Property Tax Burden Shifts to Commercial, Residential in Twin Cities

The post-pandemic plight of the office sector is shifting the property tax burden to other commercial real estate properties and even residential homes in Hennepin County, Minnesota, where most of the state’s large office buildings are located, according to a Colliers case study.

Minnesota’s property tax system is based on Net Tax Capacity (NTC), which determines how much of any building’s value can be taxed by the state and local governments. These jurisdictions determine how much money they need, also known as a levy, and calculate a tax rate by dividing the levy by the total NTC of the jurisdiction.

Minnesota classifies properties as residential, apartment, commercial or specialty and assigns a different share of the tax burden based on their class. Commercial class buildings, including office, industrial and retail, are classed at 2% of their value. Thus a $1 million commercial building would have an NTC of $20,000. Single-family residential properties are classed at 1% and apartment buildings at 1.25%, meaning a $1 million apartment building would have an NTC of $12,500. or 37.5% less than a commercial building of the same market value.

Most properties pay local property taxes to the county, city and school district in which they exist, but the state of Minnesota also separately levies general property taxes on commercial properties. On the state level, as office properties lose value, the tax burden is being redistributed onto other commercial properties, as each dollar of NTC lost from an office tower must be recuperated from all other commercial buildings, driving retail, industrial and well-performing office taxes up.

On the local level, the tax burden is shifting to suburban residential homeowners. Between 2021 and 2024, residential NTC grew by 23% as residential property values outgrew commercial values. This bumped the residential tax burden by 200 basis points, adding $45 in property tax per single-family home. As almost every office building will have to reset values on lower stabilized occupancy, residential properties must gain $2 in value for every $1 of net commercial value lost in the office sector to achieve the same tax base, the case study said.

“The values of Minneapolis’ biggest office towers dwarf almost every individual building in the state, and to the government, these towers pay the equivalent of over 1,500 single-family homes’ taxes,” said Colliers. “As more and more office buildings face distress, the property tax base will continue to shift toward residential homeowners on the local level and to other commercial properties on the state level.”