Along with a 13.8 percent tuition increase and one of the lowest rental-vacancy rates in the country, rent increases of more than 20 percent could take a toll on University students’ pocketbooks.
Spectrum Apartment Search, an Edina-based referral service, reported apartment rent near the University rose about 23 percent from June 2000 to June 2001. The survey covered approximately 60 percent of the metro-area apartment market.
In addition, the metro-area vacancy rate now stands at 2.2 percent – up from a five-year low of 1.6 percent in 1999, according to GVA Marquette Advising. The real estate consulting firm considers 5 percent to be healthy. The firm lists the University area with a vacancy rate of 1.3 percent.
But the recently signed state omnibus tax bill could remedy the situation.
The tax bill cuts taxes on rental properties in an attempt to improve the state’s housing crisis. Beginning in summer 2002, landlords will stop paying the current 2.4 percent property tax and pay only 1.8 percent. By 2004, they will pay 1.25 percent – closer to what homeowners pay.
Bill co-author Rep. Dan McElroy, R-Burnsville, said the high property tax discourages development because the expense cuts too heavily into profit margins.
“We were first in the country; property taxes were 13, 14, 15 percent of rents, 16 in some cases,” McElroy said. “The national average is about seven (percent).”
McElroy said he doesn’t expect rents to go down, but as the supply increases, the vacancy rates and rents will become more reasonable, as they have in other cities.
“The demand has exceeded the supply, and that’s the reason landlords can charge almost anything they want to,” McElroy said.
He said the tax reduction will provide the bulk of the housing relief. But federal subsidies and the removal of the sales tax on building materials for government-owned affordable housing will also help, he said.
However, Sen. Julie Sabo, DFL-Minneapolis, said one of the reasons she didn’t vote for the tax bill was its low state subsidy for housing and the lack of differentiation between high-end and affordable housing.
She disagrees with the removal of the 4D-tax classification – a tax reduction giving affordable-housing owners a 1 percent property tax. Although she said she agrees with the decrease altogether, she said the trickle-down approach will take too long.
“When we’re faced with a housing crisis here and now, even if it does work – which I don’t think it will – it would be so many years off that it really won’t assist us in the here and now or the near future,” Sabo said.
She said tax money – not tax relief – will help. “The disparity between what it costs to build and affordable levels of rent that will accommodate low wages is incompatible for the marketplace. They need direct subsidy.”
She said the tax bill will only result in more high-end apartments.
Jack Horner, lobbyist for the Minnesota Multi-Housing Association, said he agrees it might take a few years to feel the bill’s effects, but he sees the market for higher-end housing saturating soon.
“I’m not saying the market is overbuilt by any means or has reached saturation, but it certainly will,” Horner said. “It’s just a basic fact of economics.
He said soon only a few people will be able to afford high-end rent, and the market will force builders to construct more affordable dwellings.
He said property owners have told him vacancy rates in high-end apartments are much higher than those of affordable housing.
A Metropolitan Council report released last December found that, in 1999, more building permits were issued in the metro area than in any other year that decade. However, the amount of affordable housing built in 1999 was half the amount in 1996.
Effect on current rent
Dan Salamone, executive director of the Minnesota Taxpayers Association, said the reduction won’t affect current rents.
“The landlords are probably going to take the benefit of the reduction more so than the tenants,” Salamone said.
But he said it will give landlords a better rate of return on their property so they can keep their properties in better repair.
Mary Rippe, president of the Minnesota Multi-Housing Association, said although there will be a drop in taxes, the property-value increases of some buildings could absorb the savings.
Landlords must also consider rising utility costs when setting rent, Rippe added. Nonetheless, she said she believes rent increases will be moderate compared to past increases.
Tim Sturrock encourages comments at [email protected]