SUMMARY OF THE MISSOURI REAL PROPERTY TAX INCREMENT ALLOCATION REDEVELOPMENT ACT

Transcription

1 SUMMARY OF THE MISSOURI REAL PROPERTY TAX INCREMENT ALLOCATION REDEVELOPMENT ACT PREPARED BY: JAMES E. MELLO ROBERT D. KLAHR LAUREN ASHLEY SMITH ARMSTRONG TEASDALE LLP 7700 FORSYTH BOULEVARD, SUITE 1800 ST. LOUIS, MISSOURI (314) AUGUST 2010

2 I. Introduction Tax increment financing ( TIF ) is a redevelopment tool used by local governments to underwrite redevelopment project costs that would otherwise make a redevelopment project economically unfeasible. TIF has its roots in urban renewal it began in California in the late 1970s in reaction to cuts in federal funds available for community and economic development. Now nearly 40 states, including Missouri, have adopted some form of TIF. Missouri s Real Property Tax Increment Allocation Redevelopment Act, , RSMo (the TIF Act ) is typical of most TIF statutes. It enables cities to finance certain redevelopment costs with the revenue generated from (i) payments in lieu of real estate taxes, as measured by the net increase in assessed valuation resulting from redevelopment and (ii) a portion of the increase in other local tax revenue associated with new economic activity. Tax increment financing is a pay-for-itself and pay-as-you-go redevelopment tool. It is premised on the theory that by agreeing to underwrite certain redevelopment project costs, a local government can attract new private development in a redevelopment area, which will in turn generate the new tax revenues used to retire notes or bonds issued to pay for the redevelopment project costs. When a TIF plan is adopted, real estate taxes in the redevelopment area are frozen at their current level. By applying the real estate tax rate of all taxing districts having taxing power within the redevelopment area to the increased assessed valuation resulting from redevelopment, a tax increment is produced. The real estate tax increments are referred to as payments in lieu of taxes, or PILOTs, and are deposited in a special allocation fund. In addition to PILOTs, fifty percent of certain local taxes generated by new economic activities in the redevelopment area, such as sales taxes and taxes on utility gross receipts (economic activity taxes, or EATs ), are deposited in the special allocation fund. The revenue from PILOTs and EATs in the special allocation fund is then used to directly pay for project costs or to retire obligations issued to pay project costs. II. Implementation of TIF TIF may be utilized by any city, village or incorporated town within the state or any county (4), RSMo. However, a county may not implement a TIF project within a city without first receiving approval from the city , RSMo. Prior to utilizing TIF, the following actions must be taken. A. Redevelopment Plan 1. There must be a redevelopment plan proposed, which must describe the redevelopment area, provide for redevelopment of it through one or more projects and contain at least the following information , RSMo. 1 Armstrong Teasdale LLP

3 B. TIF Commission a. a general description of the programs to be undertaken, b. estimated redevelopment costs, c. anticipated sources of funding, d. evidence of commitments to provide financing, e. anticipated type and term of funding, f. anticipated type and terms of obligations (if any) to be issued, g. most recent assessed evaluation of property within the redevelopment area, h. estimated assessed value following redevelopment, i. general land use in the redevelopment area. 1. A TIF commission shall be formed, which shall consist of nine members in the City of St. Louis and in counties outside the St. Louis metro area; or eleven members in all cities outside St. Louis County; or twelve members in St. Louis County or any city within St. Louis County. The TIF commission members shall consist of the following individuals ( , RSMo): a. two representatives of the school district or districts in which the redevelopment area is located; b. one representative of other taxing entities (these members serve only during the public hearing process); c. six members appointed by the municipality (these members serve four-year terms); and d. two or three additional members of an eleven or twelve member TIF commission appointed by the county in which the municipality is located or, if the TIF commission is being formed by St. Louis County, appointed by the city or cities in which the redevelopment area is located. 2. As of August 28, 2008, in cities within St. Louis, St. Charles, and Jefferson Counties, the TIF commission shall consist of twelve persons to be appointed as follows ( , RSMo): a. Six members appointed by either the county executive or commissioner (these members shall serve on the commission until they are replaced). 2 Armstrong Teasdale LLP

