13.01 TAX INCREMENT FINANCING

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 13.01-1 through 13.01-3 illustrate these perspectives with regard to TIF. FIGURE13.01-1 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 13.01-1

Figure 13.01-1 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 13.01-2 and 13.01-3 display more critical, and sometimes pessimistic, examples of the impact of TIF. In Figure 13.01-2, 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 13.01-2 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 13.01-3 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 13.01-2

FIGURE 13.01-3 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 140.000% tax rate). TAX INCREMENT FINANCING 13.01-3

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 Figure13.01 4 (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 13.01-4 Project area TIF district Table 13.01 1 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 140.000 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 13.01-4

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 13.01-5

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 13.01-6

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 13.01-7

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 13.01-2 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 13.01-8

TABLE 13.01 2: TIF District Types: applicable limits and characteristics Rules that apply to districts for which the request for certification was made after July 1, 2000. 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 454 22.41% Housing 25 years No restrictions Housing for low- or moderate-income renters or homeowners 545 26.90% 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 920 45.41% 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 25 1.23% 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 13.01-9

* 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 2008. 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 13.01-1); 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 13.01-2). 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 13.01-10

Form 13.01-1 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. 469.174, Subd. 10). Maximum Duration: 25 years of tax increments. b. Housing (M.S. 469-174, Subd. 11). Maximum Duration: 25 years of tax increments. c. Renewal and Renovation (M.S. 469.174, 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. 21-22; 1997 Laws, Chapter 231, Art. 10, Sec. 13). Maximum Duration: 15 years of tax increments from each parcel. e. Soils Condition (M.S. 469.174, Subd. 19). Maximum Duration: 20 years of tax incements. f. Economic Development (M.S. 469.174, 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. 469.175, 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. 469.177, Subd. 2, Paragraph (a))? Yes No TAX INCREMENT FINANCING 13.01-11

8. Does the district's plan provide for its captured net tax capacity to be reduced by the fiscal disparity contribution (M.S. 469.177, 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 13.01-12

Form 13.01 2 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 469.177, 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 469.177, Subdivision 1a, that the original local tax rate that applies to the District is 100.956, this being the local tax rate for taxes payable in 2006. WITNESS my hand and the seal of the County this 30 th day of May, 2006. Stewartville County Auditor (SEAL) City s record of request for certification date: May 16, 2006. 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 13.01-13

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 13.01-14

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 13.01-15

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 13.01-16

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. 469.177, 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. 469.177, 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, 1988 - 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 13.01-17

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. 469.177, 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. 469.177, 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. 469.177, 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. 469.177, 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 13.01-18

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. 469.177, 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. 469.177, 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 13.01-19

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 13.01. 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 13.01-20

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. 469.175, 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. 469.175, 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 13.01-21

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. 469.175, subd. 1a. After receiving the TIF plan, the county has 45 days to submit the road costs to the development authority. M.S. 469.175, 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. 469.1762. 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. 469.177, subd. 1 (auditor). Calculate the captured tax capacity, M.S. 469.177, subd. 2 (auditor). Certify assessment agreements as reasonable, M.S. 469.177, 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. 469.177, 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. 469.176, subd. 2; 469.177, subd. 9 (treasurer). Notifying the Department of Education of distributions to school districts of excess increments and taxes, M.S. 469.176, subd. 2; 469.177, subd. 9(a) (auditor). Enforce the four-year knock-down rule, M.S. 469.176, subd. 6 (auditor). Decertify districts at the end of their legal duration limits, M.S. 469.177, subd. 12 (auditor). This includes enforcing the three-year activity rule (also called the three-year knock-out rule). M.S. 469.176, 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. 469.176, 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 13.01-22

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 469.177, 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. 469.176, 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 13.01-23

For districts which were certified on or after January 1, 2005, and before April 20, 2009, the four-year knockdown rule is increased to six years. Five-Year Rule in TIF The five-year rule essentially requires development activity for a TIF district to be finished within a five-year period that begins with certification of the district's original tax capacity. M.S. 469.1763, subd. 3. After this five-year period has expired, increments may only be spent to pay off obligations that were incurred to fund work done during the five-year period. When these obligations are paid (or enough money has been collected to pay them), the district must be decertified. M.S. 469.1763, subd. 4; 469.177, subd. 12(4). The Five-Year Rule Does Not Apply to All TIF Districts. It only applies to districts where the request for certification was made after April 30, 1990, the effective date of the statute imposing the rule. The five-year period begins with certification of the original tax capacity of the district by the county auditor. This will generally occur within a short time after the authority submits a request to the auditor. The period ends five years and one day after this date. After the Five-Year Period In general, the five-year rule requires that the activities on which increments will be spent must be completed within the five years - i.e., land must have been acquired, contractors must have been paid to clear the land, public improvements installed, and so forth. However, the costs may have been financed (e.g., bonds issued) and increments may be used after the five-year period to pay off the financing. After the five-year period has run, increments may be spent only on four items: 1. To pay bonds that were issued during the five-year period, if the bond proceeds were spent to fund the activity within five years. This five-year period can be extended, if the proceeds are spent within "a reasonable temporary period under the federal tax exempt bond arbitrage rules." I.R.C. 148(c)(1). Generally this allows up to a six-month extension from the date of the bond sale. 2. To pay binding contracts with a third party (i.e., someone other than the developer or owner of the property). Again, the activity financed under the contract must have been performed within the five-year period. 3. To reimburse the developer or owner of the property for costs incurred, if the developer or owner incurred the costs within the five-year period. This covers "pay-as-you-go" type financing arrangements. 4. To decertify the district by defeasing the bonds ("defeasing" means setting aside money in a dedicated account to pay future bond obligations or pre-pay contracts). In many instances, TIF districts produce more increment than is needed to pay for the development or redevelopment as originally conceived. Development authorities have tended to use these "surplus" increments for other purposes, rather than to decertify the TIF districts before their maximum duration limits. Both of the legislative auditor's program evaluations of TIF have pointed this out as a policy TAX INCREMENT FINANCING 13.01-24

