Real estate developers Brandon Champeau, David Menke and Mark Nordland
incentives not competitive with those of other states
A Civic Caucus Focus on Competitiveness
Interview February 28, 2014
Dave Broden (vice chair),
Brandon Champeau, Pat Davies, Paul Gilje (coordinator), Sallie Kemper,
Dan Loritz (chair), David Menke, Mark Nordland, Kaye Rakow, Dana
Schroeder, Clarence Shallbetter. By phone: Janis Clay.
Minnesota needs better economic
incentives to be able to compete with other states in attracting and
maintaining businesses, according to commercial real estate developers
Brandon Champeau, David Menke and Mark Nordland. They give an example
of how United Natural Foods, Inc., decided to build a large
distribution center in Prescott, Wisc., rather than in Lakeville, a
competing location. Wisconsin and Prescott were able to offer the
company over $7 million more in incentives than the incentives offered
by Minnesota and Lakeville. The developers believe economic incentives
can pay off by attracting new businesses that will cycle money from
new jobs through the community and the state economy.
Champeau, Menke and Nordland all believe
transportation is extremely important in competing with other cities
and that the Twin Cities area is making progress in developing
transit. Nordland says the area needs to complete the transit system,
but cannot neglect its degrading road system. He also believes
Minnesota must be careful not to tax itself out of competitiveness in
businesses property taxes and income taxes.
The developers say the benefit of the large
increases in land values that occur when the state invests in public
infrastructure, like a new highway interchange, generally goes to
farmers or to land speculators who own the land nearby, not to
developers, who tend not to buy land far in advance of development.
Nordland believes government can recoup part of this type of
infrastructure investment through the increased property taxes paid on
the developed land and the income taxes paid by employees working in
newly created jobs.
NAIOP Minnesota is the
Minnesota chapter of the Commercial Real Estate Development
Association. The Civic Caucus interviewed four NAIOP Minnesota
leaders: Brandon Champeau, David Menke, Mark Nordland and Kaye Rakow.
Brandon Champeau is assistant vice
president, United Properties, a commercial real estate developer and
investor working in office, industrial, retail, healthcare and senior
housing. Headquartered in Minneapolis, the firm serves clients in
Minnesota, Wisconsin and Colorado. Champeau has been with United
Properties since 2004. He serves as 2014-15 chair of the NAIOP
Minnesota Public Policy Committee, 2014 chair of the Real Estate
Diversity Collaborative and executive committee member of the Urban
Land Institute Young Leaders. He has a B.A. degree in entrepreneurial
studies and finance from the University of Minnesota's Carlson School
David Menke is executive vice president
of Opus Development Company, a
commercial real estate
company headquartered in Minneapolis, with projects across the
country. The firm is involved in construction,
development and architecture and
works in the office,
industrial, retail, institutional, residential and government sectors.
Menke joined Opus in 1995 and oversees all development for the
company's Midwest region, which currently has projects in eight
different cities. He is a member of
NAIOP Minnesota's board of directors. He
has 27 years of real estate development and brokerage experience.
Prior to joining Opus, he was a senior sales associate for eight years
at Towle Real Estate Company, working as an office sales and leasing
specialist, representing both owners and renters. He has a B.S. degree
in business finance from the University of Minnesota.
Mark Nordland is principal at Roseville,
Minn.-based Launch Properties, a
developer and investor in healthcare, retail, industrial and office
real estate in the Twin Cities. Prior to cofounding Launch Properties
in 2011, Nordland was vice president of development for Ryan
Companies, Inc., from 2006 to 2010. He was director of industrial
development for CSM Corp. from 1999 to 2006 and industrial broker for
Welsh Companies from 1996 to 1999. He is NAIOP Minnesota's 2014
president. He has a B.A. in economics and government from Lafayette
College in Easton, Penn.
Kaye Rakow retired on Dec. 31, 2013, as
director of public policy for NAIOP Minnesota. She was the first
person to fill that position in 1996. She then left for three years to
serve as president of the Twin West Chamber of Commerce. Rakow
returned to the NAIOP post in 2000. At NAIOP,
Rakow has worked with
commercial real estate developers and property owners as they advocate
at the Legislature for issues like lower business property taxes and
greater transparency of local government spending.
