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The skirmish over the legality of the Minneapolis 2040 Plan — whether it should undergo further environmental review — risks squashing a powerful force that’s been helping to keep the city’s property tax bills from going even higher.
That force is the development of new apartment buildings with greater density. In the past five years, apartment construction has added $3.5 billion worth of valuation to the city’s tax base of about $65 billion. In 2023 alone, apartment construction added twice as much new tax base as residential and commercial-industrial property combined. Developers freed of some of the previous restrictions that inhibited the density of apartment buildings have populated Minneapolis with a boom of infill housing on previously underutilized lots.
Take one recently completed apartment on Nicollet Avenue a few blocks from my house. Originally a 1940s drive-in restaurant that morphed into an affordable sit-down restaurant over the decades, it served well the neighborhood and frequently State Patrol troopers from nearby Interstate 35W. It was valued at $760,000 in its last assessment as an eatery. The owner then sold it to a developer for $1 million, a handsome reward for decades of sweat equity. The apartment building erected there now is valued at $15 million. That’s a handsome increase in the city’s tax base.
An even more spectacular addition to the city’s tax base is found six blocks north on Nicollet. That smallish property once held a grocery store. Later an auto-parts store occupied the building before rioters torched it after the death of George Floyd. It sold for $2 million just two years ago. It now holds a 205-unit apartment building the assessor values at $34 million. It will pay about half a million dollars in property tax next year.
Recent interest rate hikes by the Federal Reserve have undercut the value of existing single-family homes and existing apartment buildings by dampening demand from buyers. Yet the 2024 city assessment report found that enough new apartments were constructed during 2023 to offset the slide in the value of existing apartments. That made the apartment sector the only stable portion of the city’s three major classes of property in a year when residential values were down slightly and downtown commercial values plunged. Although interest rates eventually will ebb, how much longer will apartment developers propose new projects in the face of continuing legal uncertainty?
One reason that apartments are important to the city tax base is that market-rate units are valued at a 25% higher level than owner-occupied housing under state law. One can question the fairness of that law — market-rate apartments are run as businesses but their higher tax rates are paid indirectly through rents by tenants. Is it fair to tax these folks at a higher rate? Some tenants may be waiting to pay down student debt before they can assuming a mortgage to buy a home. Others may be trying to save for a down payment on a house. Still others have low incomes and may never accumulate the wherewithal for ownership. But taxing them more through their rents — even with a renter tax credit — still penalizes them.