concern. Individual legislators have echoed these concerns. The overlying taxing districts (counties and schools) have also regularly expressed concern about the failure of development authorities to use surplus increments to decertify districts and return them to the tax rolls. The five-year rule, adopted in 1990, was one effort to address this concern. For a redevelopment district or a renewal and renovation district certified after June 30, 2003, and before April 20, 2009, the five-year period is extended to ten years after certification of the district. This extension is provided primarily to accommodate delays in development activities due to unanticipated economic circumstances. TIF Pooling The term pooling is used to refer to the use of tax increments for activities located outside of the boundaries of the district from which they were collected. Unlike most states' TIF laws, Minnesota law permits increments to be "pooled" or spent outside of the district on other activities. The amount that may be pooled is, however, subject to percentage limits. All districts do not have pooling authority. The authority to pool increments varies, depending upon when the TIF district was created and the type of TIF district. It is useful to distinguish pooling authority based are four separate "eras" when different TIF pooling laws were in effect: 1. Pre-1979 districts: pooling authority unclear. Before enactment of the 1979 TIF act, Minnesota had several separate laws authorizing TIF. None of these laws explicitly allowed "pooling." the statutory terminology generally treated the areas in which the increment was to be collected and spent interchangeably. However, some cities and their advisors concluded (especially in light of later explicit allowance by Minnesota law of TIF pooling) that pooling was permitted and acted accordingly. 2. 1979-1982 districts: no pooling. The 1979 act's language did not allow pooling. The TIF plan was required to provide for improvement of the "district" (i.e., the area certified by the county auditor for the collection of increment). Increments were required to be spent in accordance with the TIF plan. A few lawyers disputed this view and advised cities that they could pool increments. As a result, a few cities pooled increments from districts created during this period. 1999 legislation ratified these decisions, but prohibited future pooling or financing of new activities in these districts. M.S. 469.1764. These rules are discussed below. 3. 1982-1990 districts: unlimited pooling. The 1982 legislature explicitly authorized TIF pooling. This legislation established the distinction between the TIF "district" and the "project area." 1982 Minn. Laws 888-91, ch. 523, art. 38 3, 6. The law imposed no limit on the amount or percentage of increments that could be pooled. 4. Post-1990: limited pooling. The 1990 legislature imposed percentage limits on the amount of increment that may be pooled. Waiving of Increment TAX INCREMENT FINANCING 13.01-25

Typically, a request to waive or decline a tax increment payment occurs in an early year of a district when only a small amount of increment is generated. Tax increment is waived or declined in an attempt to delay by one or more years the maximum duration limit of the district, if the district s statutory maximum duration limit is based on the first receipt of tax increment. An action by the authority to waive or decline to accept a tax increment payment has no effect on a district s duration limit. The authority is deemed to have received a tax increment payment for any year in which it waived or declined to accept the payment, regardless of whether the increment was paid to the authority. In essence, for any year the increment is not settled to the TIF Authority, it can be referred to as being 100% shared. This provision only applies to new economic development, renewal and renovation, and soils condition districts with certification requests dates after June 30, 2000. As a result, the statutory maximum duration limits of economic development, renewal and renovation, and soils condition districts with initial certification request dates on or before June 30, 2000, may be affected by waiving or declining tax increment. As a practical matter, however, this law has no impact on the statutory maximum duration limit of many economic development districts, because their statutory maximum duration limits are frequently measured from approval of the TIF plan rather than first receipt of tax increment. The law also did not affect statutory maximum duration limits for housing or redevelopment districts with certification request dates after May 31, 1993, or hazardous substance subdistricts. The only way to delay receiving tax increment from such a housing or redevelopment district or a hazardous substance subdistrict, and thus the only way to affect the statutory maximum duration limits of these districts and subdistricts, was to have included a provision in the TIF plan setting a minimum market value. The authorization to include a minimum market value in a TIF plan, and thereby delay the receipt of the first tax increment from a housing or redevelopment district or a hazardous substance subdistrict, was repealed effective for TIF districts with certification request dates after July 31, 2001. Therefore, for redevelopment or housing districts or hazardous substance subdistricts with certification request dates after July 31, 2001, the statutory maximum duration limit cannot be adjusted by setting a minimum market value in the TIF plan or waiving tax increment. Minn. Stat. 469.176, subd. 1(a) Minn. Stat. 469.176, subd. 1a. TIF May Not Be Used For General Government Purposes Minnesota law generally prohibits local governments from using increments for general government purposes. For example, increments generally cannot be used to pay for providing police and fire protection, road maintenance, or similar operating costs. Rather, they may only be used for a limited set of "project costs" that are defined under the development authority enabling laws. M.S. 469.176, subd. 4. However, the TIF law also contains specific prohibitions intended to prevent use of increments for general government purposes, even if they qualify under the authority law as project costs. TIF captures the taxes imposed by all of the levels of government (i.e., city, county, school, and special taxing districts). Cities and development authorities, however, have nearly total control over TIF. If cities were allowed to fund their general operations with increments, in some situations it could create TAX INCREMENT FINANCING 13.01-26

