13.01 TAX INCREMENT FINANCING

Transcription

1 13.01 TAX INCREMENT FINANCING The Primary Purpose of TIF Tax increment financing (TIF) is a method of financing real estate development costs to promote development, redevelopment and housing in areas where it would not otherwise occur. TIF Authorities such as cities, city or county Housing and Redevelopment Authorities, Port Authorities, Economic Development Authorities, or Rural Development Financing Authorities use TIF revenues to encourage developers to invest in new projects. These projects include constructing buildings or other private improvements, cleaning polluted areas, redeveloping areas that contain blight, or paying for public improvements such as streets, sidewalks, sewer and water, and similar improvements. The TIF Concept in Academic Terms Economic development tools such as TIF are often debated where proponents argue their merits as appropriate governmental activities in correcting market failures, while opponents object to the subsidies being granted. The key is often in the but-for evaluation, where proponents argue that development and the associated benefits would not occur but-for the use of the incentive, while opponents claim the development would occur regardless of the subsidy. Figures through illustrate these perspectives with regard to TIF. FIGURE THE CLASSIC EXAMPLE OF TIF TIF terminated V A L U E Declining value in blighted area TIF plan is enacted Continued decline in value absent the use of TIF TIF activities induce an increase in valuation Difference between actual value and frozen value is the captured value Original taxable value Benefit to other taxing jurisdictions T I M E TAX INCREMENT FINANCING

2 Figure shows a classic, and more optimistic, example illustrating the benefits of TIF. In this illustration the value of the property is on a trend to decline (or stagnate) over time absent any intervention such as the use of TIF. The implementation freezes the value for tax purposes and the investments raise the value of the property, placing it on a more positive long-term trend. The taxes associated with the increased value are captured to pay for the investments, but plenty of benefit to all taxing districts is realized in the prevention of further tax base erosion and additional tax base upon the termination of the district. Figures and display more critical, and sometimes pessimistic, examples of the impact of TIF. In Figure , the premise is that the value even if the TIF activities do induce a boost would increase over time and the freezing of the taxable value essentially takes value away from the taxable base of the taxing districts. In this scenario there is some benefit down the road after the district terminates, but it must be weighed against the cost of the lost tax base in the interim. FIGURE A CRITICAL EXAMPLE OF TIF TIF terminated V A L U E Increasing value, no blight TIF plan is enacted Value would continue to appreciate absent the use of TIF TIF activities induce an increase in valuation Original taxable value Captured value Value hijacked from other taxing jurisdictions Benefit to other taxing jurisdictions T I M E Figure is the most pessimistic view, arguing that the development would have occurred without TIF and therefore all of the captured value is a loss to the affected taxing districts, with no positive benefit associated with what amounts to a pure subsidy. Each of these scenarios has the potential to be true, ultimately making TIF a good tool only to the extent that it is prudently and appropriately used. TIF might be best suited to redevelop blighted areas or to be employed in situations where the free market fails to produce appropriate investment in a property. Entities that use TIF must understand that capturing the tax base to pay for the development may keep it from being available to lower taxes for general purposes. TAX INCREMENT FINANCING

3 FIGURE A CRITICAL EXAMPLE OF TIF TIF terminated V A L U E Increasing value, no blight TIF plan is enacted Activities would have happened without TIF Original taxable value (Captured value hijacked from other jurisdictions) Value hijacked from other taxing jurisdictions T I M E Typical Uses of TIF TIF traditionally was used as a means of redeveloping urban areas that had old or worn-out buildings in need of replacement or rehabilitation. It was initiated as a tool to help with urban renewal (redeveloping "slums" and "blighted" areas). Its use has spread to other purposes. TIF in Minnesota is generally used to: Redevelop areas occupied with substandard buildings Build housing for low-income and moderate-income families Clean up pollution Provide general economic development incentives Finance public infrastructure, such as streets, sewer, water, sidewalks, and similar improvements. An Example of How TIF is Used A developer is considering building an office building. The city would like to redevelop a site that consists of three parcels of property (parcels A, B, and C in the figure below). Parcel A is vacant and parcels B and C contain substandard commercial buildings. Parcel D contains a building in good shape. Construction of the office building will require demolition of the two buildings, new utilities (sewer and water), and closing an alley. The cost of acquiring the property, demolishing the substandard buildings, and putting in the utility and alley improvements is $1.5 million. However, the developer could obtain a comparable site elsewhere in the area for $500,000, including special assessments for utilities. The three parcels have a tax capacity of $24,000 and pay $33,600 a year in property taxes (at a % tax rate). TAX INCREMENT FINANCING