She has a B.A. in political science and
history from the University of Minnesota.
Issues to address:
Prior to the meeting, Champeau, Menke, Nordland and Rakow were
asked to be prepared to discuss the following issues: the role of
commercial-industrial development in Minnesota's economic
competitiveness; the state's economic climate today and in five, 10 or
20 years; the importance of economic incentives to businesses; the
importance of transportation corridors, such as Hwy. 169, workforce
location, and economic incentives in determining where companies
locate; development in the metro area vs. other parts of the state;
and how Minnesota is faring in commercial development compared with
Commercial developers work closely with commercial real estate
brokers. All four speakers have a background in commercial real
estate brokerage, which Mark Nordland called the most direct way to
learn about development. According to David Menke, the "lion's share"
of development contacts, about 90 percent, comes through brokerage
firms. "Very rarely do we hear straight from the companies," he said,
noting that there are a number of strong commercial brokerage firms in
the metro area. Also, some contacts come through Greater MSP, the
Minneapolis Saint Paul Regional Economic Development Partnership.
Nordland added that Greater MSP is a
facilitator. If there's an out-of-town company, Greater MSP
facilitates the initial contact with a brokerage firm. "Almost
everybody is represented by somebody," he said.
Wisconsin attracted a company away from
Minnesota with a large package of economic incentives. Nordland
noted the recent example of United Natural Foods, Inc., the leading
distributor of natural, organic and specialty food in North America,
deciding to build a $37.8 million, 300,000 square-foot distribution
center with over 300 jobs in Prescott, Wisc. The company currently has
a facility in Burnsville, but it needed room to expand and was looking
in the Twin Cities market. Nordland's firm proposed selling the
company a large piece of land in an industrial park in Lakeville.
United used the services of a broker and site selectors, he said.
The company ended up going to Prescott,
Nordland said, because it received $9.5 million in incentives from the
state of Wisconsin and the city of Prescott. At the Lakeville
location, the combination of state and local incentives amounted to
about $2.5 million to $3 million, primarily through tax-increment
financing (TIF), a process through which a city can capture all the
increased property taxes in a development area over a period of years
to help pay for infrastructure and other costs of development. "The
state of Minnesota really didn't have a lot to offer," he said.
Minnesota needs better incentives to get
distribution and manufacturing companies here. An interviewer
asked what things would need to be in place to make more companies
want to come to or expand in Minnesota. "We've got 19 Fortune 500
companies here," Nordland said. "People like to have their
headquarters here. They like the quality of life. But that only goes
so far when you break it down to the working-class jobs." When
companies want to hire for blue-collar jobs in distribution and
manufacturing, he said, they start looking at lower-cost places, such
as Kentucky, Arkansas, Louisiana, or Wisconsin, North Dakota or Iowa.
He said Minnesota needs better incentives to get those companies
to locate here. "We need the same tools the other states have," he
Wisconsin offers lower taxes and better
incentives. Champeau offered the example of a piece of land he is
working on in Hudson, Wisc. "The state of Wisconsin loves to compare
itself to Minnesota," he said. He noted the following comparisons:
Corporate income tax (2012): Minnesota, 9.8 percent; Wisconsin,
Top personal income tax bracket (2011): Minnesota, $74,000;
Property taxes on a building valued at $8,000,000, with 99
employees (payable in 2009): Minnesota, $128,975; Wisconsin,
$59,545. Wisconsin property tax savings over 10 years: $694,300.
State sales tax and use tax (2011): Minnesota, 6.875 percent;
Wisconsin, five percent.
There are other exemptions and incentives
offered in Wisconsin that are not offered in Minnesota.
Champeau said developers wish Minnesota
would be on "a more level playing field with some of the states around
us." "It's taxes and incentives," Nordland added. "Incentives have
become a necessary evil, because all other states are doing them,"
Champeau said. "You have to play in that game. It's easy to make a
case against relocating or moving to Minnesota when states around us
can show a company our tax and incentive comparisons."
Incentives are especially important to
companies with larger space requirements. An interviewer asked how
much development activity from Twin Cities firms that are expanding or
from firms that are locating here is driven by the marketplace vs.
being affected significantly by incentives from cities, counties or
the state. Nordland replied that the larger space-requirement projects
are much more affected by the incentives. "They're going to figure out
the most cost-effective place to be," he said.