the opportunity to shift city costs to school and county taxpayers located outside of the city. As a result, the law limits use of TIF for general government purposes. Public Improvements TIF is frequently used for public improvements, such as sewer, water, roads, sidewalks, and similar improvements. In many cases, these improvements are directly related to or part of the real estate developments that generate the tax increments. However, there is no explicit requirement that these improvements relate to the development generating the increments or be located within the TIF district. Increments cannot be used to finance the construction of government buildings. The law prohibits use of increments for a building that is used "primarily and regularly for conducting the business of a" governmental unit. M.S. 469.176, subd. 4g. This prohibition applies to virtually any type of governmental unit, whether local, state, or federal. Excess Increments In general, excess increments rules apply in situations when the total increments that have been collected from a district exceed the authorized expenditures of tax increments under the TIF plan. The excess increment rules are intended to ensure that overlapping taxing districts (i.e., the county and school district) share in the taxes generated by the TIF district that are not needed to fund the TIF plan. Note that the excess increments in this discussion, sometimes referred to as surplus TIF, are different from excess taxes (or excess TIF ) caused by the original tax rate provision discussed earlier in Section 13.01. How Excess Increments Are Calculated The law establishes an elaborate set of rules to determine whether a district has excess increments. It is perhaps easiest to understand these rules by expressing them as a series of calculation steps. Step 1. Determine the total amount of increments collected from the district since its inception or certification. This is based on the broad definition of increments and includes developer repayments of amounts funded with increments, investment income earned on increments, and so forth. Step 2. Subtract any amount of excess increments that were distributed in a prior year to the city, county, and school district. Since excess increments are calculated for the life of the district, this subtraction is made to prevent double counting of increments that previously were distributed. Step 3. Subtract the total amount of costs authorized by the TIF plan to be paid with increments. This is the basic calculation: has the district collected more increments than it is authorized to spend? If so, it has excess increments. (the amount of authorized costs is adjusted as provided in steps 4 through 6. The total amount of these adjustments cannot exceed the amount of authorized costs, though.) Step 4. Add the amount of the authorized costs that were paid with non-increment revenues. For example, if part of the authorized costs were paid with a federal or state grant, then increments are not TAX INCREMENT FINANCING 13.01-27

needed to pay these costs. This adjustment does not apply to revenues, such as advances or interfund loans, that are to be repaid with increments. Step 5. Add nonincrements revenues that have been received and are dedicated to pay these costs, but that have not actually been used to pay the costs (and thus are not counted under step 4). Similar to step 4, to the extent these nonincrement revenues have been received to pay authorized costs, increments are not needed to do so. Step 6. Add the amount of principal and interest payments that are due on bonds in future years and that have not been prepaid. (under the excess increment rules, future principal and interest obligations are counted in the year when they are due or when they are prepaid.) The resulting amount is the excess increment for the district. When Excess Increments Are Determined The law requires the development authority to determine whether a district has excess increments at the end of each calendar year. This determination is made based on revenues actually received by year end. Permitted Uses of Excess Increments Excess increments must be used for either of two basic purposes: 1. Prepaying outstanding bonds this can be done directly (if permitted by the bond agreement) or by funding an escrow account for the bonds or otherwise discharging the bonds. 2. Distribution to the city, county, and school district in proportion to their respective tax rates. The county auditor makes these distributions. If there are no bonds outstanding, this is the only permitted use of excess increments. If all of the contractual obligations of the district have been satisfied, the authority could also decertify the TIF district early. For pre-1990 districts, the authority may wish to amend the TIF plan to authorize new uses of increments. This would allow only future increments to be used for these new purposes, since past increments would still be considered to be excess increments. Distribution of Excess Tax Increment The TIF authority must annually determine the amount of excess increment, if any, for a TIF district. The determination must be based on the TIF plan in effect on December 31 of the year and the increments and other revenues received as of December 31 of the year. The authority must use the excess increment only to: (1) prepay any outstanding bonds; (2) discharge the pledge of tax increment for any outstanding bonds; (3) pay into an escrow account dedicated to the payment of any outstanding bonds; or (4) return the excess amount to the county auditor who must distribute the excess amount to the city or town, county, and school district in which the TIF district is located in direct proportion to their respective local tax rates. Special Reporting Requirements That Apply To Excess Increments Within 30 days after making a distribution of excess tax increment to a school district, the County Auditor must report to the Department of Education the amount of excess tax increment the school district received. This is intended to allow re-computing of the school s state aid. TAX INCREMENT FINANCING 13.01-28

Duration Extension due to Deficits The TIF Act contains four special provisions for dealing with deficits in a TIF district. 1. Pooling Permitted for Deficits. The municipality of a TIF district may transfer available increment from other TIF districts located in the municipality, if the transfer is necessary to eliminate a deficit in the district to which the increments are transferred. This TIF Act provision is an exception to the multi-county use prohibition, and the amount of tax increment an authority is allowed to spend outside of a TIF district. The municipality may only use this authority, however, only after it has used all available increments from the receiving authority to eliminate the insufficiency and exercised any permitted action under Minnesota Statutes, section 469.1792, subd. 3. 2. Special Taxing District A city may establish a special taxing district within a TIF district only if it has determined that total increments from a TIF district will be insufficient to pay the amounts due in a year on preexisting obligations, and this insufficiency resulted from a reduction in property class rates enacted in the 1997 and 1998 legislative sessions. The city must also agree to transfer any available increments from other TIF districts in the city to pay preexisting obligations of the district allowed under the pooling permitted for deficits provisions discussed above. If the TIF district does not qualify under these provisions, the city may still establish a special taxing district. If the city elects this provision, increments from the TIF district and the tax proceeds imposed by this provision may only be used to pay preexisting obligations and reasonable administrative expenses of the authority. Minn. Stat. 469.1792; Minn. Stat. 469.1794. 3. Special Deficit Authority This special authority applies only to an authority with a preexisting TIF district for which: (1) the increments from the district are insufficient to pay preexisting obligations as a result of the class rate changes or the elimination of the state-determined general education property tax levy; or (2) the authority has a binding contract with a person and the authority is unable to pay the full amount of the contract, because of class rate changes or elimination of the state-determined general education property tax levy. An authority with a district that meets these requirements may elect that: (1) the local tax rate does not apply to the district; and (2) the fiscal disparities contribution will be computed under Minnesota Statutes, section 469.177, subdivision 3, paragraph, regardless of the election that was originally made for the district. The authority must meet these elections on an annual basis and notify the County Auditor by July 1 of the year before the year in which the election is to be effective. The authority must provide notice and conduct a public hearing before adopting a resolution approving either of these electives. TAX INCREMENT FINANCING 13.01-29

