Is Minneapolis unfairly taxing residents in 'distressed' neighborhoods?

It's still early 2015, but over the last few weeks homeowners in Minneapolis have been asking serious questions about their property tax valuations for 2016. The new valuations showed up in the mail in early February, and it was far from an early Valentine for some already strapped owners. Many saw their home valuations skyrocket, which means they will be required to fork over more in property taxes next year.

To be sure, city assessments have nothing to do with the price homeowners can set for their home; that's an appraiser's job to determine a real house value, and it's a prospective buyer's job to determine if they will pay that amount. Instead, it's the city assessor's job to study and determine the taxable market value of a home, which dictates how much is owed in property taxes each year, often paid in escrow every month.

The city has a complicated system of determining market value, and many say that system unfairly taxes lower-income neighborhoods. That's because the city eliminates sales of all "distressed properties"—short sales and foreclosures—before designating average market values in a neighborhood.

Which means that in some distressed neighborhoods, like Jordan on the northside for example, the city is tossing out as much as 40 percent of all lower-priced sales. Compare that with wealthier neighborhoods like Fulton, North Loop, Marcy Holmes, West Calhoun, and East Isles, all of which had distressed sales of less than 5 percent in 2014, according to data from the Minneapolis Association of Realtors.

Brian Nelson, an assessor with the city of Minneapolis, says city assessors remove all distressed properties when determining market value because it is a requirement by the Minnesota Department of Revenue.

While it is true that the Minnesota Department of Revenue does list foreclosures and short sales as "general types of sales that do not meet the acceptance criteria" for sales studies in its Sales Ratio Study Criteria, the Department also clearly stresses that these are only guidelines, and ultimately it is up to the assessor to determine how foreclosures and short sales impact real value of properties.

This, from the Minnesota Property Tax Administrator's Manual, stresses this idea further:

"It cannot be emphasized enough that these are general guidelines regarding the proper use of the sales study rejection codes 15 and 21. There may be other circumstances to be considered. For example, if you are in a jurisdiction where a large percentage of all sales are bank or foreclosure sales, they may need to be considered for inclusion in the sales ratio study."

What's more, in 2007, when towns across the state were decimated by foreclosures, the Minnesota Department of Revenue issued an addendum to all assessors as part of a larger memo on the foreclosure crisis. It states:

"It should be clear that assessors should consider all transactions and sales data that can assist them in determining current market conditions and trends. It is inherently the obligation of the assessor to determine and measure the extent to which foreclosure sales impact the overall market in their jurisdiction."

John Braun, an attorney at Thomas Law Group, which specializes in real estate law, says the city is placing a higher tax burden on lower income residents by not including all transactions and sales data in their assessments. What's more, he says, such a practice of tossing out arms-length short sales and foreclosures is in defiance of a Minnesota statute.

He cities Minnesota Statute 273.1101 that says: '"true and full' values, relating to the procedure of boards of review and equalization, and to certifications by assessors and other public officers, shall be construed as referring to the current market values as determined in assessment."

In 2012, Braun represented homeowners in Near North, Camden, and Phillips who said the city inflated home values, and therefore inflated tax appraisals, by willfully ignoring foreclosures in their neighborhoods. Braun estimated that the city collected millions of dollars in illegal taxation in those neighborhoods. The city settled with the homeowners before the suit could reach class-action status.

While it's true that the number of foreclosures and short sales in the city have declined since 2008, many of the city's lower income neighorhoods are still experiencing a disproportionate number of distressed sales. Braun says that all arms-length sales, including foreclosures and short sales, should still be included in all assessments to determine market value.

In Powderhorn Park, for example, 18.7 percent of total sales in the neighborhood were distressed in 2014. By not including these sales, the city threw out about 15 of 75 total sales to determine the neighorhood's market value. Some homeowners in the neighobrhood say they saw their estimated market value, as determined by the city, rise anywhere from 10 to 22 percent over the previous year. Yet overall, including distressed sales, Powderhorn prices only rose 6.8 percent, below the city average of 8.5 percent in 2014, according to data from the Minneapolis Association of Realtors.

Nelson says the the "estimated market value" for all homes in Minneapolis rose 8.3 percent for the city's 2016 tax valutions, which is on par with the city's average price increase of 8.5 percent over 2014. He says if homeowers believe their valuation is incorrect, they can appeal it through the Board of Appeal and Equalization.

Braun says the onus shouldn't be on the homeowners to appeal. It should be on the city to abide by the law and include all sales to determine real value and taxation. "It is absolutely and completely illegal," Braun says. "And the city will continue to get away with it as long as people let them."