4 But if developer builds the planned $5 million office building, the tax will rise to $304,000 per year (an increase of $280,000). To induce the developer to build on the site, the city designates a project area and creates a TIF district that includes the development site. The district consists of parcels A, B, C, and D (the shaded area). (Parcel D must be included to permit the site to qualify as a redevelopment district under state law.) The district is illustrated in Figure (below). The city agrees with developer to acquire the site, demolish the substandard buildings, and put in the utility improvements and vacate the alley. The city, in turn, sells the site to developer for its market value of $500,000. This is commonly called "writing down" the cost of the land. The city's $1.5 million cost is "written down" to $500,000. (The city could write it down to zero--in effect, giving the land to developer.) The computation of the increment is shown in the table. The "project area" is the area in which increment may be spent (e.g., if some of the sewer and water improvements may actually be outside of the district). The extent to which this may be done is restricted by the rules on "pooling." (See paragraph on TIF pooling later in this chapter.) FIGURE Project area TIF district Table Computation of Tax Increment Parcel B (substandard bldg) Parcel A (vacant land) Parcel C (substandard bldg) Parcel D (bldg in good condition) Parcel Original tax capacity Post development tax capacity Captured tax capacity A $18,000 $224,000 $200,000 B $3,000 C $3,000 D $124,000 $124,000 0 Total $148,000 $348,000 $200,000 Tax rate Tax increment $280,000 (tax rate x captured tax capacity) The Source of the Financing TIF Districts capture the additional property taxes paid as a result of new development in the district to pay for part of the development costs. The tax revenue that is generated and collected on the new development is not distributed as provided in general law to the County, School District, City/Township and Special Taxing Districts, but instead is distributed to the TIF Authority that created the district. When a new building is constructed, the market value of the property and its property taxes typically rise. Classic examples would be building a new store on an undeveloped parcel or replacing one or more TAX INCREMENT FINANCING

5 old buildings with a new, larger building. In both of these instances, the market value of the property will rise because the improvements add value to the parcel. The "tax increment or increment" for the district is determined by multiplying the original tax rate by the captured retained net tax capacity. This roughly equals the taxes paid by the captured tax capacity or the increase in taxes that occur as a result of the development. Creation of the Development District and TIF District Development District Before a TIF District can be created, geographic areas for the Development District and the TIF District must be created. A Development District, also known as a project area, is an area within the corporate limits of a city which has been designated and separately numbered by the governing body. In many cases, Development Districts are defined as the geographic boundaries of the City and within a singular Development District, multiple TIF Districts may exist. But there are instances where there are separately numbered Development Districts that coincide with TIF Districts. A Development District must be created prior to the creation of the TIF District. Tax Increment Financing District The TIF District is defined as a contiguous or noncontiguous geographic area within a Development District, or project area, from which some or all of the properties, identified in the tax increment financing plan, will have tax increment generated from the captured retained net tax capacity. The tax increment financing plan should always include the legal descriptions of all the properties that are contained within the plan, along with a map delineating the boundaries. The County Auditor should pay close attention to both of these descriptions because there are cases where the two do not match and the County will need to contact the TIF Authority and require changes to one or both of these items until they match. Tax Increment Financing Plan A Tax Increment Financing Plan is a critical piece of information that gives the detail of an entire project and guides the activities that are to take place. All TIF projects must adhere to all requirements, expenditures, improvements or other objectives listed within the plan. Plans should contain the following information: A. Statement of objectives of an authority for improvement of a project B. Statement of property within development to occur for the project C. Required findings: 1. Type of district 2. Satisfaction of the but for findings unless it is a housing district 3. TIF plan conformity to the municipality s plans for development or redevelopment as a whole 4. Selection of the fiscal disparities option D. List of property(s) the authority intends to acquire E. Identification of all parcels to be included in the district TAX INCREMENT FINANCING

6 F. List of development activities G. Description of other specific development activities that are likely to occur and the date when that development is likely to occur H. Certification of no permits have been issued in the past 18 months I. Estimates of the cost of the project, including administrative expenses J. Estimate of the amount of bonds to be issued K. TIF plan budget with minimum required line-item categories L. Original net tax capacity of the property to be included in the TIF District at completion M. Estimated captured net tax capacity of property in the TIF district N. Estimated impact on all other taxing jurisdictions O. Duration of the TIF District P. Minimum market value election for housing, redevelopment or hazardous substance subdistricts Q. Minimum assessment agreements, if any R. Cost of county road improvements, if any As well, many of the plans include supporting documentation such as: Supporting studies, analyses and documentation for all require findings that define the type of district Narratives, economic development studies, letters, and market value analysis information that validate the but for findings Supporting facts for determination that the TIF plan will afford the maximum opportunity for the development by a private enterprise Documentation that provides proof of notification to the County Auditor of any prior planned improvements on the properties in the district Maps of the development & TIF district boundaries Estimated cash flow assumptions Additionally, there are other statutory requirements that a TIF District must adhere to, many of which should have information included in the TIF plan. The following are some of those requirements: Reporting Requirements Three-year knockout rule Four-year knockdown rule Five-year expenditure limitations Pooling restrictions Excess increment rules Administrative expense limits Modification requirements Developer agreement limitations NOTE: If a TIF plan is later modified, the modification statute requires the municipality to make all required findings again. These findings must also be supported by adequate documentation. Opportunity to Comment on New District Proposed TIF Plan or Modification of an Existing TIF Plan Prior to a Tax Increment Financing Plan becoming a reality the TIF Authority must provide the County Auditor and the Clerk of the School Board with the proposed tax increment financing plan for the TAX INCREMENT FINANCING