4. Duration Extension to Offset Deficits An authority may extend the duration limit of a TIF district if the increments from the district are insufficient to pay qualifying obligations, because of changes in the class rates and elimination of the state-determined general education property tax levy of 2001. However, the authority must first exercise its options under Minnesota Statutes, sections 469.1763 and 469.1792 before this provision applies. Delinquent Taxes on Decertified TIF Parcels A County Auditor may distribute property tax revenue from a parcel formerly in a TIF district to the TIF authority as tax increment if the revenue is collected after the TIF district was decertified only when the following three conditions exist: 1) The parcel on which the property taxes were paid must have been part of the TIF district at the time it was decertified. 2) The property taxes must have been delinquent, not merely past due, at the time the TIF district was decertified. 3) Third, the failure to pay the delinquent property taxes when they were due must have either caused the TIF authority to be unable to pay obligations or must have forced it to use non-tif funds to pay the obligations. Decertification of TIF Districts The County Auditor is bound by statute to decertify a TIF District, even if the authority has not sent a notification or resolution formally decertifying the district. This is one of the reasons why it is imperative for County Auditors to closely monitor the dates referenced earlier in this document. When the County Auditor or TIF authority decertifies a TIF District, the district no longer contains any parcels and the distribution of tax increment stops as of the date of the decertification, except that under the certain limited circumstances for delinquent taxes on decertified parcels that have been met. The TIF Authority must return any excess increment after the decertification and the County Auditor must settle the returned increment as excess TIF. The Office of the State Auditor has a form that must be completed upon the decertification of any TIF district. The form, Confirmation of Decertified TIF District, (sample form 13.01-3) requires information and certifications from both the TIF Authority and the County Auditor. It generally accompanies the resolution decertifying the TIF district by the TIF Authority, if they have formally done so, or may be sent to the County Auditor independent of the resolution. After completion, the County Auditor should retain a copy for their files, send a copy to the TIF Authority, and send the original to the State Auditor s Office. A copy of the form is as follows: NOTE If the delinquent property taxes collected after a TIF district was decertified do not meet these requirements, the County Auditor should distribute the funds as ordinary property tax revenue, not excess tax increment. TAX INCREMENT FINANCING 13.01-30

Form 13.01-3 CONFIRMATION OF DECERTIFIED TIF DISTRICT The auditors from the TIF, Investment & Finance Division of the Office of the Office of the State Auditor (OSA) are reviewing our compliance with the requirements of the TIF Act relating to decertification of the following TIF district. Please complete the following information requested below in Part A and then forward the form to the County Auditor to be certified in Part B. Once the information has been completed by both the authorized TIF representative and the County Auditor, please return the form to the TIF Division of the OSA at the address listed below: Office of the State Auditor TIF, Investment & Finance Division 525 Park Street, Suite 500 St. Paul, MN 55103 PART A. To be completed by the TIF authorized representative: County Auditor/Treasurer s Name: Date: County Name: County Address: TIF Authority Name: TIF District # and Name: TIF District Type: TIF Plan Approval Date: Certification Request Date: Certification Date: Required Decertification Date: TIF Plan Statutory Maximum (Information to be confirmed by the County Auditor:) 1. Actual decertification date: 2. Date of first tax increment received: 3. Final tax increment distribution date: and amount $ 4. Amount of excess tax increment returned to the county, if any $ and date Signature: Date: Name and title of TIF authorized representative: PART B: To be completed by the County Auditor or representative: On behalf of the County Auditor/Treasurer, I certify that the above information, specifically information provided in questions 1-4, is correct with the following exceptions, if any: Signature: Date: Name and title of the County representative: Phone: Exceptions? No Yes If yes, please describe below: TAX INCREMENT FINANCING 13.01-31

A Minnesota Tax Increment Financing Glossary Administrative expenses are all expenditures of a development authority other than the direct cost of physical improvements, including architectural and engineering fees. They include expenses such as bond counsel and fiscal consultant fees and the development authority's operating costs (employee salaries, overhead, and so forth). M.S. 469.174, subd. 14. The tax increment financing act limits the amount of tax increments that may be expended for administrative expenses. For most districts, the limit is 10 percent of the lesser of the (1) expenditures authorized in the TIF plan or (2) expenditures made for the project. M.S. 469.176, subd. 3. These rules apply to the project, rather the district. Special rules apply to districts certified after august 1, 1979, and before July 1, 1982. For districts for which the request for certification was made after July 1, 2001, the limit applies based on the district, not the project, and is the lesser of: (1) 10 percent of expenditures of increment authorized by the TIF plan, or (2) 10 percent of the narrow definition of the increments from the district. These percentage limitations in administrative cost do not apply to county administrative cost under M.S. 469.176, subd. 4h. An assessment agreement binds the developer to a minimum market value for property tax purposes, regardless of the development's actual market value. M.S. 469.177, subd. 8. Assessment agreements are binding on a purchaser of the property; they "run with the land." Minnesota courts have, in several cases, held developers and other property owners to the terms of these agreements. Assessment agreements reduce the risk to the authority and city that the tax increments will not be sufficient to pay obligations of the project (e.g., bonds). Since the liability for property taxes has priority over the mortgage lenders' liens, property taxes generally will be paid even in a foreclosure situation. Although assessment agreements reduce the risk to the city, they do not eliminate it. Increments may still fall short of projections if the legislature changes class rates or the taxing districts' tax rates drop. In addition, temporary cash shortfalls may occur if a developer goes bankrupt and the mortgage lender does not step in immediately to make property tax payments. Blight or blighted areas are redevelopment jargon for areas that contain (or conditions that cause) high percentages of dilapidated buildings or otherwise deteriorating and substandard structures. The term was originally used largely to refer to slum housing and its effects on the quality of housing and commercial structures in adjoining areas. The law requires TIF redevelopment districts, TIF renewal and renovation districts, and HRA project areas to meet statutory tests for blight. The Minnesota tax increment law defines blight reference to the percentage of the district's area that is occupied by buildings, streets, utilities, or similar structures and the percentage of these that are "structurally substandard." see, e.g., M.S. 469.174, subd. 10. But-For Test is actually a finding requirement. Before creating a TIF district or subdistrict, a local government must find that in its opinion the subsidized development would not have happened but for the use of TIF (hence, the term but-for test). Capitalized interest is the issuance of additional TIF bonds to pay the interest on the project's debt until increments begin to be received. TIF involves an inherent mismatch in costs and revenues. Most costs are incurred at the beginning of development. However, increments are collected only when the development begins paying increased property taxes--two or more years later. This mismatch can be overcome by borrowing money to cover these interest payments. In TIF jargon, these interest payments are "capitalized." TAX INCREMENT FINANCING 13.01-32

