Why does downtown Minneapolis still have a lot of surface parking lots? It’s complicated.

MinnPost photo by Peter Callaghan
The parking lot across Nicollet Mall from the Central Library — arguably one of the most desirable sites in downtown — is assessed at $13 million.

It was a routine briefing of a Minneapolis City Council committee on a seemingly unrelated topic, but it offered the chance to rouse a long-simmering issue in Minneapolis:

What can the city do to rid itself of the acres of surface parking lots in and around downtown?

While development activity has seen many of those lots disappear, many remain — too many, according to Council Members Lisa Goodman and Jacob Frey, who used the May 11 briefing to press city assessor Patrick Todd to do something about it.

Like what? Goodman thinks the city should use state requirements that require property be assessed on its “highest and best use” — and not on its current use — to incentivize owners to either develop the land or sell to someone who will.

So when Todd explained that the Duffy Paper Co. building in the North Loop was assessed as though it contained a luxury condo rather than a commercial business, Goodman asked: “If that’s the case, and I’m glad it is, then why wouldn’t we see high evaluations on all of these surface parking lots downtown that seem to be WAY undervalued?”

Goodman has argued that the lots remain lots because they make plenty of money for their owners with few expenses. If property taxes on surface parking lots were increased, those same owners might act differently — and the downtown would lose more of its asphalt fringe.

“If they’re making enough money by selling parking downtown,” she said, “then they’re not being taxed high enough, and they’re certainly not being taxed high enough for a potential Class A office use.” 

Surface Tension?

It is a long-running issue in Minneapolis, as it is in most cities: How can less land be devoted to parking cars and more to the types of uses that attract businesses and residents? Eran Ben-Joseph, a professor at MIT, estimates that there are 800 million parking spaces in the United States. In some places, there are 30 spaces for each car.

In 2013, amid planning for the new Vikings Stadium, the group HR&A Advisors conducted a $40,000 study of ways to reduce the number of surface lots in Minneapolis. Several council ordinances have sought to force beautification of parking lots, something that could have also increased the costs associated with operating them. And a bill introduced by state Sen. Scott Dibble, DFL-Minneapolis, would allow Minneapolis and St. Paul to impose a per-stall fee on parking, with revenue going to public plazas, transit lines, bike facilities and pedestrian improvements.

What’s more, for nearly two decades, the city has banned conversion of existing buildings to surface parking, which explains why cars can park around the foundation lines of a former Ramada Hotel at 10th Street and Hawthorne Avenue but not where the building once stood. (The hotel was notorious for being the monthly meeting place for a Twin Cities swingers club.)

But some owners of surface parking in the city question both the premise of Goodman’s tax arguments and the advisability of government intervening in the market — a market that the city plays an important role in as the owner of many downtown parking ramps.

MinnPost photo by Peter Callaghan
For nearly two decades, the city has banned conversion of existing buildings to surface parking, which explains why cars can park around the foundation lines of a former Ramada Hotel at 10th Street and Hawthorne Avenue but not where the building once stood.

“The underlying premise that if they raise real estate taxes something else will happen is, at best, wrongheaded,” said Brian Short, chief executive of the family-owned Leamington Co., which has interests in trucking, community banking and, in downtown Minneapolis, parking lots. In fact, one of those lots — bounded by 10th Street and Third Avenue — was singled out by Goodman as one that should have higher property tax assessments.

“There isn’t any, I believe, surface parking lot owner in the city of Minneapolis that would rather have a surface parking lot as opposed to having the next IDS Center built on his or her piece of real estate,” Short said. “It isn’t parking lot owners that refuse to sell land that stymies development. It’s demand. If there is somebody who thought they could make money on an office building, there would be an office building under construction at this moment.”

Brian Short
Brian Short

And Short, an attorney, said he thinks it would be unconstitutional for a city to use increased taxes to force a type of land use it doesn’t like out of existence. “It makes business people nervous when people like the assessor become politicized,” he said. “The assessor should call them as he sees them.”

Short said Leamington owns a vacant lot where a motor inn once stood that, because of the city ordinances, cannot be used as parking. Short said he lets a neighboring church use it for a community garden. He gets no revenue from it but still has to pay insurance and taxes, so he has no incentive to keep it in its current use. “Why isn’t there a building there?” he asked.

Short said the lots his company does use for parking produce relatively little profit. And his economics are better than most, since the lots were long ago paid off. Much of the parking owned by Leamington, in fact, was purchased by Short’s father, Robert, in the ’70s, after the city pushed a plan to surround the downtown with parking and concentrate development in downtown’s core.

Surprisingly, perhaps, given that many one-time surface lots in and around downtown have been developed, there has not been a resulting increase in demand; Leamington hasn’t been able to increase rates. Short attributes that to increased use of transit, especially since the opening of the light rail lines that meet in the heart of downtown.  