4 b. Three members appointed by the municipalities (these members serve only during the time the redevelopment project is considered for approval). c. Two members appointed by the school boards (these members serve only during the time the redevelopment project is considered for approval). d. One member to represent other taxing entities (these members serve only during the time the redevelopment project is considered for approval). 3. The TIF commission must hold public hearings relative to the proposed plan and must vote and make its recommendation to the governing body regarding the plan within 30 days after the hearing , RSMo. 4. The following public hearing notice requirements are jurisdictional and must be strictly complied with , RSMo. a. Taxing districts with taxable property in redevelopment area must receive notice by certified mail at least 45 days prior to hearing. b. Property taxpayers within the area must be notified by mail at least 10 days prior to hearing. c. Public notified by publication of two notices, the first not more than 30 days before the hearing, the second not less than 10 days before the hearing. 5. If, after conclusion of the public hearing, the commission makes a recommendation under in opposition to the proposed plan, a municipality may approve the plan by a two-thirds majority vote of the governing body of the municipality; otherwise only a majority vote of the governing body is required. Notice of at least four business days prior to voting and a public hearing where interested parties and citizens have an opportunity to be heard are required when the municipality votes to approve the plan unless passage of an ordinance approving the plan requires two separate readings on different days , RSMo. 6. A county, city, town, or any entity created by these political subdivisions may need to provide additional notice and opportunities for public comment when voting to implement a tax increase or with respect to a retail development project which utilizes the power of eminent domain unless passage of an ordinance dealing with such issues requires two separate readings on different days , RSMo. C. TIF Ordinances 3 Armstrong Teasdale LLP

5 1. An ordinance or ordinances (or in the case of counties, a resolution) shall be adopted approving the redevelopment plan, project and area and adopting tax increment financing. The ordinance or ordinances must be introduced at least 14 days, but no more than 90 days, after the public hearing , RSMo. 2. The ordinance approving the redevelopment plan must contain the following findings which are legislative in nature and will be upheld upon judicial review unless arbitrary, fraudulent or based on collusion , RSMo; Dalton v. Land Clearance for Redevelopment Authority of Kansas City, 270 S.W.2d 44 (Mo. 1987) a. the redevelopment area, taken as a whole, is a blighted area, a conservation area, or an economic development area; b. the redevelopment area is not reasonably expected to develop without the adoption of the plan (the but-for test); c. the redevelopment plan conforms to the municipality s comprehensive plan for development; d. the redevelopment plan will be completed and debt retired no more than 23 years after adoption of the ordinance approving TIF; e. a plan providing relocation assistance to residents and businesses complying with , RSMo, has been developed. III. The Mechanics of TIF ( , RSMo) A. Special Allocation Fund A special allocation fund is established to pay for redevelopment costs, which may include debt service for bonds. The incremental PILOTS and EATs are deposited into special allocation fund. In addition PILOTS and EATs, certain redevelopment plans and projects receiving the approval of the state department of economic development and the state office of administration are, subject to annual appropriation by the state general assembly, eligible to receive up to fifty percent (50%) of the new state revenues estimated for businesses within the redevelopment area. At the election of the municipality, such new state revenues consist of one of the following: 1. The incremental increase in the general revenue portion of state sales tax revenues, excluding sales taxes that are constitutionally dedicated, taxes deposited to the school district trust fund, sales and use taxes on motor vehicles, trailers, boats and outboard motors and future sales taxes earmarked by law; or 4 Armstrong Teasdale LLP

6 B. PILOTS 2. The state income tax withheld on behalf of new employees by the employer at the business located within the project as identified by the municipality. The state income tax withholding shall be the municipality s estimate of the amount of state income tax withheld by the employer within the redevelopment area for new employees who fill new jobs directly created by the TIF project. Property taxes are frozen at their pre-redevelopment level and payments in lieu of taxes (PILOTS) equal to the additional real estate taxes that would have been assessed due to the increased property value are paid into the special allocation fund by the property owner. C. EATS One-half of the additional economic activity taxes (EATS) are paid by the local taxing districts into the special allocation fund. 1. Included in the EATS payment are most local taxes on sales, gross receipts. earnings and utilities. 2. Excluded from the EATS payment are state sales tax and local sales taxes on hotel and motel rooms, license fees, special assessments and personal property taxes. 3. Surplus EATS not necessary for redevelopment costs are distributed annually to local taxing districts in proportion as real property taxes are distributed. D. Surplus Once all redevelopment costs are paid and TIF debt retired, remaining funds in the special allocation fund shall be declared surplus and distributed to local taxing districts. E. Example of TIF in Action An example best illustrates how the theory of tax increment financing is put into practice. Suppose a city has an area that has either not been developed or has been developed but the improvements have deteriorated or are obsolete. Because of the area s location, it is ideal for redevelopment, but the area has not been redeveloped because the cost of redevelopment would prevent private developers from making a reasonable profit. Ordinarily, the area would remain vacant or continue to deteriorate because private developers would pursue profitable development projects in other areas. Because of the area s importance to the community, however, the city governing body designates the area as a TIF redevelopment area and adopts a plan for the improvement of the area. The plan provides for reimbursing a developer for certain redevelopment costs incurred in 5 Armstrong Teasdale LLP