Captured tax capacity is the current property tax capacity of the parcels of property in the TIF district area, less the original tax capacity. M.S. 469.177, subd. 2. Captured tax capacity multiplied by the original local tax rate yields the amount of increment. Certification request date is the reference date for an increment district s request to the county auditor for the certification of original values and original local tax rates for the properties comprising the increment district. For a request that is mailed to the county auditor, it is the postmark date on the mailing envelope. For a request that is hand delivered to the county auditor, it is the delivery date which should be stamped on the request by the county auditor. The certification request date is not the date that the county auditor certifies the requested original values to the increment district. A compact development TIF district is a type of TIF district used to finance the redevelopment of areas occupied by commercial industrial buildings and other structures. To qualify as a compact development district, 70 percent of the district's area must be occupied by buildings and structures classified as 3a. The planned redevelopment or development of the district, when completed, must increase the total square footage of buildings, occupying the district by three times or more relative to the square footage of similar buildings occupying the district when the resolution was approved.. The duration of a redevelopment district is limited to 25 year from the receipt of the first increment. M.S. 469.176, subd. 1(e). Credit enhanced bonds are TIF revenue bonds that are secured by pledges of increments from several TIF districts. M.S. 469.174, subd. 21. Credit enhanced bonds are used to finance improvements in a TIF district and rely, first, on the increments from that district for repayment. However, if those increments (contrary to initial estimates) are not sufficient, increments from other districts may be used to pay the bonds. These payments do not violate the percentage limits on pooling of increments applicable to post- 1990 districts---i.e., payment of credit enhanced bonds are considered to be payments for improvements located in the TIF district. M.S. 469.1763, subd. 2(a); 5. To qualify as credit enhanced bonds: (1) 75 percent of the proceeds of the bonds must be used to finance improvements in the district and (2) the issuer must estimate (at the time of issuance) that the revenues from the district will be sufficient to the pay the bonds. M.S. 469.174, subd. 21. Deficit reduction provisions authorize a development authority or municipality with a preexisting district to take steps to increase increments, if the 2001 property tax reform reduced the district's increments by so much that it cannot pay the preexisting (pre-2001) obligations. The permitted deficit reduction options include: 1. Transferring surplus increments from other districts, M.S. 469.176, subd. 6 2. Increasing the original tax capacity to the current rate, M.S. 469.1792, subd.3(1) 3. Changing fiscal disparities options, M.S. 469.1792, subd.3(2) 4. Extending how long the district can legally collect increment M.S. 469.1793. A development authority or authority is a government entity authorized by the TIF law to exercise tax increment financing powers. M.S. 469.174, subd. 2. Authorities include cities (exercising powers under the city development district law or the municipal industrial development act), economic development TAX INCREMENT FINANCING 13.01-33

authorities (EDAs), housing and redevelopment authorities (HRAs), port authorities, and rural development finance authorities. The most common development authorities are HRAs and EDAs. Developer payments are repayment (or payment for) by a developer of assistance financed with tax increments. The recipient development authority must treat these payments in the same manner as increments, i.e., they may only be spent on items that the law permits increments to be spent on. M.S. 469.174, subd. 25; 469.1766. District area is the area containing properties from which increment is collected. M.S. 469.174, subd. 9. The area is defined by the TIF plan and need not be contiguous. The total property tax value (tax capacity) of the properties in the district is certified when the district is created. This value is the original tax capacity for the district. Economic development authorities (or EDAs) are special purpose governmental entities authorized to exercise a variety of development powers, including tax increment financing powers. M.S. 469.090-469.108; 469.174, subd. 4. EDAs are typically created by a city, although most counties are now also permitted to establish EDAs either under special or general law. See M.S. 469.1082 (general law authority for counties located outside of the twin cities metropolitan area). An economic development district is a type of TIF district that may be established in any geographic area. M.S. 469.174, subd. 12. They are not restricted to "blighted areas" or to areas with development difficulties. Economic development districts may only be used to retain a business in Minnesota or the city, to increase employment in the state, or to preserve and enhance the state's tax base. Put another way, an economic development district is not to be used to assist a development that otherwise would locate in Minnesota, unless it is done to prevent a business from leaving the city and moving elsewhere in Minnesota. The duration of an economic development district is limited to eight years from the receipt of the first increment. M.S. 469.176, subd. 1(e). Increments from economic development districts may be used to assist limited types of business facilities: (1) manufacturing, (2) warehousing, (3) research and development, (4) telemarketing, and (5) tourism in tourism counties. M.S. 469.176, subd. 4c(a). Excess increments are increments that exceed the amount needed to pay the costs authorized under the TIF plan for the year. M.S. 469.176, subd. 2. Increments are not excess increments if the TIF plan still permits additional expenditures. The law requires excess increments either to be used to pay outstanding bonds or to be shared proportionately among the city, county, and school district. Excess increment distributions to a school district trigger recalculations of the school's state aid payments. Excess taxes must be distinguished from excess increments. Excess taxes are created when the tax rate imposed on properties in a TIF district exceeds the certified original local tax rate. M.S. 469.177, subd. 9. The amount of excess taxes equals the actual tax capacity rate, less the original local tax rate, multiplied by the captured tax capacity. Excess taxes are distributed to the three main taxing districts (city-town, county, and school district) in proportion to the respective increases in their tax rates. If a school district is a recipient of a distribution of excess taxes, the school's state aid is recalculated. The four-year knock-down rules require development activity to occur on a parcel located in a TIF district within four years after its creation or the parcel will be dropped from the tax increment district. TAX INCREMENT FINANCING 13.01-34

