State Board of Equalization (SBE) and Sales Ratio Study Process of Commercial Property Valuations

Timeframe: Why a 12-Month Study?
The SBE utilizes a 12-month sales ratio study in reviewing the level of assessment of properties in each county. This means sales that occurred between October 1 and September 30 are considered as one study period. For the 2009 SBEs that are coming up, the Minnesota Department of Revenue will review sales that occurred between October 1, 2007 and September 30, 2008. This study period is required by law (MS 270.12, subdivision 2).

The value of utilizing a 12-month study is that it allows for a reasonable sample size without including sales that happened so long ago that they no longer reflect the market for the jurisdiction. It is also a consistent standard that can be applied throughout the state. It should be noted that not all sales are included; they are to be verified by the county to be sure they are valid sales and were representative of open-market, arm’s-length transactions. The department also reviews and verifies sales before they are included.

Sample Size: Six Property Sales
The Department of Revenue’s policy requires six sales per property type per jurisdiction to constitute a valid sample. This determination is provided by state law (MS 270.12, subdivision 2) and is consistent with the standards established by the International Association of Assessing Officers (IAAO). In fact, the IAAO has recently stated as few as five sales can constitute a valid sample.

The six sale minimum provides a sound statistical base that the SBE has deemed to provide reliable information, but it is also cognizant of the fact that many parts of the state struggle to reach the six sale minimum. If this minimum was increased, even fewer counties/jurisdictions would be able meet the minimum requirements. It should also be noted that the six sale minimum is a factor, but it is not a bright line test. The SBE does take into account previous year actions by the county, results of previous assessments, and looks at the larger picture before ordering any changes. The SBE’s goal is equalization, so it considers any and all information to ensure this; the six sale minimum is just a starting point.

Formula for Taxes: Four Components
There is a common misunderstanding that increases in value cause increases in tax. Valuation is only one of the four main components that affect the taxes a property pays. The other three components:

• The classification of the property affects the tax liability. Commercial property, for example, has a higher classification rate, so it pays more of the tax liability.
  
• The percentage of value of each property compared to all other properties determines part of its tax liability as well. If one property type is going up in value while all others are going down, the increased properties are going to shoulder more of the total tax liability.
  
• The fourth component is the local tax levy rate. If the school, city, or county (for example) requires more revenue to provide services, each property’s tax liability will likely increase to provide this revenue.

The State Board of Equalization works diligently to treat all property types and jurisdictions fairly, using all information available to it to make sound decisions that are statistically-supported and representative of market. It works to equalize values so all properties are valued as close to their market values as possible so they all pay their fair share of taxes.

If you have any additional questions, please contact the County Assessor’s Office at 507-444-7435. The Assessor’s staff should be able to answer your questions or direct you to someone who can.