7 district and the authority s estimate of the fiscal and economic implications of the proposed TIF district. The TIF Authority must also provide the plan to the County Commissioner to each County Commissioner who represents the area if the TIF district is a housing or redevelopment district. In most cases, the TIF Authority provides a copy of the proposed TIF plan to the Chair of the County Board, regardless of the type of district. The County has 30 days by which it can comment to the TIF Authority on the plans prior to the public hearing. The TIF Authority can request a waiver of the 30-day review period from the school and the county which can be granted upon written approval from the authorities. The Board of Commissioners in many Counties have not been active in commenting on proposed TIF districts, in part because the TIF Authority is not required to do anything in response to those comments. In contrast, some Boards, with assistance from their County Auditors, have closely examined proposed TIF districts and provide comments about them. Comments surrounding potential districts have raised the publics concern about the proposed districts to an extent that the TIF Authority either modifies components of the TIF plan or reconsiders going forward with the creation of the district altogether. Ultimately, the ability for County s to review the plans have proven helpful in detecting substantive or typographical errors and provides the TIF Authority the opportunity to correct the errors prior to the approval of the district. At the time that the County receives the proposed plan, the following are the items that they should pay close attention to: 1. County Road Costs: When the County receives a copy of the proposed plan, it should examine the impact of the proposed development or redevelopment on county roads. The County Board may require the authority to pay all or a portion of the cost of county road improvements out of tax increment revenues if the development will result in a substantial increase in the use of the county roads and if the improvements to the road were not scheduled for reconstruction within the five-year county capital improvement plan. If the county chooses to use increments to finance the road improvements, it must notify the TIF Authority within 45 days after receiving the TIF plan of the estimated costs of the road improvements and a schedule for reconstruction and payment of the costs. 2. Development District and TIF District Boundary line Determinations: The County Auditor should verify that the parcel numbers, legal descriptions and maps all coincide with each other. If there are any variances between the three of them as indicated in the TIF plan and/or with the County records as they pertain to the County records, the County should contact the TIF Authority immediately upon detection of the issues. The County Auditor should make sure that the legal descriptions and parcels that are identified to be within a TIF District are entirely within the district. No parcel can be partially within a TIF district. If any portion of the property is not included in the district, the entire parcel is excluded from the district. In many cases, a subdivision or plat is planned to be filed. The subdivision or plat must be filed and the parcel(s) created prior to the TIF District s final plan and request for certification received by the County. TAX INCREMENT FINANCING

8 3. Identification of Value, Classification, Tax Capacity and Minimum Assessment Agreements: The market value, tax capacity and local tax rate that are considered as the base values for the district are dependent upon the date the County Auditor receives the request for certification of the final TIF district. If a request for certification is received on or before June 30, the current payable year s estimated market value and local tax rate are to be considered as the base values and rate. If the request for certification is received by the County Auditor after June 30, the current assessment year s estimated market value and the subsequent year s local tax rate are considered to be the base value and rate of the district. The County Auditor should review the values and rates used in the assumptions and should make sure the TIF Authority has used the correct values when trying to determine anticipated TIF revenues. 4. District Type & Duration (see Table below) a) Determination of Type of District verify that the projects intended plans and the acceptable district types are agreeable b) Duration The County should verify that the duration dates and planned decertification dates are within the statutory guidelines. TIF Authorities can indicate a decertification date/year that is less than the maximum amount of years to run. In some instances, TIF plans assume a possible decertification date that is earlier than the maximum but do not indicate that the district will definitely decertify upon that date. 5. Examination of Permits The TIF plan must certify that no building permits had been issued on any of the affected parcels for 18 months prior to the request for certification of the district. If permits have been issued on any of the affected parcels, the improvement is not to be included within the retained portion of the TIF District. 6. Examination of any Assessment Agreements In some of the TIF plans, a certification of a minimum market value or assessment agreement is indicated. There are cases where the minimum assessment agreement is referred to in a development plan, which is generally recorded with the County Recorder. In any case, the County Auditor should check with the County Assessor as to whether that office has seen the plans for the improvements and if they had certified a minimum assessed value based upon the plan. If nothing has been provided to the Assessor, the County Auditor should contact the TIF Authority and question the validity of the agreement. 7. Financial Analysis The County Auditor should review the assumptions and financial analysis sections of the TIF plan. Some of the areas that the County should review are as follows: a) Projected tax increment dollars b) Sharing of increment c) Fiscal Disparity Election d) Bonded Debt e) Percentage of NTC already in TIF in Municipality & County in comparison to total TAX INCREMENT FINANCING