M.S. 469.176, subd. 6. The parcel will be re-instated if development activity occurs, but at its current value (not the value at the time of certification of the district). The knock-down rules can be satisfied by demolition, rehabilitation, or renovation (public or privately financed) of improvements on the parcel or by improvement of a public street adjacent to the parcel. Installing utilities (e.g., sewer and water service) does not qualify. Fiscal disparity captured value contribution - a municipality in the seven county metropolitan area or seven-county iron range area may elect to have a tax increment district contribute a portion of its captured value to the fiscal disparity pool. This election is part of the increment district plan. There is no election for economic districts with a certification request date after June 30, 1997. They must contribute. [1997 laws, chapter 231, art. 10, sect. 11] M.S. 469.177, subd. 3(a)] The contribution is equal to the current year fiscal disparity contribution ratio of the municipality in which the increment district is located multiplied by the current year commercial and industrial value increase over the original commercial and industrial value in the increment district. If a municipality does not elect to have a tax increment district contribute captured value to the fiscal disparity pool, the fiscal disparity contribution comes from the taxable value of the taxing districts. The fiscal disparity pool receives a contribution based on the commercial-industrial growth in the increment district. The municipality's election only affects whether the contribution decreases the increment district's captured value or decreases the taxing districts' taxable value. There is a one time option for the municipality to change from not contributing (clause a) to contributing (clause b). There is no option to change from contributing to not contributing. M.S. 473f.08, subd. 8a The growth period for determining the fiscal disparity contribution is always the tax increment districts original year to the current year even if the contribution election is made years later. The election change year is not the base year. The five-year rule requires 80 percent (75 percent for redevelopment districts) of tax increment revenues derived from a TIF district after the fifth year to be spent to decertify the district. After the fifth year, money may only be spent to (1) pay bonds or contracts that financed improvements, if bonds were issued before the end of the five-year period or (2) reimburse the developer for costs it paid to make improvements in the district during the first five years. M.S. 499.1763, subd. 3. When sufficient money has been set aside, the district is decertified. General obligation tax increment bonds are TIF bonds to which the municipality (usually a city) pledges its general obligation. M.S. 469.178, subd. 2. If the tax increment or other pledged revenues are insufficient to meet the debt service obligations, the city must levy a property tax to make up the difference. Although these bonds are general obligation city bonds, they are not subject to the election or referendum requirements, if more than 20 percent of the cost will be paid with tax increments. M.S. 469.178, subd. 2; 475.58, subd. 1(3). General obligation authority bonds are TIF bonds that are backed by the full faith and credit of the development authority (e.g., the HRA or EDA), but not the city. M.S. 469.178, subd. 3. If the increment or other revenues prove insufficient, the HRA must use any available authority revenues. However, TAX INCREMENT FINANCING 13.01-35

because the authority has only limited taxing authority, a general tax levy cannot be imposed to make up the shortfall. Development authorities may establish a guaranty fund to pay environmental liability costs. M.S. 469.1765. A guaranty fund can be financed with either increments or other revenues. It can be used to indemnify or provide insurance against environmental liability for someone using or financing property in a TIF district. A hazardous substance subdistrict is a type of TIF district that is used to finance the clean-up cost of properties containing pollution. M.S. 469.175, subd. 7. A hazardous substance subdistrict is created within another, regular TIF district. The original tax capacity of the subdistrict is reduced by the cost of clean-up (but not below zero), providing immediate increment from the existing property value. M.S. 469.174, subd. 7(b). A hazardous substance site may only collect increments for the lesser of 25 years from the receipt of the first increment or the time necessary to recover the cost of cleaning up the pollution. M.S. 469.176, subd. 1e. The duration of the part of the overlying district containing the subdistrict is also extended for the duration of the subdistrict. The additional increments received as a result of reducing the original tax capacity by the clean-up costs may only be used to pay clean-up and related costs. M.S. 469.176, subd. 4e. This restriction apparently (it is not crystal clear in the statute) applies to the other increments collected during the extension period (i.e., increments that don't result from the "write-down" but that are collected after the end of overlying district's regular duration limit). Housing districts are TIF districts created and used primarily to provide housing for low and moderateincome families. M.S. 469.174, subd. 11. To qualify as a housing district, 80 percent or more of the value of the assisted development must be used for low and moderate-income housing. In addition, specified income guidelines apply to individuals occupying the housing. M.S. 469.1761. The geographic area of a housing district need not meet the "blight criteria" required for redevelopment districts. Other types of TIF districts, such as redevelopment districts, may provide assistance to housing developments. These districts are not subject to the income or other restrictions that apply to housing districts. Housing and redevelopment authorities (HRAs) are development agencies authorized to exercise TIF powers for redevelopment and housing projects. M.S. 469.001-469.047; 469.174, subd. 2. Any city or county may establish an HRA. M.S. 469.003, subd. 1; 469.004. The county authorization, however, does not extend to Ramsey county or to counties with housing authorities established under special laws. Interest rate write-down programs may use tax increments to subsidize the interest payments on private loans to finance low-income rental housing developments and "related and subordinate facilities[.]" M.S. 469.174, subd. 8; 469.176, subd. 4; 469.033, subd. 1; 469.002, subd. 12; 469.012, subd 7, 8, and 9. Tax increments from a district may not be collected to provide interest reduction programs for more than 15 years. This limit starts with the first interest reduction payment. Interest reduction programs may not be used for owner-occupied, single-family dwellings. M.S. 469.176, subd. 4f. Interfund loans are loans or advances made by the development authority or municipality to pay TIF costs that will be repaid with tax increments. M.S. 469.179, subd. 7. These loans must be authorized by TAX INCREMENT FINANCING 13.01-36

