Minneapolis landlords say rising property values, taxes behind rent hikes

The value of apartment buildings in Minneapolis is soaring, thanks to the construction of thousands of new luxury units and big prices when buildings are sold.

But for landlords who just want to maintain and rent out apartments, the good times also include higher property taxes, which are forcing them to raise rents.

The Hornig Cos. bought a 17-unit apartment building in Uptown in 2013, started charging $750 a month in rent and would have been happy to keep it that way. It was enough to make a small profit, maybe 5 percent, said Jon Hornig, whose firm owns 2,000 units in Minneapolis.

Since then, the assessed value of 2730 Dupont Av. S. has nearly doubled and Hornig's property taxes rose by 15 percent. That left him no choice, he says, but to raise rent by about $100 a month for the one-bedroom units.

"We don't sell much," Hornig said. "We're a buy and hold company, and assessed value, you can't really eat that for dinner."

Amid a charged public debate about rising rent in Minneapolis, landlords are feeling embattled. Tenant rights group Inquilinxs Unidxs por Justicia — United Renters for Justice — has mobilized hundreds of renters in the city, called for rent control rules and organized protests outside apartment buildings.

Though rent control doesn't have broad support on the City Council, several council members and candidates want to curb rent and make it easier for the poor to find housing. Proposals include forcing all new apartment buildings to reserve units for lower-income renters, making it more difficult to evict tenants and requiring all landlords to accept Section 8 vouchers.

The Minnesota Multi Housing Association supports none of these solutions. The group fears what action could come down from the council in 2017, and is anxious to draw attention to rising property taxes and the costs of maintaining their aging buildings.

"Minneapolis has a strong history of naturally occurring affordable housing that is severely threatened if local officials continue to pursue policies that will drive up rents and pile on administrative regulations," Mary Rippe, the president of the Multi Housing Association, said in a statement. "In the end, it could lead to more nonlocal owners and renting being harder for residents."

Since 2012, the market value of apartments in Minneapolis has more than doubled, to $7.2 billion. About half the increase came from new construction. The other half came from growth in the assessed values of existing buildings.

The city of Minneapolis will collect $313.9 million in property taxes in 2017 but doesn't track how much of that will come from apartments. Some building owners get breaks because they rent out affordable units. Those who don't have seen their tax bills rise quickly, a fact that has become the chief financial concern of developers and "a primary cause for existing properties to increase rent," said Jon Fletcher, of national developer LMC, which is building a 20-story apartment tower in northeast Minneapolis.

Higher taxes haven't stopped new construction, however. The city's Planning Commission will look at proposals for another 388 new units next week alone.

Rebecca Malmquist, director of assessments for the city, said she thought maybe the market would have been saturated by now, but "based on the data we're not there yet." The indicators the city's appraisers look at, including comparable sales, have been bullish.

"People are still willing to pay these higher rents, buildings are filling up, we still have buildings coming out of the ground because there's still demand," Malmquist said.

Whether that will be true a year from now is unclear, but Malmquist explained that assessed values always lag the market. If the apartment market cools in 2017, as some analysts expect, landlords will be stuck with higher property taxes after filling units gets more difficult.

Landlords may not like the higher taxes, but for now they don't argue the assessments are inflated.

"I think the assessor has a really hard job because of some of the sales that have occurred," Hornig said. "It's a really tricky question."

The council, meanwhile, is mulling several ideas that affect renters and landlords. Council Member Elizabeth Glidden, who last year proposed an ordinance that would require all landlords to accept Section 8 vouchers, said the rule will come up for a vote early this year.

Council Member Lisa Bender said she's interested in enacting protections for renters who might be forced out of buildings en masse, which happened at the Park Laurel on the west edge of downtown Minneapolis.

"The most dramatic example of people being impacted by rising housing costs are when whole buildings filled with people are evicted either actively or because the rents have risen so much, so quickly," said Bender.

She also hopes the council will update its zoning code to encourage owners to build more units. Allowing so-called "granny flats" in Minneapolis and reducing the required number of parking spots for apartments are among ways the city has tried to do this, Bender said.

"We have what I would consider a dysfunctional rental market with way too low of a vacancy rate for a healthy balance of supply and demand," Bender said.

Clearing the way for more apartments to be built should be the first priority if the goal is increasing vacancy and keeping prices under control, said Nick Magrino, a city planning commissioner.

"Nowhere in Minneapolis is anywhere near a Brooklyn-type situation or a San Francisco-type situation," Magrino said. "If we want to avoid that, then folks like me would advocate that we should let more construction happen."

Apartment owners can only keep a lid on rent for so long with property taxes rising and buildings in need of upkeep, Hornig said

"I don't think the answer is keeping rents super low and hoping the landlord keeps reinvesting with low margins," Hornig said.

Adam Belz • 612-673-4405

Twitter: @adambelz