Companies sue over local taxes


(7/17/2017)

by CHRIS ROGERS

Eight companies sued Winona County this spring over their property taxes. Businesses representing Walmart, Target, Shopko, Menards, Mills Fleet Farm, the former Winona Kmart property, Fastenal, and Thern all filed separate suits, arguing that the Winona County Assessor’s Office overvalued their properties, leading to unfairly high property tax bills.

According to the county, the businesses are worth a combined $53.5 million. The suits challenge approximately $3 million in already paid taxes from 2015 and 2016. If the county loses or settles, it may have to refund some of those taxes at the county’s expense. If it loses, the county might also have to reduce the businesses’ valuations, which would shift a portion of future taxes onto other local properties.

Winona County Assessor Steve Hacken and his staff are charged with estimating the value of every property in the county. The property taxes owners pay to the county, local school districts, and their city or township are based on those estimates, and in the case of commercial and industrial properties, owners pay property taxes to the Minnesota state government, as well. To make those estimates — or assessments — Hacken and his staff look at property sales and the real estate market. How much did similar properties sell for recently? However, because every property is different, it is sometimes hard to find apples-to-apples comparisons. So assessors also use other methods to gauge how much a property is worth, including how much a building costs to erect or how much revenue it generates. Assessors use a plethora of formulas to guide their estimates, but there is also judgment involved. Under Minnesota law, property owners have the right to appeal their tax assessments to the County Board or to an executive branch court called the Minnesota Tax Court.

Large businesses have occasionally sued Winona County to challenge their tax valuations, but Hacken said that facing eight lawsuits in one year is a new phenomenon. “I’ve been here 20 years, and we’ll get a few here and there always. We’ve never had this,” he stated. It is not just happening here; large retailers and other companies are suing counties across Minnesota.

Attorneys for the companies said that they believe the county’s assessments of the businesses’ property values are higher than their market value — higher than what a buyer would actually pay. The companies have not stated what they believe the properties are worth, but Robert Hill, the attorney for Walmart, Menards, Fastenal, and Thern, gave some indication of how big the gap is. ”The market is at 30-40 [dollars per square foot]. The assessments are at 60-70 without any transactions to justify them,” he stated.

Hill is known for arguing “Menard, Inc. v. County of Clay,” a landmark 2016 Minnesota Supreme Court case. In Moorhead, Minn., the Clay County Assessor had pegged the local Menards store’s value at $11.2 million, but the courts slashed that to $7.6 million and ordered Clay County to partially refund four years worth of taxes. Hill is now involved in hundreds of tax court cases in Minnesota. He argues that large retail stores are often worth far less than their assessments because there is a glut of big box stores around the country that will soon be made obsolete by online retailers. These huge properties are hard to repurpose, so no one will pay top dollar for them, Hill explained. “Would you have many buyers in Winona if that Walmart decided to put a ‘for sale’ sign up?” he asked. These stores wind up becoming warehouses that are worth far less, but assessors have not caught up with the changing retail economy and real estate market, he argued.

Hill was particularly unhappy with the practice of basing assessments on business revenue. Imagine taxing identical homes differently because one homeowner has a home business and earns income off their property, Hill said. “Would you ever tolerate that?” he asked. Hill feels the same way about basing assessments on construction costs. Buyers do not care how much money sellers put into a property, and neither should assessors, he argued. If judges look at the actual property sales, they will see that these properties are selling for far less than they are valued at, Hill contended.

Hill is also representing two industrial properties in Winona: Fastenal’s main plant on Theurer Boulevard in Winona and Thern’s factory in the airport industrial park. Those manufacturers are not being made obsolete by internet retailers, but Hill said they, too, are overtaxed compared to what similar properties actually sell for.

Hacken disagrees. Businesses’ argument about the changing retail economy affecting real estate values is a valid one, but when it comes time to look at the actual sale prices of similar properties, company attorneys do not make apples-to-apples comparisons, Hacken argued. They offer sale prices from properties with worse locations, older buildings, and major deed restrictions, Hacken stated. Hacken contended that there are a number of things that make commercial and industrial land in Winona uniquely valuable, including the landlocked city’s overall shortage of land and the relatively limited competition for large retailers.

For his part, Hill argued that it is the county assessors who are making unfair comparisons. “These guys have been assessing these [stores] as though they’re the end caps at the Mall of America. They ain’t,” he stated.

The local real estate market offers some evidence to support both sides of the debate. In 2013, the county settled a tax court lawsuit with the Winona JC Penney’s holding company and agreed to lower the store’s assessment from $4 million to $2.3 million. Shortly afterward, the store sold to Fastenal for $2.45 million, a seeming vindication of the reduced assessment. On the other hand, there are plenty of examples of buyers shelling out large figures for local business properties and vacant land. The Winona mall sold for $5 million this year, and WinCraft sold its East Mark Street plant a couple years ago for $2.9 million. In 2016, VEH Properties spent $1.5 million on vacant land near Target, Menards, Walmart, and Fleet Farm.

Hacken is particularly confident that the county’s assessment of Shopko is justified because the property was recently sold to a holding company for $7.7 million, far less than its current tax assessment of $3.7 million. The attorney for Shopko, Douglas Altman, said he was not aware of the sale, but said that whenever a sale price if far above the assessed value, it raises the possibility that it was a leaseback sale — in which the seller rents the property they just sold — and may not reflect the actual market value.

“I think the public should have an idea of what’s going on. Ninety-nine percent of our property owners pay their taxes without even a phone call, and it seems like the biggest guys make the biggest waves,” Hacken said. He added, “I want to be sure I’m being fair and equitable with everybody, including Ethel on East Eighth Street as well as these multimillion-dollar properties.”

Following an update on the property tax lawsuits at a County Board meeting last week, commissioner Marcia Ward spoke up for large retailers, noting that internet retailers often avoid paying property and sales taxes toward local schools, roads, and government services. She called that an “injustice,” and added, “I have to respect these businesses for doing business in our community, and yet we ask them to pay a lot more expenses than some of these internet companies.”

 

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