7 redeveloping the area. The reimbursement would come from new tax revenues generated by the redevelopment, which is referred to as the tax increment. Prior to the TIF redevelopment area being formed, the area generated $10,000 per year in property taxes. Based on the plan, a developer agrees to construct a major facility that would generate an additional $100,000 per year in property taxes. In return, the City agrees to issue TIF notes to the developer, which represent the City s obligation to reimburse the developer for approved redevelopment costs incurred by the developer in redeveloping the area. The reimbursement will be made by payments from the increment of $100,000 per year that is generated once the project is complete. These payments are projected to pay off the TIF notes over a ten-year period, after which the TIF Note expires. During the life of the TIF notes, the original $10,000 per year property taxes would not be affected and taxing jurisdictions would continue to receive their respective shares of these monies. After the repayment or expiration of the TIF notes, the TIF redevelopment area is dissolved, having served its purpose, and the $100,000 per year increment is redistributed to local taxing jurisdictions every year as ordinary tax revenue. IV. Redevelopment Area The TIF Act provides for the use of TIF to finance improvements within a geographically defined area called a redevelopment project area or a redevelopment area. In order to qualify as a redevelopment area, and thus for TIF assistance, an area must be found by the local legislative body to be either a blighted area, a conservation area, or an economic development area. The following is a discussion of the three categories of property that can qualify as a redevelopment area. A. Blighted Area The definition of a blighted area has two parts (1), RSMo. 1. First, there must exist a predominance of one or more of the following conditions: a. defective or inadequate street layout, b. insanitary or unsafe conditions, c. deterioration of site improvements, d. improper subdivision or obsolete platting, e. the existence of conditions which endanger life or property by fire or other causes, or f. any combination of such factors. 6 Armstrong Teasdale LLP

8 2. Second, the existence of one or more of the above-listed conditions must either: a. retard the provision of housing accommodations, b. constitute an economic or social liability, or c. constitute a menace to the public health, safety, morals or welfare. Vacant, unimproved land may fit the definition of blight if it is a portion of a larger tract that, as a whole, is a blighted area (see Parking Systems, Inc. v. Kansas City Downtown Redevelopment Corp., 518 S.W.2d 11 (Mo. 1974)) or, if it has remained undeveloped because one or more of the statutory blight factors exists and has produced one or more of the statutory blight conditions. Atkinson v. Planned Industrial Expansion Authority, 517 S.W.2d 36 (Mo banc 1978). For example, a vacant parcel suitable for retail sales may be blighted if served by an already overburdened street (inadequate street layout) which causes the parcel to be undevelopable (an economic liability) without substantive upgrading to handle increased traffic. But virgin territory or pristine wilderness is not blighted. Atkinson, supra. California courts have overturned blight findings involving vacant land in two cases. See Sweetwater Civic Assoc. v. City of National City, 133 Cal. Rptr. 859 (Cal. 1976) (golf course subject to flooding) and Emmington v. Salano County Redevelopment Agency, 195 Cal. App. 3d 491 (1987) (two small villages and 10,000 acres of farm land). B. Conservation Area A conservation area is an improved area in which 50 percent or more of existing structures are more than 35 years old, which is not yet blighted, but detrimental to the public health, safety morals or welfare and may become blighted due to one or more of the following factors (3), RSMo. 1. dilapidation, 2. obsolescence, 3. deterioration, 4. illegal use of individual structures, 5. presence of structures below minimum code standards, 6. abandonment, 7. excessive vacancies, 8. overcrowding of structures and community facilities, 9. lack of ventilation, light or sanitary facilities, 7 Armstrong Teasdale LLP