Minnesota needs to have incentives to
compete. "If I had my way, nobody would have incentives," Nordland
said. "Then we'd be a market economy. That's just fundamentally what I
believe. Then states could compete on their own. We'd have to deal
with the tax issue here, but that's easier to overcome than the
incentives, because we have a good quality of life and good employees.
The reality is that incentives do exist both nationally and regionally
and we need to have them to compete."
The quality of the workforce in the Twin
Cities is more important for high-tech companies. An interviewer
asked how much the quality of the workforce is a driver in location
decisions. Champeau replied that high-tech companies might choose the
Twin Cities, because they would place more importance on their
employees' educational background. But, he said, manufacturers or
distributors who don't need highly skilled employees and are offered
$6 million or $8 million in tax savings or subsidy over 10 years will
say, 'We'll train 40 new people and locate somewhere else.'
Minnesota needs to be able to compete
regionally. "Some of the southern states that don't have much
going on are going to throw the book at companies they're trying to
attract," Nordland said. "They're going to win the day on some of
these things. But if we can compete with the Midwest region, that
would do a lot. I would like us to be more competitive regionally."
Menke noted that currently a company
requiring 300,000 square feet, with lots of high-paying jobs, is
looking at locating in Texas, San Diego, Denver or Minnesota.
He said the incentive package put together
by Texas is six or seven times the size of the Minnesota package.
"It's real," he said.
The Twin Cities is competing with Portland,
Seattle and Denver for intellectual kinds of jobs. An interviewer
commented that the Twin Cities area is always being told it must
compete with Portland, Seattle and Denver. "Different types of jobs,"
Nordland said. Those communities and the Twin Cities all have a highly
educated workforce for what he called the "intellectual kinds of
jobs." But, he argued, that doesn't provide a balanced economy. "You
can't just have the intellectual class here and not have a working
class," he said. "It just doesn't work. It doesn't support the overall
health of the community and the economy."
Economic incentives can pay off. An
interviewer asked why a state like Wisconsin would offer $9 million in
economic incentives to attract a business to Prescott, rather than
using that money for K-12 education. Nordland replied, "Because it
grows the whole system. If you have 400 new workers who are all making
good wages and are all in the community, the money will cycle through
the system. They'll spend a lot of money in Prescott and elsewhere in
Champeau noted that the City of Shakopee
structures business incentive deals so that companies must meet
job-number and wage-level requirements set by the city. "They're not
just handing a check over and then wondering if it ever comes back,"
he said. "Cities are smart and they will look at what that building
and that workforce will contribute to the tax base long-term and they
say it's worth X dollars toward a project. Sometimes they might
overpay, but I believe many times they don't."
Different types of development are drawn to
different locations. An interviewer asked where the focal points
of development in the Twin Cities are located. Menke said sizable
industrial businesses are going to be looking for major arterial
highway connectivity, generally in greenfield locations. For housing,
he said, there is strong demand for more urban, transit-oriented
development. For example, Opus is building a high rise in downtown
Minneapolis at a light-rail station. For office development, "when and
if it comes back," transportation is a strong driver, so it will be
more urban, less greenfield development, he said.
Champeau said companies have figured out
ways to save space and to have office workers work in less space.
Because of that, there has been little office expansion or new office
building development for a number of years.
Companies want to be centrally located.
An interviewer asked if there is a linkage between where workers are
located and where facilities are going up. Nordland said there was a
lot of sprawl before the recession, but now companies want to be
centrally located. Employees are coming from all over, he said, so if
you're relocating, you don't want to move too far from where you are.
Menke pointed out that Wells Fargo plans to
make a big investment to locate on the east side of downtown
Minneapolis, near the new Vikings stadium. "They concluded that access
to transportation, access to a large employee base, being urban and
having that urban environment for their employees trumped everything
else," he said.
