Does a Comparable Sale Represent Investment Value or Market Value?
Twin Cities commercial real estate has been experiencing substantial investment by real estate investment trusts (“REITs”), insurance companies, and other national investors. There can be many reasons for this: good market fundamentals, low unemployment, high quality of life, number of bike lanes, the list goes on and on. However, many of these investors are paying near-record and record-high prices for assets in the Twin Cities.
For example, Ameriprise Financial Center sold to a Florida investment firm for $200,000,000 or $163 per square foot; Norman Point II in Bloomington sold to a Chicago investment firm for $52,500,000, also $163 per square foot; and Excelsior and Grand sold to an Ohio investment firm for $317,589 per unit. Meanwhile, many average office properties have sold for less than $100 per square foot, and many apartment complexes have sold for less than $150,000 per unit.
There are many reasons national and international investors are acquiring commercial real estate in the Twins Cities and these sales should be analyzed very carefully if they are to be considered for property tax purposes. Given the current trend in the Twin Cities, it is not surprising to see many market values fall substantially below investment value.
Sales that garner the attention of national investors will often be institutional-grade properties. Institutional-grade property is defined as “real property investments that are sought out by institutional buyers and have the capacity to meet generally prevalent institutional investment criteria.”[i] Such as high credit tenants, low historical vacancy, premium locations, etc. In addition, institutional-grade properties are usually purchased based on investment value.
Investment value is “the value of a property interest to a … class of investors based on the investor’s specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessarily typical of the market.”[ii]
However, in Minnesota, all property shall be valued at its market value when being valued for property tax purposes. “Market value is objective, impersonal, detached; investment value is based on subjective, personal parameters.”[iii] For example, an investor may be willing to pay a higher price and accept a lower rate of return for an asset that is the right type and size needed to balance a portfolio. That sale would not be equivalent to a market sale, because a market purchaser would have bought the property based strictly on market-based criteria.
As a result, assessed values should not be based on investment sales, except in the rare situation where the investment sale actually represents market value.
[i] The Dictionary of Real Estate Appraisal, p. 102 (2010 5th Ed.).
[ii] Id., p. 104.
[iii] Simonson v. County of Hennepin, 1997 WL 45311 (Minn. Tax) (quoting The Appraisal of Real Estate, p. 23 (10th ed. 1992)).