Don’t risk the Minneapolis tax base by litigating the 2040 Plan

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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.

Some opposing the 2040 Plan think the city skipped a necessary environmental review in changing its comprehensive plan to encourage density. But more intensive land use where appropriate economizes our development and environmental footprint compared with forcing people into sprawl on the metro area’s fringes. Moreover, such environmental review is more properly applied to projects, not comprehensive plans.

Still others fear density. On my block, I live across from a fourplex and a tenplex apartment building. Yet the house that sits between them has changed hands only twice in its 119-year history. That suggests density is something we can live with.

The seesaw battle in the courts has resulted in a start-again, stop-again disruption of permitting apartments in Minneapolis (“2040 Plan restarts after appeals court reverses injunction,” front page, May 14). Opponents of the plan may yet prevail in their legal appeals, and force the environmental review they seek unless the Legislature steps in, as it should. But 2040 opponents ought to beware of their appeals choking off the most robust factor helping to add value to a temporarily faltering city tax base, and keeping property taxes from rising even higher.

Steve Brandt is president of the Minneapolis Board of Estimate and Taxation. He’s a retired Star Tribune reporter.