The new Vikings stadium will compel
development in downtown Minneapolis. An interviewer asked whether
the massive public investment in the stadium is justified. Menke said
the stadium-related development is "fabulous for downtown" and that
the sheer size of the stadium and the adjacent park will compel
An interviewer commented that the Twin
Cities area is the 15th largest metro area in the country
and asked how important it is for the area to be "major league" and
"to fight above its weight." Champeau replied that it's very
important. He lives in the North Loop in downtown Minneapolis, just a
few blocks from Target Field. Between April and October on Twins game
nights, he said, "the neighborhood buzzes with people. It's
dramatically changed the area in a very positive way."
Transportation is extremely important in
competing with other cities. An interviewer asked how Minnesota
stacks up on foundational assets, like preK-12 education, higher
education, public safety, natural resources and transportation. Menke
replied that transportation is coming along. "Denver is ahead of us in
that regard," he said. "But the transportation investment we're making
is significant and necessary."
Champeau and Nordland both agreed that
transportation is extremely important in competing with other cities
and in attracting young people here. "We need to finish the transit
system," Nordland said. "We need to finish the system so that it's a
legitimate transit system that someone could actually use, not one
people take just so they don't have to pay for parking downtown, which
is what I think it's used for now. Also, we can't neglect the roads.
Our road system is OK, but it's degrading." He pointed out all the
growth that has occurred in Shakopee after the state fixed the 169/494
Minnesota must not tax itself out of
the Twin Cities area has the arts, education, sports and a "tricky"
tax climate. "We need to be careful about things like business
property taxes and income taxes and make sure we don't tax ourselves
out of competitiveness," he said. "That affects more of the
working-class jobs than the higher-end, more intellectual jobs.
Medtronic is still going to be here, even if they have to pay another
couple of bucks in property taxes on their building. But if they need
to put up a facility someplace that doesn't require the skill of the
people here, they can go elsewhere."
There is a new trend of locating smaller
distribution centers in the Twin Cities to distribute locally. An
interviewer asked about the importance of moving the product, as well
as the people. Menke said the Twin Cities are not considered a large
distribution marketplace, so product movement is not so important.
Nordland noted a new trend of companies locating smaller, 100,000 to
300,000 square-foot distribution centers in the area to distribute
locally. "They need to be able to get around town fairly quickly, so
you've got to keep the roads unclogged," he said.
Government can capture the value of a new
infrastructure investment on development through new property and
income taxes. An interviewer asked who should be paying for
additional capital outlays and operating costs of transportation
investments. He noted that land values skyrocket when a new
interchange is built and the landowners pocket those increased values
without having done anything. Champeau noted that whenever the new
Hwy. 610 interchange is built, people will want to develop there and
the new growth will generate property taxes and income taxes from jobs
created there. "All of us will be looking to develop when something
like that happens," he said.
The interviewer asked how at least some of
that increased value can be captured to help pay for the public
highway investment. Nordland said the value of an infrastructure
investment is captured when farmland, which pays low property taxes,
is developed and becomes home to a business paying high property taxes
and employing 500 people. All of that money then circulates back into
the economy, he said.
Transit benefits companies at the urban
core, not those located on suburban light-rail lines. An
interviewer asked whether UnitedHealth should pay a special tax when
the Southwest light-rail line comes in because so many of their
employees will take the light rail to work. Nordland believes only a
"miniscule" number of UnitedHealth employees will ride the light rail
to work. He said the idea that people are going to take suburban
light-rail lines to suburban job locations is "overcooked." He said
transit benefits the urban core, because employees will ride the light
rail to downtown jobs.
Financial tools for economic development are
very transparent. An interviewer asked how to keep the
unprecedented amount of competition for economic development
honorable. "The financial tools we all use are very transparent:
tax-increment financing (TIF), tax abatement, state grants," Menke
replied. "They're very much in front of everyone to see. They get
voted on by commissions, councils and the state." He said one
community might be more aggressive than others. "We don't influence
that," he said. "Those are the commissions and councils that operate
in that manner."
Champeau added, "The downside of the
incentive discussion is that we pass these bills that give money to
DEED and it's up to DEED to decide which companies will benefit."
Menke agreed: "The DEED process is a little unclear."
But, Nordland said, there is a fairly
transparent system in place now, where companies get a certain amount
of money, depending on the number of jobs they are bringing and what
those jobs pay.
