Significant Law Changes in Minnesota Affecting Real Estate
By: MARY S. RANUM
July 2001
Property Tax "Reform"
At the end of June, Governor Ventura signed an omnibus tax act (the "2001 Tax Law") that, among many other things relating to state taxes and finances, provides for major property tax "reform" and major changes in the source of school funding in Minnesota. The 2001 Tax Law will have a significant impact on commercial and industrial real estate development in Minnesota.
The 2001 Tax Law reduces the "class rate" on commercial and industrial ("C/I") property from 2.4% on the first tier ($150,000) of value to 1.5%, and from 3.4% on the second tier (in excess of $150,000) of value to 2.0%. Class rates of all other classes of properties are also modified, and there are a myriad of other property tax changes affecting homestead classifications, exemptions from tax, special taxing districts and levy limits. The Minnesota Chamber of Commerce has estimated that C/I taxes will decrease by a net 10.3% statewide by reason of the 2001 Tax Law. The House Research Department has estimated that, on average, C/I taxes will decrease 8.8% (in the "high tier," i.e., values in excess of $150,000) in the metro area, from an effective tax rate of 4.19% to an effective tax rate of 3.82%. The decrease will vary from city to city.
Most of the reduction in local property taxes is the result of a major shift of school funding from local property taxes to the state. The state-determined local school tax has been eliminated by the 2001 Tax Law. While permitted levies by local school districts are drastically reduced, a new state-level property tax on C/I property and seasonal/recreational property (the "state general tax") has been imposed. The state general tax will be in the aggregate amount of $592,000,000 for taxes payable in 2002 and will increase annually after 2002. The state general tax must be levied at a uniform rate within each county, and the levy rate is to be determined by the Commissioner of Revenue by November 1 of each year. The Department of Revenue has advised that a uniform rate will likely be imposed state-wide, and estimates that the state general tax will be approximately 1.19% of the taxable market value of C/I and seasonal/recreational properties.
C/I taxes available for tax abatement and tax increment financing are projected to decrease by approximately 40% statewide, since the overall tax burden will decrease for all properties and the state general tax is not subject to tax abatement or tax-increment financing. The impact on tax abatements will be less than on tax increment financing, since school districts have been less likely to provide tax abatements and most of the local levy reductions were in the school tax. The overall local spread levy by cities and counties, the taxing districts most likely to grant abatements, will actually increase under the 2001 Tax Law. The 2001 Tax Law has several provisions to protect and continue funding of tax increment financing or tax abatement arrangements for which "binding commitments" have been entered into by a taxing district prior to August 1, 2001.
The effects of the 2001 Tax Law on taxes, tax increment financing and tax abatements will vary among cities and counties and classes of properties. The Department of Revenue, as well as cities, counties and their fiscal consultants, are still sorting out the impact of the 2001 Tax Law. In the next few months, more information will become available regarding the impact of the 2001 Tax Law on specific property types and specific taxing jurisdictions.
Amendment to Rezoning Vote Requirements
Effective May 30, 2001, Minnesota law was amended so that the statutory voting requirement for rezoning matters is reduced from a two-thirds majority to a simple majority of all members of the city council. The only exception to the new requirement is a change of a zoning district from residential to either commercial or industrial which will continue to require a two-thirds majority vote. In most cities, this means that three votes will prevail in any rezoning request; in others, with a seven member council, four votes will carry the day.
Elimination of Indirect Source Permit Program
Because of funding cuts imposed on the Minnesota Pollution Control Agency (MPCA), the MPCA has eliminated the Indirect Source Permit Program. As of July 1, 2001, large projects such as shopping centers and office buildings will no longer need to apply for an Indirect Source Permit to the MPCA. Thus, the additional time and expense associated with traffic and air quality analyses required as a part of the MPCA's air quality control program over mobile sources (cars and trucks) has been eliminated. The MPCA has yet to send out a guidance letter to local governments and holders of existing permits, but intends to do so.
Fee Ordinance Required
As of January 1, 2002, a new law will require municipalities to establish fees for applications for amendment of planning and land use controls by ordinance. Previously, many cities established fees by resolution or policy determinations. The legislation also requires that the fees be "fair, reasonable and proportionate to actual cost of service". If a person is aggrieved by a fee, they may deposit the fee in escrow and appeal to the district court, and the application may proceed as if the fee were paid during the appeal.
Special Assessment Waiver
The effect of a waiver of the right to appeal special assessments often included in development agreement has now been restricted to the amount of assessments estimated or agreed upon in a development agreement. This will eliminate the "blank check" effect of special assessment waivers.
Codification of Non-Conforming Use Rights
Effective August 1, 2001, a new law codifies certain non-conforming use rights. The nonconformity may continue, including repair or maintenance of it, unless it is discontinued for a period of more than one year or is destroyed by fire or other circumstance to an extent greater than 50% of its market value. Currently municipal ordinances are quite diverse in their approaches to non-conforming use rights; now, they will have to conform to the statutory language. In 1999, the Legislature prohibited the amortization of non-conforming uses, except for so-called "adult uses".
If you have any questions about any of the above, feel free to call any member of the Fredrikson & Byron Real Estate Group at (612) 492-7000.