a resolution of the authority or municipality, passed before the loan is made. The terms of the loan must be in writing and include the principal amount, term, and interest rate. A land write-down occurs when the development authority transfers property to a developer at less than authority's acquisition cost. For example, an HRA may acquire a parcel for $1 million and spend an additional $100,000 demolishing a building on the property. If the HRA sells the property to a developer for $500,000, the price of the land is "written down" from the HRA's $1.1 million cost to $500,000. The authority may give the land to the developer---i.e., "write it" down to zero. A municipality is the general purpose governmental unit required to approve new TIF districts, issuance of bonds, and other major TIF decisions made initially by the development authority. M.S. 469.174, subd. 6; 469.175, subd 3. In most cases, the municipality is the city in which the project is located but it may be a township or a county. For projects located outside of a city or for certain multi-county projects, the municipality is the county. Original tax capacity is the tax capacity of the TIF district when the TIF district is established. (hazardous substance subdistricts are an exception to this rule. For these subdistricts, the original tax capacity value is reduced by estimated cleanup costs.) This value is occasionally referred to as the frozen value. The original tax capacity is subject to adjustment if tax exempt property in the district becomes taxable, taxable properties become tax exempt, the legislature modifies the class rates of properties in the district, or parcels are added to or deleted from the district. Original local tax rate is the sum of the tax rates imposed by all the taxing districts (e.g., city, county, and school district) in the year the TIF district is created. This rate is multiplied by the captured tax capacity to determine the amount of tax increment. These rules apply only to post-1988 districts. For pre-1988, increment is determined using the current year local tax rates. Local tax rates are after adjustment for any disparity reduction aid. The original local tax rate never changes. Pay-as-you-go financing relies on the private developer or property owner to initially finance the costs of the TIF improvements. A development agreement between the authority and the developer, then, provides the developer will be repaid as tax increments are collected. This method of financing allows the city or authority to avoid borrowing money (e.g., by issuing bonds) to pay for the costs of up-front or to "capitalize interest." the developer bears these costs until increments are collected. The developer may only be reimbursed for costs that can be financed with TIF. Pay-as-you-go financing has become more popular after the federal tax law made it more difficult to use tax exempt bonds to finance many TIF costs. Pooling of increments is permitted under the TIF act for post-1982 TIF districts. M.S. 469.175, subd. 1 and 4; 1982 Minn. Laws 888-92, chap. 523, art. 38 '' 3, 5, and 10. Pooling allows increments collected from a TIF district to be expended on activities geographically located outside the district or functionally unrelated to the development in the district, if the activities are within the same project area. The activities may or may not be located in another TIF district. There are a variety of different mechanical means of pooling increments, including use of large project areas, "master projects," and other mechanisms. TAX INCREMENT FINANCING 13.01-37

Port authorities are special purpose governmental entities authorized to exercise a variety of development powers, including TIF powers. M.S. 469.048-469.089; 469.174, subd. 2. Only a limited number of cities have port authority powers, although EDA powers are similar. Pre-1979 districts are TIF districts for which certification was requested before august 1, 1979. These districts are generally not subject to the act, except the act requires de-certification by august 1, 2009 and prohibits enlargement of the district after august 1, 1984. M.S. 469.179. Pre-1982 districts are TIF districts for which certification was requested before July 1, 1982. These districts do not qualify under the 1982 amendments to the act, including the authority to spend increments on activities outside the district area and to spend more than 5 percent of increments on administrative expenses. M.S. 469.175, subd. 1 and 4; 1982 Minn. Laws 888-92, ch. 523, art. 38 '' 3, 5, and 10. Pre-1988 districts are TIF districts for which certification was requested before may 1, 1988. These districts are not subject to most of the restrictions that were enacted by the 1988 legislature. These include the calculation of increment revenues based on the certified original tax capacity rate, the restrictions on soils condition districts, the requirement to pay the county's administrative costs, and a variety of other restrictions. Pre-1990 districts are TIF districts for which certification was requested before may 1, 1990. These districts are not subject to most of the 1990 changes in the TIF law. 1990 Minn. Laws 2603, ch. 604, art. 7, 31. The 1990 changes included (1) the percentage limitations on pooling and (2) the five-year rule. The enforcement provisions of the 1990 act apply to all TIF districts. To qualify as a pre-1990 district, the development authority had to do one of the following by June 1, 1991: (1) enter into a development agreement for a site in the district, (2) issue bonds, or (3) acquire property in the district. Preexisting district is a TIF district for which the request for certification was made before august 1, 2001. M.S. 469.1792, subd. 2. The law limits use of special deficit reduction provisions to preexisting districts. These deficit reduction provisions are intended to provide development authorities options for increasing increments in response to the effects of the 2001 property tax reform. The 2001 reform significantly reduced increments statewide and making it difficult for some districts to meet their contractual and bond obligations. Preexisting obligations are TIF bonds, contracts, pay-as-you-go contracts, and interfund loans that were approved or issued before august 1, 2001 (or refunded bonds issued before august 1, 2001). Stat. 469.1792, subd. 2. (contracts to issue bonds must have been approved before July 1, 2001.) The special deficit reduction provisions are generally limited to paying preexisting obligations. Prior planned improvements are improvements for which building permits were issued 18 months before certification of the TIF districts. The property value of these improvements may not be captured-- -i.e., the value is added to the original tax capacity. M.S. 469.177, subd. 4. Project area is the geographic area in which tax increment revenues may be spent. These revenues must be collected from TIF districts located in the project area. Project areas are designated by the development authority under the applicable development law, such as the HRA, port authority, TAX INCREMENT FINANCING 13.01-38