Developers are not in the business of land
speculation. Responding to an interviewer's question about
landowners' benefitting from road construction, Nordland explained,
"Usually it's farmers that hold the land for longer periods, or
sometimes there are land speculators involved. But putting a road in
somewhere doesn't result in a windfall for developers. We usually pay
market rate for the property and create value on the land."
An interviewer asked if the developers own a
lot of land. Nordland responded that his company buys land right
before developing it. "Usually, we buy it with a user already in tow,"
he said. "We don't buy it to develop in 10 years. We buy it to develop
in the next five to seven years, at the most."
"We all learned a few lessons in the last
few years, where we bought thinking we were going to develop in the
next six months," Champeau said. "Then the recession hit. We have land
positions that we bought in 2005 that we're trying to work our way out
Retail development is smaller and there is
less of it. An interviewer asked the developers how they view
retail development. Menke said retail is clearly different now. "The
retail Opus is doing today is much smaller and there's much less of
it," he said. "It's more neighborhood grocery-anchored retail. The
users of big boxes are all reinventing how they get things to their
customers. It's untested; it's very fluid. We're being very careful
about where we're deploying our equity in the retail sector."
"The connection between retail and
industrial, specifically distribution and warehousing, is colliding at
an incredible pace," Champeau said. "Retailers are going to give back
one-third to one-half of their space in the next 10 years in exchange
for distribution space. Buying will be about convenience. Shopping
will be about experience. There's always going to be a need for
retail, but it'll be smaller stores, where you can see the product and
it'll be delivered to your home." Nordland added that showrooms for
things like mattresses and beds are much smaller now. Menke said some
former big-box stores are being repurposed into health clinics.
Champeau said the old model for retail
distribution was to have four large facilities around the country. Now
companies want more and smaller distribution centers, closer to their
customers. "That's what's dangerous about the warehouse tax that the
Legislature passed last year," he said. "That's the future of
distribution and the future of retail. If we want to tax those
warehouses out of our state, it's going to impact not only the
distribution that comes here, but also the retail that comes here."
High-level jobs need good access to the
airport. An interviewer asked how important the airport is. "We've
got a great airport and we've got a lot of flights," Nordland replied.
The high-level jobs need good access to the airport, but the $15 to
$20-an-hour manufacturing jobs don't, he said.
Menke said Greater MSP has been
helpful from a developer's perspective. "It feels like there's an
organized, aggressive effort to tell our story," he said. "I view that
as very important. Other states had been doing much better telling
their stories. I view Greater MSP's efforts as very valuable."
Champeau remarked that the state needs to
think of itself as a business. "It needs to look at the things we're
good at and keep pushing those," he said. "And for the things we're
not ranked well in, we need to figure out how to move those up the
scale." Specific to real estate, he added, "Real estate development
cannot be outsourced. It's a local business that employs local trades
and, when we can be competitive with other states for deals, it can
generate a lot of hidden economic activity."
"Maintaining the foundation we have here is
good," Nordland said, "but not doing it to the detriment of other
things. We've been able to build this foundation. We know we're a high
tax state. We get something for that. I don't think we can pile on
more. The human service element is growing and it's difficult to turn
that away. But we have to balance everything. And we need a few more
tools. We don't need to win all those deals, but we need to be closer
to other states in the region."
"NAIOP members are experiencing a
significant increase in the fees and costs imposed on commercial real
estate development by local units of government," Rakow observed.
"This, coupled with the maze of overlapping regulations at all levels,
makes it more challenging to get economic development and construction
projects off the drawing board. We should carefully monitor
Minnesota's overall investment attractiveness. If we tax our employers
too aggressively, they will invest elsewhere, taking new jobs and
economic development with them. Policymakers' actions should build
confidence and reassure investors, entrepreneurs and employers that
they are welcome, appreciated and have a bright future here."
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Interview Group
includes persons of varying political persuasions,
reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
S. Adams, David Broden, Audrey Clay, Janis Clay, Pat Davies, Bill
Frenzel, Paul Gilje (coordinator), Randy Johnson, Sallie Kemper, Ted
Kolderie, Dan Loritz (chair),
Tim McDonald, Bruce Mooty, John Mooty, Jim Olson, Paul Ostrow, Wayne
Popham, Dana Schroeder, Clarence Shallbetter, and Fred Zimmerman