9 TABLE : TIF District Types: applicable limits and characteristics Rules that apply to districts for which the request for certification was made after July 1, Note that different duration limits may apply to districts created prior to 07/01/2000. District Type Duration limit (after receipt of first increment) Geographic Areas that Qualify Permitted Uses of Increments Number of districts and % of total (2008)* Economic Development 8 years No restrictions - Manufacturing - Warehousing - R&D facilities - Telemarketing - Tourism in qualifying counties - Commercial developments in small cities % Housing 25 years No restrictions Housing for low- or moderate-income renters or homeowners % Hazardous Substance Subdistricts 25 years Parcels in a TIF district containing polluted sites and contiguous parcels Site acquisition and cleanup 26 Redevelopment 25 years - 70% occupied by buildings, 50% of which are substandard or - certain railyards - tank facilities Correction of conditions justifying creating district % Renewal and Renovation 15 years 70% occupied by buildings, 20% of which are substandard and another 30% require renovation Correction of conditions justifying creating district % Soils Condition 20 years Site contains pollution and cost of cleanup exceeds lesser of $2/sq. Ft. Or the fair market value of the land Site acquisition and cleanup 20.99% Compact Development District 25 years 70% occupied by buildings classified as 3a (C/I), renovation Correction of conditions justifying creating district N/A TAX INCREMENT FINANCING

10 * Office of State Auditor, TIF report (December 2008). The percentages were calculated including districts not listed in the table, i.e., pre-1979 districts (58) and those adopted under special laws (4). The information on hazardous substance subdistricts is from the Department of Revenue for taxes payable in Certification of New District TIF or Modifications to Existing Plan Once the 30 day period to comment and after the TIF Authority has held the statutory public hearing and received approval of the TIF District, the Request for Certification of Value (net tax capacity and market value) and Local Tax Rate is sent to the County Auditor. If the time period is such that the request is after June 30, the County Auditor cannot complete the certification until after such time that the local tax rate is established, which would be sometime after the final rates for the next payable year are established. This will cause a delay in the certification of values and rates, however, the district will not become an active district by which increment will be collected until the payable year following the year from which rates and values are certified. When a district is certified, the TIF Authority will ask the County Auditor to complete two forms samples of both are included below. One of them is the Certification Request Supplement (form ); the other is the County Auditor s Certification as to Original Net Tax Capacity and Original Local Tax Rate for Properties Located in the TIF District (form ). The first form, which is sent to the County along with the final TIF plan, should be completed and sent back to the TIF Authority. The second form is one that is completed in part by the TIF Authority and in part by the County Auditor. A copy of the form is sent back to the TIF Authority; a copy is retained by the County; and the original is sent to the Minnesota Dept of Revenue. Modification to an Existing TIF Plan Modifications to an original TIF plan can be made only after notice and discussion, as required in the original certification of the district, a public hearing and sound findings for the modification. The findings that are required are: 1) Reductions or Enlargements: Reductions are allowed under circumstances where the current net tax capacity of the parcels being eliminated from the district equals or exceeds the net tax capacity of those parcels in the district s original net tax capacity or the original net tax capacity will only be reduced by no more than the current net tax capacity of the parcels eliminated from the district. A district cannot be enlarged after five years following the date of certification of the original net tax capacity by the County Auditor; or 2) There is an increase of bonded indebtedness to be incurred; or 3) The plan is to change in order to capitalize interest on the debt (not included in the original plan) or to increase or decrease the amount of interest on the debt to be capitalized; or 4) There is an increase in the portion of the captured net tax capacity to be retained by the Authority; or 5) There is an increase in the estimated cost of the project, including Administrative expenses, that is to be funded by the increment of the district; or 6) There is additional property that is going to be acquired by the TIF Authority A TIF Authority cannot modify an original TIF plan in the attempt to change the type of the district to another type. In this case, a new plan and district will need to be adopted. TAX INCREMENT FINANCING

11 Form Tax Increment Financing District Certification Request Supplement 1. Municipality Name: 2. District Name: 3. New District District Expansion Hazardous Substance Subdistrict 4. District Type: a. Redevelopment (M.S , Subd. 10). Maximum Duration: 25 years of tax increments. b. Housing (M.S , Subd. 11). Maximum Duration: 25 years of tax increments. c. Renewal and Renovation (M.S , Subd. 10a). Maximum Duration: 15 years of tax increments. d. Housing Replacement (1995 Laws, Chapter 264, Article 5, Sections 44-47; 1996 Laws, Chapter 471, Art. 7, Secs ; 1997 Laws, Chapter 231, Art. 10, Sec. 13). Maximum Duration: 15 years of tax increments from each parcel. e. Soils Condition (M.S , Subd. 19). Maximum Duration: 20 years of tax incements. f. Economic Development (M.S , Subd. 12). Maximum Duration: 8 years of tax increments. 5. If the district is a Redevelopment, Housing or a Hazardous Substance Subdistrict, is the minimum market value tax increment delay option elected (M.S , Subd. 1, Paragraph (b))? Yes No 6. Does the district have extended duration limits provided by a special law? Yes No If yes, law citation: 7. Does the district's plan provide for any sharing of captured net tax capacity with the local taxing districts (M.S , Subd. 2, Paragraph (a))? Yes No TAX INCREMENT FINANCING