9 10. inadequate utilities, 11. excessive land coverage, 12. deleterious land use or layout, 13. depreciation of physical maintenance, and 14. lack of community planning. C. Economic Development Area An economic development area is an area that does not meet the standards of a blighted area or conservation area, but the redevelopment of such an area is determined by the municipality to be in the public interest in order to accomplish one or more of the following outcomes (5), RSMo. 1. discourage commerce, industry or manufacturing from relocating in a different state, 2. increase employment, or 3. preserve or enhance the municipality s tax base. It should be noted that, in an economic development areas, TIF funds shall only be used for public infra-structure; TIF shall not be used to funding buildings , RSMo. A redevelopment area may not be found to be both blighted and an economic development area. Smith v. Independence Tax Increment Financing Commission, 919 S.W.2d 292 (Mo. App. (1996)) V. TIF Eligible Costs The TIF Act provides for the use of TIF to pay all reasonable or necessary costs incurred or incidental to a redevelopment project. A non-exhaustive list of redevelopment costs that may be reimbursed from TIF proceeds is as follows (11). A. Redevelopment Project Costs Redevelopment project costs include the sum total of all reasonable or necessary costs incurred or estimated to be incurred, and any such costs incidental to a redevelopment plan or redevelopment project, as applicable. Such costs include without limitation the following: 1. costs of studies, surveys, plans, and specifications; 2. professional service costs, including, but not limited to, architectural, engineering, legal, marketing, financial, planning or special services; 8 Armstrong Teasdale LLP

10 3. property assembly costs, including, but not limited to, acquisition of land and other property, real or personal, or rights or interests therein, demolition of buildings, and the clearing and grading of land; 4. costs of rehabilitation, reconstruction, or repair or remodeling of existing buildings and fixtures; 5. costs of construction of public works or improvements; 6. costs of issuing TIF obligations; 7. all or a portion of a taxing district s capital costs resulting from the redevelopment project necessarily incurred or to be incurred in furtherance of the objectives of the redevelopment plan and the redevelopment project, to the extent the City by written agreement accepts and approves such costs; 8. relocation costs to the extent the City determines that relocation costs shall be paid or are required to be paid by federal or state law; and VI. Municipality s Powers and Duties A. Municipality s Powers The municipality or the TIF commission (if the municipality has delegated such powers or duties) may exercise the following powers ( , RSMo.): 1. enter into all contracts necessary or incidental to the implementation and furtherance of the plan; 2. acquire by purchase or eminent domain and dispose of property as is reasonably necessary to achieve the objectives of the plan; 3. clear any area by demolition or removal of existing buildings and structures; 4. renovate, rehabilitate or construct any structure or building; 5. install, repair, construct, reconstruct or relocate streets, utilities and site improvements; 6. fix and collect rents; 7. accept grants, guarantees and donations or property, labor or other things of value from a public or private source; 8. acquire and construct public facilities; 9 Armstrong Teasdale LLP

11 9. incur redevelopment costs and issue obligations; 10. make payments in lieu of taxes, or a portion thereof, to taxing districts; 11. disburse surplus funds from the special allocation fund to taxing districts as follows: a. surplus payments in lieu of taxes shall be distributed on a basis that is proportional to the current collections or revenue which each taxing district receives from real property in the redevelopment area; b. surplus economic activity taxes shall be distributed on a basis that is proportional to the amount of such economic activity taxes the taxing district would have received from the redevelopment area had TIF not been adopted; c. all other surplus funds shall be distributed on a basis that is proportional to the total receipt of such other revenues in such account in the year prior to disbursement. 12. charge as a redevelopment cost the reasonable costs incurred by its clerk or other official in administering the redevelopment project. B. Municipality s Duties The TIF Act places various duties members of the governing body of the municipality, members of the TIF commission, or employees or consultants of the municipality involved in the planning or preparation of the redevelopment plan or redevelopment project who own or control an interest, direct or indirect, in any property included in a redevelopment area. These duties are summarized below (13), RSMo. 1. the interested member or employee shall disclose such interest in writing to the clerk of the municipality and shall also disclose the dates, terms and conditions of any disposition of such interest; 2. the interested member or employee shall refrain from: (a) any further official involvement in regard to such redevelopment plan, redevelopment project or redevelopment area; (b) voting on any matter pertaining to such plan, project or area; (c) communicating with other members concerning any matter pertaining to such plan, project or area; 3. no member or employee shall acquire any interest, direct or indirect, in any property in a redevelopment area after the earlier of (a) the time that such individual obtains knowledge of such plan or project, or (b) the first public notice of such plan, project, or area. 10 Armstrong Teasdale LLP

