Q: How is the commercial property taxed in Mankato? Square footage? Age? Location? Market value? Assessed value? Quality?
Also, when a big-box store closes, who is on the hook to pay the property tax, the owner or the lessee? Is there any motive for either to pay it? Does the tax amount decrease?
A: A lot of questions here. But, then, Mankato has a lot of commercial property, including a growing number of vacant retail spaces.
Michael Stalberger, Blue Earth County’s director of property and environmental resources, provided all of the answers with significant assistance from County Assessor Mark Manderfeld.
In addition, Ask Us Guy took a look at a few of the major big-box stores that have closed in the past three years and found most — but not all — are still paying their tax bills even without income from tenants. The owner of the former Kmart building along Highway 22 stopped paying midway through 2018. (More about that later.)
But, first, the questions ... .
Q: How is the commercial property taxed in Mankato?
“Minnesota law requires an assessor to value all property at its market value, including commercial property,” Stalberger said. “Market value is generally defined as the most probable price a property would sell for through an open, arm’s length transaction, between a willing and knowledgeable buyer and seller.”
The market value can be determined through several approaches, including estimating the cost to rebuild the property, looking at what similar properties are selling for, and calculating the worth of a property based on the income it creates for the owner/investor.
“Depending on the type of property, one approach to market valuation may be relied on more than the others,” Stalberger said. “For example, in most cases, the ‘income approach’ would be the best indication of market value for an income-producing property such as an apartment complex.”
All of the approaches take into consideration the property’s physical characteristics such as square footage, age, location, quality and more.
Q: Also, when a big-box store closes, who is on the hook to pay the property tax, the owner of the lessee?
“If a property is vacated, the property tax remains the responsibility of the property owner,” Stalberger said.
Often, a big-box store leases — rather than owns — the building, and the lease agreement makes the store responsible for paying the property taxes. But under the law, the property owner is ultimately responsible for footing the tax bill if the lessee goes bankrupt or otherwise fails to pay up.
Q: Is there any motive for either to pay it?
Yes. Because the county will notice if the check doesn’t arrive.
“If property taxes are not paid, the property will accumulate penalty and interest,” Stalberger said. “If nonpayment continues, the property will forfeit to the state of Minnesota.”
That ultimate response can result in the property’s ownership being conveyed to a government entity or being sold to a third party via a tax forfeiture sale conducted by the county.
The former Kmart store appears to be traveling down that path. The building, which was converted into a Gordman’s store and a Gander Mountain after Kmart shut down, has an assessed market value of $7.02 million, down only slightly from the $7.38 million the property was assessed at in 2017 — the final year the retail stores were operating.
The owner — Lockard Capital Investors of Waterloo, Iowa — had consistently paid its taxes since purchasing the building in 2005. That stopped with the second-half payment in 2018, resulting in more than $30,000 in penalties and interest on top of the $108,000 in unpaid taxes.
In 2019, the property faced another $223,552 in taxes plus a $2,000 street assessment. Lockard has paid exactly zero of last year’s bill, according to county tax records, and is facing another $30,000 in penalties and interest.
Other property owners paid their 2019 tax bills, including for the former Shopko ($138,000), Lowe’s ($185,000), Sears ($125,000) and Herberger’s (nearly $112,000).
“The ‘motive’ in paying property taxes is the consequence that failure to pay them eventually results in forfeiture of the property,” Stalberger said.
Q: Does the tax amount decrease (when a store closes and the building is vacant)?
A: Not necessarily. It all depends on what’s happening with the value of similar properties.
“As we mentioned earlier, the assessor must value at market valuation ...,” Stalberger said.
So if sale prices and lease rates for similar properties remain strong, the valuation of the vacant store would not automatically drop.
“In fact, vacancy is a reality of many retail operations, which is adjusted for using market vacancy rates for that property type,” he said. “However, if the market as a whole is seeing an increase in vacancy, then the assessor would potentially make adjustments across the whole market. They follow the evidence and information.”
Ask Us Guy’s looked at the vacant big-box stores and found that the valuations aren’t plunging yet.
Sears was valued at $3.92 million in 2015, climbed to $4.1 million in 2017 (the year Sears closed) and was at $3.93 million last year. Herberger’s dropped from $3.49 million in 2018, when it closed, to $2.94 million in 2019. Lowe’s held steady at $5.77 million for four years before climbing slightly to $5.82 million last year, when it was shuttered. Shopko, which also went out of business a year ago, has been at $4.3 million for two straight years.
“If I was going to add anything,” Stalberger said, “I would add that our appraisal team does a really good job of learning the markets for all our property types — houses, apartments, commercial buildings — and doing their best to respond to the market to set fair values.”
Finally, Stalberger mentioned that all pro- perty owners will be re- ceiving their tax statement and valuation notice toward the end of March. He encouraged people to review the documents closely and call the Property and Environmental Resources Department at 507-304-4251 with any questions.
Contact Ask Us at The Free Press, P.O Box 3287, Mankato, MN 56002. Call Mark Fischenich at 344-6321 or email your question to firstname.lastname@example.org; put Ask Us in the subject line.