12 8. Does the district's plan provide for its captured net tax capacity to be reduced by the fiscal disparity contribution (M.S , Subd. 177, Subd. 3)? (Seven Metropolitan Counties and Taconite Tax Relief Area Counties Only). Yes (Clause B Option) No (Clause A Option) 9. Date the district plan was approved by the Municipality: 10. District contact person: Name: Phone: Address: Signature: (Prepared By) Date: Note: All statute references are as amended by Laws 1995, Chapter 264, Article 5; Laws 1996, Chapter 471, Article 7; and Laws 2000, Chapter 490, Article 11. County Auditor Use Only 12. Certification Request Date: 13. Certification Date: 14. Original Value and Tax Rate Year: Taxes Payable TAX INCREMENT FINANCING

13 Form STATE OF MINNESOTA ) ) ss. STEWARTVILLE COUNTY ) COUNTY AUDITOR S CERTIFICATION AS TO ORIGINAL NET TAX CAPACITY AND ORIGINAL LOCAL TAX RATE FOR PROPERTIES WITHIN THE TIF DISTRICT NO. 4-1 IN THE CITY OF STEWARTVILLE, MINNESOTA I, the undersigned, being the duly qualified and acting County Auditor of Stewartville County, Minnesota (the County ), DO HEREBY CERTIFY to the City of Stewartville in said County (the City ), pursuant to the provisions of Minnesota Statues, Section , Subdivision 1, that the original net tax capacity of all taxable property within the tax increment district designated as TIF District No. 4-1 (the District ) of said City, as described in the Tax Increment Financing Plan for the area approved by resolution of the City Council dated May 30, 2006, is 926. I also certify that such original net tax capacity is composed of the tax capacity of the tax capacity of each parcel of taxable property within the District as determined by the assessment thereof in 2005 for taxes payable in 2006, this being the tax capacity most recently certified by the State of Minnesota as of the date when this certification was requested. I also certify pursuant to the provisions of Minnesota Statutes , Subdivision 1a, that the original local tax rate that applies to the District is , this being the local tax rate for taxes payable in WITNESS my hand and the seal of the County this 30 th day of May, Stewartville County Auditor (SEAL) City s record of request for certification date: May 16, Please indicate the identification Number assigned by the County: Please indicate the Certification Request Date you placed on the County s systems: Actual Certification Date: TAX INCREMENT FINANCING

14 EXHIBIT A TO CERTIFICATE AS TO ORIGINAL TAX CAPACTIY AND ORIGINAL TAX CAPACITY RATE Taxable Parcels Within Tax Increment Financing District No. 4-1 Economic Development Authority for The City of Stewartville, Minnesota Parcel Numbers(s): Market Value: Class Rate: Tax Capacity: (This exhibit differs from one TIF Authority to another. Additional information such as legal description by parcel may be requested) Total Original Tax Capacity of TIF District No. 1-4: $. TAX INCREMENT FINANCING

15 County Auditor Checklist This checklist is a part of the Minnesota State Auditor s Tax Increment Financing County Guide. It highlights some of the most important things that a county must do with regard to administering a TIF district. Approval 30 days before municipality s approval of TIF plan - county and school boards receive information regarding plan and invitation to comment (boards may waive notice period) 45 days after receiving TIF plan - deadline for county to notify TIF authority of request for reimbursement for county road costs Certification Certification request received on or before June 30 recognized for determining local tax rates for current and subsequent levy years Certification request received after June 30 recognized for determining local tax rates for subsequent levy years Original net tax capacity of TIF district must be adjusted to reflect building permits issued within 18 months preceding approval of TIF plan If applicable, assessment agreement reviewed and approved Management County may require TIF authority to reimburse county for expenses related to county administration of TIF district Three-year rule if no qualifying activity within three years after district certification, district must be decertified Four-year rule if authority does not provide evidence of qualifying work undertaken on a parcel within four years of certification, original net tax capacity of that parcel must be excluded from the TIF district Percentage of tax increment (.36%) must be deducted before increment is paid to TIF authority and sent to the state treasurer TAX INCREMENT FINANCING

16 Documentation for County Files Initial TIF plan adopted by the TIF authority and approved by the municipality Any modification or amendments to the TIF plan Resolution approving TIF plan, including date of TIF plan approval by the TIF Authority Documentation supporting the certification request date Date the county auditor certified the original TIF district and each subsequent date of any geographic enlargements of the TIF district Copies of other documentation related to the district: County notification to the Department of Education Special legislation Other relevant correspondence Statutory deadline dates: Date that the district must be decertified Date three-year knockout rule applies Date four-year knockdown rule applies Settlement information, including the date the TIF district received it s first tax increment Statutory decertification date TAX INCREMENT FINANCING