12 VII. Reporting and additional procedural requirements ( , RSMo) A. Annual Report on Special Allocation Fund The municipality must submit an annual report to the state department of economic development and publish a statement regarding the collection and disbursement of special allocation funds and the status of the project. This report shall include the following: 1. The amount and source of revenue in the special allocation fund. 2. The amount and purpose of expenditures from the special allocation fund. 3. The amount of any pledge of revenues, including principal and interest on any outstanding bonded indebtedness. 4. The original assessed value of the redevelopment project. 5. The assessed valuation added to the redevelopment project. 6. Payments made in lieu of taxes received and expended. 7. The economic activity taxes generated within the redevelopment area in the calendar year prior to the approval of the redevelopment plan, to include a separate entry for the state sales tax revenue base for the redevelopment area or the state income tax withheld by employers on behalf of existing employees in the redevelopment area prior to the redevelopment plan. 8. The economic activity taxes generated within the redevelopment area after the approval of the redevelopment plan, to include a separate entry for the increase in state sales tax revenues for the redevelopment area or the increase in state income tax withheld by employers on behalf of new employees who fill new jobs created in the redevelopment area. 9. Reports on contracts made incident to the implementation and furtherance of a redevelopment plan or project. 10. A copy of any redevelopment plan, which shall include the required findings and cost-benefit analysis. 11. The cost of any property acquired, disposed of, rehabilitated, reconstructed, repaired or remodeled. 12. Any additional information the municipality deems necessary. B. Publication of an Annual Statement In addition to the annual reporting requirement, also requires that the municipality publish an annual statement in a newspaper of general circulation in the city. This 11 Armstrong Teasdale LLP

13 annual statement must include information on: the status of the TIF plan and project(s), payments made in lieu of taxes received and expended in that year, the amount of outstanding bond indebtedness; and any additional information the municipality deems necessary. C. Five-Year Review of Redevelopment Plan A public hearing on the redevelopment plan is required every five years. The purpose of the hearing shall be to determine if the redevelopment project is making satisfactory progress under the proposed time schedule contained within the approved plans for completion of such projects. D. Penalty for Noncompliance with Reporting Requirements Municipalities that fail to comply with TIF reporting requirements in will be prohibited from implementing any new TIF projects for at least five years. E. Other Reporting Requirements 1. Selection of a Redeveloper: The selection of a redeveloper requires that a municipality solicit proposals prior to entering into a redevelopment contract. 2. Transfer of Real Property: The municipality shall publicly disclose the terms of any transfer of real property. VIII. TIF Bonds ( , RSMo) TIF bonds may be issued by the TIF commission or the municipality. Such TIF bonds are not general obligation bonds and are secured by the special allocation fund. However, the municipality may provide added security interest in any new net revenue generated by any redevelopment project or by a mortgage on part or all of the redevelopment project. IX. Summary TIF is a valuable economic development tool. TIF is premised on the philosophy that redeveloping an area spurs economic development, which in turn generates new tax revenue to pay for the cost of redevelopment and more, all of which results in a net gain to the community. Although the municipality issues notes or bonds to pay for the part of the cost of redevelopment, it does not pledge its general fund to the repayment of the TIF obligations; rather, the TIF obligations are repayable solely from the new tax revenues deposited in the special allocation fund. In effect, the municipality, along with the other affected taxing jurisdictions, pays for a portion of the redevelopment by foregoing a portion of the increased tax revenue until the notes or bonds are paid off. Under TIF, the affected taxing jurisdictions can justify temporarily foregoing the increased tax revenue because the municipality has determined that but for the use of TIF reimbursements for approved redevelopment costs, the redevelopment and the resulting increase in tax 12 Armstrong Teasdale LLP

14 revenues would not occur. Thus, TIF is appropriate in circumstances where redevelopment is not likely to take place without the incentive that TIF offers. 13 Armstrong Teasdale LLP