‘It’s just supply and demand’

According to Phillip Jaffe, principal and chief executive of Provident Real Estate, the economics of surface parking differ depending on how long the lot has been owned. If they’ve been owned for a long time and carry no debt, they can be profitable. And many owners can make extra revenue from billboard rentals.

But if an owner bought a lot recently and is still repaying loans, it might not be a money maker. That is why he thinks, generally speaking, people own surface lots with the intent to develop them eventually.

“There’s nothing revolutionary about it,” Jaffe said “It’s just supply and demand. If there’s a use that makes sense on a site and the economics makes sense, the lot’s gonna get developed. In the absence of that, it’s just gonna sit.”

Until recently, Jaffe was part of Alatus, a development company led by Bob Lux that has purchased several surface parking lots for development. Parking was an interim use. Two of those lots west of Hennepin Avenue and Hawthorne Avenue at 10th were sold recently, Jaffee said, when someone “made an offer we were willing to accept. We’ll let the next guy decide what he wants to do.”

Peter Brown, who consults for both government and real estate developers and is the author of the book, “How Real Estate Developers Think,” said people own parking lots for different reasons: some to develop, some for employees and some for the cash flow they produce.

To sell, therefore, “it has to be in the right place and someone needs to make you an offer,” Brown said. And the offer needs to be enough to replace that cash flow. “What’s the sweet spot? Everyone’s got a different one.”

parking lot on Hennepin Avenue
MinnPost photos by Peter Callaghan
What used to be a parking lot on Hennepin Avenue in a photo from January 2015, top, is now a construction site for an AC hotel, bottom.

Todd, the city assessor, said his office does in fact increase valuations on property that has the potential to be developed. But it also looks to see which lots are likely to be the next in line. While those might see higher evaluations, other surface lots that are less desirable to developers do not see higher evaluations and, in turn, tax bills.

“There’s a pecking order,” Todd explained during the May committee meeting. “Just because it’s got the ability to be built on doesn’t mean that’s going to be the next lot that’s going to be built on. If we’re taking a look at commercial building downtown, there could be six available lots but there’s only going to be one that’s the next lot built on.”

“It might be four or five developments away before it is available to be built,” he said.

A sampling of Hennepin County property tax records reflects Todd’s statement — that there is a wide range of assessed values on parking lots, seemingly in relation to their location. For example, the parking lot across Nicollet Mall from the Central Library — arguably one of the most desirable sites in downtown — is assessed at $13 million. And it will only increase in value when the city completes a deal with United Properties for the lot across S. 3rd Street from the library. The value of the recently sold site of the former Ramada Inn on Hawthorne, though, where parking capacity is limited by city ordinance, is assessed at $4.6 million.

Can government change the economics?

That 2013 study of surface lots did find evidence that owners of parking lots in Downtown East sometimes have unrealistic expectations for their land’s value. And it found that owners who might have inherited property also valued the reliable cash flow that comes from parking fees and billboard leases.

The report suggested ways the city might “incentivize development” by increasing the costs of running a parking lot. One was to enforce landscaping ordinances (though Short mounted a successful legal challenge a 2014 city demand that existing lots increase plantings and setbacks). The other was to increase taxes.

“Taxes (sales and property) currently account for the largest portion of the surface parking lots’ expense burden,” the study said. But because operating costs are relatively low in many lots, the tax hikes would have to be significant and, even then, could be passed on to consumers.

At the time, the consultant did not think it made financial sense to convert surface parking lots to market-rate development. But Candace Damon, vice chair of the firm, told Finance & Commerce that could change as the city “amenitized” the area — consultant-speak for adding parks and open space that would make the area more attractive to workers and residents. She said that the then pending Ryan Companies proposal to build office towers and new residential buildings around a new public park, “is a start.”

In just three years time, that project — along with U.S. Bank Stadium — has changed the neighborhood. But it was a changing real estate market, more than direct intervention, that led to the city’s desired result.

And the half-dozen major projects that have been built, are under construction or are being planned have one thing in common: They are on what had been parking lots. Some have government involvement, such as the Commons Park and the proposed development of the city owned parking lot next to the Central Library.

But others are private projects, including the Wells Fargo buildings next to the Commons Park; a hotel at South Fourth Street and Hennepin; the apartments at North Second and Hennepin Avenue, the Latitude 45 apartments on Washington Avenue; the multi-use redevelopment of the Kraus-Anderson headquarters on Portland Avenue; and the Mill City Quarter senior housing project on South Second Street. 

For all of the development activity, though, Peter Brown, the consultant, said there is still plenty of surface lots that will remain that way for some time. “There are still 40 blocks of surface lots in downtown,” Brown said. “We have a long ways to go before it’s built out.”