17 Certification of Values and Rates Original Value Certifications & Base Adjustments When a TIF district is created, the county auditor certifies the current tax capacity of the properties in the district as the TIF district's "original net tax capacity." As the property in the district increases in value, these increases above the original net tax capacity are "captured." The law refers to this amount as the district's "captured net tax capacity." There are instances where the base classification and/or value are adjusted. Because of the many changes that can implemented by the Legislature to classification percentages and the dependency on minimum tax increment dollars to pay bonds that are issued, a mechanism by which changes to the base is provided. As well, parcels that are subject to a form of value exclusion are also subject to increases in the base value as exclusions are diminished or removed entirely. The following are circumstances where the County Auditor and County Assessor must adjust the base classification or value: Base Tax Capacity Adjustments 1. Classification law changes M.S , subd. 7 provides that when there is a change in any law governing the classification of real property, the change is applied to both the base and current net tax capacities (and as a result - the captured net tax capacity). This applies to all TIF districts regardless of when they were created. NOTE Examples of legislative changes that would fit this statute would include: A change in class rate A change in tier thresholds The elimination of a classification Any changes made to law as suggested here are year specific. 2. Changes in Exclusion Status 2003 Laws of Minnesota, Chapter 127, Art. 10, Sec. 17 amended M.S , Subd. 1 so that if a property loses its green acre, open space, ag preserve or new plat law exclusion - both the current and base net tax capacities are changed to reflect the loss of the exclusion. This applies to all TIF districts regardless of when they were created. Note that the exclusion has to apply to the base year in order to require an adjustment to the base year net tax capacity under this section. 3. Changes in classification Same statutory reference as #2. Here's the scenarios: Post May 1988: If the current classification changes on a parcel in a TIF district that was created after May 1, 1988 or added by a modification of a Pre May 1988 TIF district that occurred after May 1, the base year TIF classification is changed to match the current classification. Pre May 1988: a) If the current classification changes the parcel's use after December 31, 2002, the base year classification is changed to match the current classification; or b) For changes in use that occurred prior to December 31, 2002 or if the current classification has not changed from when the TIF district was created, the base TAX INCREMENT FINANCING

18 classification remains the same as when the TIF district was created (with the possible exception of changes taxable/exempt status). A classification change is defined as occurring if the new classification has a different assessment ratio than the previous classification. NOTE The determination of a classification change can be complicated by splits, combinations, new plats, or other similar divisions where the change in classification may not be readily apparent. 4. Exempt to Taxable (M.S , subd. 1(c)) When a property changes classifications from exempt to taxable, a new base value is established. The value to be used is one of the following: 1. If the six-year exempt report has been produced in the past year, the base value is from that report. 2. If the parcel is not on the six-year exempt report or if the date of transfer making the property taxable is outside of that one year window, the base value is determined by the assessor as of the date of the transfer. 3. If improvements are made to an exempt property after the TIF district is created but before the parcel becomes taxable, the TIF authority may request the assessor to value those improvements separately and the auditor to exclude the value of the new improvements from the new base value. 4. If substantial improvements are made to a parcel after certification of the TIF district by the county auditor and if the parcel becomes exempt as a result of tax forfeiture, or foreclosure or a similar lease or revenue agreement, then the new base value is the base value before the property the property became exempt. NOTE Counties need to be attentive to ownership changes as the process can get interesting if a parcel goes partially taxable or if the portion of the property that is exempt changes from one year to the next or changes from taxable to exempt and back to taxable all within the same year. 5. Taxable to Exempt (M.S , subd. 1(e)) If a taxable parcel in a TIF district becomes exempt, the new base value becomes zero. Some counties change the base market value to zero and assign an exempt classification - other counties just change the classification to an exempt classification to arrive at a base tax capacity of zero. 6. Tax Adjustments that Affect the Base Year (M.S , subd. 1(e)) If a tax court petition or county abatement affects the base year value for a parcel in a TIF district, the change in base value is applied to that year and subsequent tax years. 7. Substandard Buildings (M.S , subd. 1(f)) If a parcel contained a substandard building that was removed and the TIF authority chooses to treat the parcel as having been occupied by a substandard building, the auditor assigns a new base TAX INCREMENT FINANCING

