiser, to adjust to the date of the appraisal, considering current market conditions,” Hoff said.
“We know that COVID has had some impacts. But in terms of how we determine value, we still have to look at sales and sales ratios, as well as income streams,” Garness said.
The county’s latest valuations reflect data gathered on actual sales of similar properties between Oct. 1, 2019, and Sept. 30, 2020.
“We’re not necessarily just going to be taking a snapshot of this one year. We’re getting into several months now where there’s been COVID impacts," Gardness said. "We’re going to be looking at future income streams. So, to make some large across-the-board adjustments for specific sectors could potentially be really problematic. And it’s not fair and equitable for all property classes and types."
Despite the grim impact of the pandemic, some downtown properties continue to face increased assessments, such as the USAN building, which saw its proposed value more than double from $919,200 to a proposed $2 million this tax season, or the Advanstar building, with a proposed assessment of $2.2 million — 92% more than the previous year.
“Those are two petitions I’m on, and you can see those buildings have very substantial vacancies. But that doesn’t seem to bother the assessor,” Burns said. “It’s sort of inexplicable to me that the assessor, in this time of hardship, took such a hard whack at commercial properties and apartment buildings.”
Hoff agreed that there seems to be a disconnect.
“We’re working to get through this," he said. "But it certainly is a negative influence and it has a bad impact, when property owners who are struggling now see that the county believes the pandemic didn’t occur, and they’re actually increasing values on properties that have diminished cash flow. They can barely afford to pay the taxes they have now, and then they’re looking at 2022 as another year with big increases. It’s just hard to imagine what that is based on.”
Garness expressed her sympathies and willingness to hear people out: “I know a lot of individuals and businesses are struggling, and to see increases is a hard thing to swallow. But if we get good information that we can consider, we will do the right thing. And we have done the right thing, in terms of adjusting values.”