But Council Member Frey, who along with Goodman represents downtown, now agrees with Short that there are legal limits to how the city can tax surface parking lots, and said the economy — along with the city’s own projects — is changing downtown.

“I came into office with the clear goal of reducing the number of surface parking lots,” he said. “Eighty percent of the downtown lots in my ward are either built on or will be built on.”

Comments (7)

  1. Submitted by William Lindeke on 06/23/2016 - 11:51 am.

    tax policy can do more

    Good read on this Peter. A while back, Chris Kemig floated an idea for Minneapolis about taxing land instead of buildings. (http://streets.mn/2012/12/10/tax-land-not-buildings/)

    Here’s the key example from the piece:

    The intersection of 5th Avenue South and 3rd Street South in downtown Minneapolis provides an instructive example of how our property tax code is currently sabotaging the city’s development goals. At this intersection, we see three distinct forms of development: a surface parking lot (owned by the Star Tribune Co.), a multi-level parking garage (Gateway Ramp), and a commercial space (the Minneapolis Grain Exchange building).

    When you look closely at the property tax bill for each, it becomes clear that the conventional property tax deters development and risk-taking. The surface parking lot spans 2.5 acres, and its owner pays $1.57 per-square-foot of land in annual property taxes to the city. The parking garage across the street spans roughly the same area (2.48 acres), and because of the lot’s structural improvements, pays a bit more than double the surface lot in property tax —$3.70 per-square-foot of land. The Minneapolis Grain Exchange building (which occupies 1.22 acres of the adjacent block), however, pays a staggering $65.34 per-square-foot of land—a rate almost 42 times higher than the surface parking lot.

    This is completely backwards. From the city’s perspective, the Grain Exchange building is the best and most preferable use of land of the three, while the surface lot is the least. And yet, looking at the tax figures one would think exactly the opposite.

  2. Submitted by Nick Magrino on 06/23/2016 - 12:23 pm.

    Walking around downtown, yeah, there are a lot of surface parking lots and some pretty bad spots, like the big ones on the south end of Hennepin and that full block lot at 3rd Avenue and 10th Street. But it is getting better, quickly. In the article, it’s mentioned that there are 40 blocks of parking downtown. Are there?

    https://www.google.com/maps/@44.9756001,-93.2675978,1543m/data=!3m1!1e3

    Maybe ten years ago, but definitely not today, and there are several full block lots in the satellite photos that are construction sites now. And out of what is still parking, a decent chunk of those have had proposals floated. For example, Opus has land use approvals to build an apartment tower on half of that full block spot across the street from the library mentioned in the article, and they have a future phase two planned for the other half. There’s the proposed Four Seasons hotel/apartment complex on the lot at the corner of Washington and Hennepin, and there are proposals (some of which have already been approved) for things up and down Washington Avenue from Plymouth to I-35W.

  3. Submitted by Rodgers Adams on 06/23/2016 - 12:41 pm.

    Location?

    Isn’t the parking lot around the former Ramada Inn at 10th and Hawthorne, not 10th and Hennepin?

  4. Submitted by Peter Callaghan on 06/23/2016 - 12:59 pm.

    Ramada

    Yep. Hawthorne. Fixed. Thanks

  5. Submitted by Matthew Steele on 06/24/2016 - 01:02 pm.

    Because they are categorized as vacant for tax purposes

    It’s a simple fix. If you are providing parking for a particular business, or for a fee, you are not “vacant land” and should not be taxed as such. Tax it based on the parking revenue. And even then, it would still be undertaxed compared to a proper land value tax. We’ll get to a land value tax someday. But in the meantime let’s stop assessing parking lots as “vacant land” and we’ll see the “missing teeth” of surface parking start to fill in faster.

  6. Submitted by Rich Nymoen on 06/24/2016 - 03:23 pm.

    Land Value Tax District bill introduced

    See Callaghan’s earlier article for an explanation: https://www.minnpost.com/politics-policy/2015/01/heres-one-way-reduce-number-undeveloped-lots-Minneapolis)

    This year a bill was introduced: https://www.revisor.mn.gov/bills/text.php?number=HF3895&version=0&session=ls89&session_year=2016&session_number=0

    For more info, e-mail: twincitiescommonground@gmail.com

  7. Submitted by Anne Salwasser on 06/25/2016 - 11:15 am.

    Very silly question

    The reason Downtown Minneapolis has (and needs) surface parking lots is that they have 3 stadiums and multiple office buildings that employ lots of people who cannot use public transit to come to work, not to mention shopping and restaurants. Don’t you want people to come downtown? There isn’t enough parking now but if you build anything other than parking ramps where the surface lots are now this gets worse. After all we have all these things downtown to attract people, don’t we? Making affordable parking impossible to find discourages visitors from using them. They will watch the sports from home or at bars in other places and they will shop at malls, which have plenty of parking, mostly in surface lots.

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