19 value equal to the greater of: 1) the current net tax capacity of the parcel or 2) the value of the parcel for the year that the building was removed (using the current class rates). 8. Qualified Disaster Areas (M.S , subd. 1(g)) For qualified disaster areas in redevelopment districts, the base value for any parcel with a building with substantial damage as a result of the disaster is the existing base value for land only. 9. Presidential Disaster Area (M.S , subd. 1c) If the parcel is located in a federal disaster area and the TIF authority requests the change, the base value is reduced by the value of the damage to the property (but not less than zero) as determined by the assessor. In each of the subsequent years following the certification of the original net tax capacity, the County Auditor must certify the amount by which the original net tax capacity has increased or decreased as a result of: 1. a change in tax exempt status of property within the district and any subdistrict 2. a reduction or enlargement of the district; or 3. changes in prior planned improvements Creation of a Hazardous Substance Subdistrict (HSS) A TIF Authority can establish within a TIF District a Hazardous Substance Subdistrict. The geographic area of the subdistrict is made up any parcels the municipality has designated for inclusion in the district that are hazardous substance sites and any additional sites that are contiguous to the hazardous sites. The creation of the subdistrict is contingent on two supporting facts: 1) The development or re-development of the site would not occur through private and tax increment funding, therefore the hazardous substance subdistrict is deemed necessary 2) The subdistrict is not larger than, and the period of time that tax increments are expected to be collected is not longer than, that which is necessary to provide for the additional costs due to the existence of a hazardous substance Local Tax Rate Certification When a TIF district is created, the county auditor certifies an "original local tax rate." The original tax rate is total property tax rate that applies in the district, i.e., the tax rates imposed by all of the local governments that levy taxes (the city/town, county, school district, and special taxing districts) by UTA. A TIF District can overlap between UTA s, so the County Auditor may need to certify more than one set of rates. If a TIF district is expanded, the local tax rates that are associated with the expansion at the time of the County receives the request for certification of the expansion or modification also need to be certified and applied toward those parcels in the expansion area. Differences between Increment and the Full Taxes (Excess Taxes and Fiscal Disparities) The increment does not always equal the full taxes paid by the captured value. The original tax rate limits increment to the taxes generated by the tax rates in effect when the district was created. Thus, if the local governments increase their tax rates (e.g., to increase revenues or because of changes in the tax TAX INCREMENT FINANCING

20 base), the increased rates do not yield more increment. Furthermore, in the twin cities metropolitan area and in the taconite tax relief area, increment may be reduced by the fiscal disparities contribution for the district's properties, if the city elects that option. Note that the excess taxes in this discussion, which may be referred to as excess TIF or base excess, are different from excess increments (or surplus TIF ) which are discussed later in this Section Increments May Be Attributable to Other Factors as well as New Construction Increments may be attributed to: Construction of improvements Overall inflation in property values unrelated to development Market effects that are attributable to the TIF development, if the properties are in the TIF district. (proximity to a new development, in many cases, will increase the value of surrounding properties.) Market effects that are unrelated to the TIF development, if the properties are in the TIF districts. (market values in areas around TIF districts may increase and these increases may be caused by factors, such as shifts in locational values or tastes, other than the TIF development. For example, some researchers have observed the tendency of cities to put TIF districts in areas that are already experiencing rising property values.) Other Limitations to Using TIF as a Financing Method Development costs must be paid "up-front" or at the very beginning of the development, but the increased property taxes (increments) are not paid until later and, then, only in modest amounts (relative to the development costs) spread over many years. This creates an imbalance or mismatch between costs and revenues. TIF traditionally overcomes this mismatch by issuing bonds. These bonds pay for: 1. Development cost (e.g., site acquisition); 2. Interest on the bonds until increments are received. The need to pay these interest costs on borrowing, pending receipt of increments is commonly referred to as capitalizing interest. The need to capitalize interest means that increment flows must be larger to pay off this component of the cost. Before 1986, bonds were routinely used as part of TIF financing. These bonds were usually tax exempt, providing a lower interest rate to the city and the developers. The 1986 tax reform made it more difficult to issue tax-exempt bonds for this purpose. This took away much of the incentive for the local TAX INCREMENT FINANCING

21 governments to borrow in anticipation of receipt of tax increments. The practice in Minnesota now often does not use bonds, but instead expects developers to pay the costs and to be reimbursed as increments become available. This approach (called "pay-as-you go" financing) shifts the "capitalized interest" costs to the developers. In some cases, the city or development authority absorbs the cost by advancing its money (e.g., from another city or authority fund) until it can be reimbursed with the increments. If the city accepts lower or no interest on these advances, it is using these funds to assist or subsidize the development. Local Governments Roles in TIF Four types of governmental units have some role under the TIF law: 1. Development authorities. These entities (e.g., a housing and redevelopment authority or HRA) make nearly all the important decisions, such as deciding whether to use TIF, determining how it will be used, adopting TIF plans, and so forth. They also implement TIF decisions enter development agreements, contract for TIF work, and so forth. 2. Municipalities. The municipality, usually a city, must approve some of the TIF decisions made initially by the development authority. In a few instances, the municipality is charged with making direct TIF findings or decisions. In many cases, the municipality controls the development authority or, in fact, is the development authority. 3. Counties. The county is responsible for administering much of the TIF law that relates to the collection and distribution of increments. Otherwise the county's role is limited to making advisory comments on major TIF decisions of the development authority. 4. School districts. Schools' role in TIF is largely limited to making advisory comments on major TIF decisions of the development authority. The Role of the County in TIF Decisions Counties have fairly limited roles in making TIF decisions, although county officials are responsible for administering the collection and distribution of increments for TIF districts. The counties powers and responsibilities consist of three components: 1. Making comments on proposed TIF plans and major amendments 2. Charging for county road costs that are stimulated by the TIF development 3. Administering the collection and distribution of TIF revenues for the authority. Before approving a TIF district, the development authority must notify the county and provide a copy of the proposed TIF plan and an estimate of the impact on the county. M.S , subd. 2. This must be done at least 30 days before the public hearing is scheduled. For housing or redevelopment districts, separate notices must also be given to individual county commissioners who represent the area of the district. M.S , subd. 2a. If the county disagrees with the TIF proposal, its only power is to persuade the authority to abandon or modify its plans. It cannot veto or delay adoption of the plan. TAX INCREMENT FINANCING