economic development authority, or municipal development act. Qualified disaster area is an area that was subject to disaster or emergency (declared by the federal, state, or local government in the last 18 months), which caused substantial damage to at least one-half of the buildings in the area. M.S. 469.174, subd. 10b. These areas can be designated a redevelopment district with an original tax capacity equal to the value of the land. M.S. 469.177, subd. 1(g). Retained captured value is the captured value less any portion of the captured value which is shared with the taxing districts and less any captured value contributions to the fiscal disparity pool. The retained captured value is the value which determines the increment district's tax increment. It is also the value that is excluded from a taxing district's net tax capacity in determining its taxable net tax capacity. The retained captured value is determined for an increment district in total, not on a parcel by parcel basis. This is especially true where buildings may be torn down and replaced. After the buildings are torn down, but before the new ones are built, there can be a period of time where the current value of the property is less than the original. These value decreases should reduce the captured value of the entire increment district. A redevelopment TIF district is a type of TIF district used to finance the redevelopment of areas occupied by substandard buildings and other structures or railroad properties. To qualify as a redevelopment district, 70 percent of the district's area must be occupied by buildings and structures and 50 percent of these must be structurally substandard. Alternatively, the area may also qualify as vacant or underused railroad property, tank facilities, or as a qualified disaster area. M.S. 469.174, subd. 10. The duration of a redevelopment district is limited to 25 year from the receipt of the first increment. M.S. 469.176, subd. 1(e). Shared captured value - tax increment districts have the option to include in their tax increment plans a provision providing for the sharing of captured value with the local taxing districts. An increment district that does not need the entire captured value to fund its activities may elect to share a portion of its captured value with the taxing districts. This is done by having an amount less than the captured value used as the tax increment value deduction in determining the taxable value of the taxing districts in which the increment district is located. It can be expressed as either a percentage or a dollar amount. This amount may vary from year to year. A small city under the TIF law may use economic development districts for small commercial developments, such as retail and office space. (other cities may only use economic development districts for a more limited set of uses, such as manufacturing, warehousing, and research and development. To be a small city, the city's population must be 5,000 or less, it may not be located within ten miles of a city with a population of 10,000 or more. M.S. 469.174, subd. 27. This is intended to disqualify suburbs of larger cities. Qualification is determined based on the year of the certification of the TIF district. M.S. 469.176, subd. 4c(e). In 2002, about 500 cities qualified as small cities. A soils condition TIF district is a type of TIF district that is used to finance correction of hazardous waste or pollution clean-up. M.S. 469.174, subd. 19. Clean-up costs must exceed $2 per square foot or the market value of the property. Increments from soils condition districts may only be expended to acquire property, clean up contamination, and pay for administrative expenses. M.S. 469.176, subd. 4b.. TAX INCREMENT FINANCING 13.01-39

The state aid offset was repealed, effective for taxes in 2002. The offer provided for a reduction in the local government aid or homestead and agricultural aid that was paid to the municipality that approved the TIF district. The amount of the reduction was based on the amount that state school aid would have gone down if the TIF district's captured value were used in state school aid formula. The offset amount varied by the type and age of the TIF district. Tax increment financing act (or the act) refers to the 1979 act, and subsequent amendments, that govern the establishment of tax increment financing and collection of tax increments. M.S. 469.174-469.179. The development authority acts (HRA, port authority, municipal development act, and so forth) also govern the purposes for which tax increments may be expended. The tax increment financing plan states the objective of a TIF district, the activities to be undertaken, the type of district to be created, the estimated costs, and other details of the proposal. M.S. 469.175, subd. 1. The TIF plan must be approved by the municipality after a public hearing. M.S. 469.175, subd. 3. The plan defines and limits the activities that may be undertaken with the increments collected from the district. The plan may be amended at any time. However, a public hearing must be held before significant changes such as modifications in the size of the district or increases in bonded debt are approved. M.S. 469.175, subd. 4(a). The geographic area of a TIF district cannot be increased five or more years after the district was created. M.S. 469.175, subd. 4(b). Tax increment revenue bonds are payable only out revenues generated by the TIF district itself---i.e., the tax increments and other revenues such as the proceeds of land sales and other developer payments. M.S. 469.178, subd. 4. Tax increments or tax increment revenues include (1) the property taxes paid by the captured value of the TIF district; (2) interest or other investment earnings on tax increments; (3) proceeds from sales of property purchased with tax increments; and (4) lease payments from property acquired with tax increments. M.S. 469.174, subd. 25. The property tax component of tax increment (item (1) above) is determined by multiplying captured tax capacity by the tax capacity rate or for a post-1988 district, by the original local tax rate. M.S. 469.177, subd. 3. The three-year rule requires the development authority to do one of the following within three years after creating a TIF district: (1) acquire property in the district; (2) issue bonds; or (3) construct public improvements. M.S. 469.176, subd. 1a. Failure to satisfy this rule eliminates the authority of the district to collect increments. Tourism counties are counties in which economic development districts may be used for tourism projects. Qualifying counties must (1) have income at or below 85 percent of the state median and (2) be located in development regions 2, 3, 4, 5 OR 7E. TAX INCREMENT FINANCING 13.01-40