22 Road Costs The county may charge the TIF authority for county road costs, if: The TIF development will (in the county s judgment) substantially increase the use of county roads requiring construction of improvements or other costs and A formal county plan had not scheduled the improvements for construction within five years. M.S , subd. 1a. After receiving the TIF plan, the county has 45 days to submit the road costs to the development authority. M.S , subd. 1(b). The authority is required to add the improvements to the TIF plan. Since the TIF plan can be approved within 30 days and road costs may be submitted after 45 days, this may require a plan amendment. If the costs break the budget in the TIF plan, the authority and county are to negotiate an agreement to permit the financing. If they cannot agree, the dispute must be submitted to binding arbitration. M.S The County s Role in Administering TIF Although counties have a very limited decision making role in TIF, county officials have a substantial role in administering TIF. Specifically, county officials: Certify and maintain an ongoing record of the original tax capacity of the TIF district, M.S , subd. 1 (auditor). Calculate the captured tax capacity, M.S , subd. 2 (auditor). Certify assessment agreements as reasonable, M.S , subd. 8 (assessor). A city assessor performs this function, if a city assessor is responsible for assessing the property. Determine and collect the increment for the district, M.S , subd. 3 (treasurer). Distribute increment to the development authority, M.S. Ch. 276 (treasurer). Distribute excess increments and excess taxes to the taxing jurisdictions, M.S , subd. 2; , subd. 9 (treasurer). Notifying the Department of Education of distributions to school districts of excess increments and taxes, M.S , subd. 2; , subd. 9(a) (auditor). Enforce the four-year knock-down rule, M.S , subd. 6 (auditor). Decertify districts at the end of their legal duration limits, M.S , subd. 12 (auditor). This includes enforcing the three-year activity rule (also called the three-year knock-out rule). M.S , subd. 1a. The county may require the development authority to pay these administrative costs. These costs are not subject to the percentage limitations on administration expenses. Increments from the district are generally used for this purpose. M.S , subd. 4h. Three-Year Knockout Rule If a TIF district has no qualifying activity within three years after certification of the district, the County Auditor must decertify the district. A qualifying activity can be the sale of certain bonds, the authority s TAX INCREMENT FINANCING

23 acquisition of property within the district, or the construction of public improvements within the district. Activity that takes place before a TIF district is certified is not a qualifying activity for purposes of the three-year rule, and the rule applies to the entire district and not individual parcels. Four-Year Knockdown Rule If, after four years from the date of certification of the original net tax capacity of the tax increment financing district pursuant to section , no demolition, rehabilitation, or renovation of property or other site preparation, including qualified improvement of a street adjacent to a parcel but not installation of utility service including sewer or water systems, has been commenced on a parcel located within a tax increment financing district by the authority or by the owner of the parcel in accordance with the tax increment financing plan, no additional tax increment may be taken from that parcel, and the original net tax capacity of that parcel shall be excluded from the original net tax capacity of the tax increment financing district. If the authority or the owner of the parcel subsequently commences demolition, rehabilitation, or renovation or other site preparation on that parcel including qualified improvement of a street adjacent to that parcel, in accordance with the tax increment financing plan, the authority shall certify to the County Auditor that the activity has commenced, and the County Auditor shall certify the net tax capacity that which is the most recently value certified by the commissioner of revenue and add it to the original net tax capacity of the tax increment financing district. The County Auditor must enforce the provisions of this subdivision. The authority must submit to the County Auditor evidence that the required activity has taken place for each parcel in the district. The evidence for a parcel must be submitted by February 1 of the fifth year following the year in which the parcel was certified as included in the district. Minn. Stat , subd. 6. For purposes of this subdivision, qualified improvements of a street are limited to: 1) construction or opening of a new street, 2) relocation of a street, and 3) substantial reconstruction or rebuilding of an existing street. This provision applies to each parcel individually rather than the TIF district as a whole. Demolition, rehabilitation, renovation, or other site preparation, including qualifying street improvements, must be made on each parcel in accordance with the TIF plan within four years after certification of the TIF district. The TIF authority must submit evidence of each parcel s qualifying activity to the County Auditor. Because the qualifying activity must be authorized by the TIF plan, the county auditor should review the TIF plan and the qualifying activity documentation to see if the two are consistent and should require information from the authority that is sufficient to make this evaluation. If no demolition, rehabilitation, renovation or other site preparation has taken place on a parcel, or if the activity that did occur was not authorized by the TIF plan, the original net tax capacity of the parcel must be excluded from the TIF district. If subsequent qualifying activity takes place, the most recent net tax capacity of the parcel is added back to the original net tax capacity of the TIF district. TAX INCREMENT FINANCING