Legislature Passes Technical Tax Bill with TIF Changes

May 24, 2011 in TIF

The governor has already vetoed HF42, the major Omnibus Tax Bill passed by the Legislature.  However, on May 23, 2011, the House and Senate approved a technical corrections bill, HF 1219.  The summary of the bill gives an overview.  Article 4 contains the TIF changes which include:

1. Extensions of some of the JOBS bill provisions for TIF passed in 2010 (more below)

2.Special bills for Sauk Rapids, Lino Lakes, Chohasset, and Ramsey.

3.Special pooling through 2016 for foreclosed, affordable homes.

The special provisions form 2010 that allowed a broader use of nine year economic development districts is found in Article 4, Sec. 16. Minnesota Statutes 2010, section 469.176, subdivision 4c, is amended to read:

“(1)the municipality finds that the project will create or retain jobs in this state, including construction jobs, and that construction of the project would not have commenced before July 1, 2011 2012, without the authority providing assistance under the provisions of this paragraph; (2) construction of the project begins no later than July 1, 2011 2012; and (3) the request for certification of the district is made no later than June 30, 2011 2012; and (4) for development of housing under this paragraph, the construction must begin before January 1, 2012. The provisions of this paragraph may not be used to assist housing that is developed to qualify under section 469.1761, subdivision 2 or 3, or similar requirements of other law, if construction of the project begins later than July 1, 2011.”

This means a one year extension for commercial/industrial/utility projects and a six month market rate housing extension.  Affordable housing is not allowed in the economic development district.

The general pooling from existing cash balances of older districts was extended as well in  Sec. 17. Minnesota Statutes 2010, section 469.176, subdivision 4m, amended to read:

Subd. 4m. Temporary authority to stimulate construction. (a) Notwithstanding the restrictions in any other subdivision of this section or any other law to the contrary, except the requirement to pay bonds to which the increments are pledged and the provisions of subdivisions 4g and 4h, the authority may spend tax increments for one or more of the following purposes:
(1) to provide improvements, loans, interest rate subsidies, or assistance in any form to private development consisting of the construction or substantial rehabilitation of buildings and ancillary facilities, if doing so will create or retain jobs in this state, including construction jobs, and that the construction commences before July 1, 2011 2012, and would not have commenced before that date without the assistance; or (2) to make an equity or similar investment in a corporation, partnership, or limited liability company that the authority determines is necessary to make construction of a development that meets the requirements of clause (1) financially feasible.(b) The authority may undertake actions under the authority of this subdivision only after approval by the municipality of a written spending plan that specifically authorizes the authority to take the actions. The municipality shall approve the spending plan only after a public hearing after published notice in a newspaper of general circulation in the municipality at least once, not less than ten days nor more than 30 days prior to the date of the hearing. (c) The authority to spend tax increments under this subdivision expires December 31, 2011 2012. (d) For a development consisting of housing, the authority to spend tax increments under this subdivision expires December 31, 2011, and construction must commence before July 1, 2011, except the authority to spend tax increments on market rate housing developments under this subdivision expires July 31, 2012, and construction must commence before January 1, 2012.

Again we have a one year extension for non-housing and a six month extension for market rate housing.

No word on the Governor’s willingness to sign this bill.

TIF and Fiscal Disparities

May 12, 2011 in TIF

So, what’s the big deal about fiscal disparities with respect to TIF?  If the TIF Authority is located in the 7 county metro or the IRRB Iron Range a portion of the value of a TIF district goes to the fiscal disparities pool.  So, if you are not in either of those areas or if you only use TIF for housing, you can quit reading this as it doesn’t apply.  Of course you can certainly continue reading just to learn about TIF technical minutia if you want.

Fiscal disparities is Minnesota-only method to share commercial/industrial/utility (“CIU”) property value among jurisdictions.  A background piece on fiscal disparities is found here.  Fiscal disparities takes 40% of the new CIU growth in a community since 1971 and sends it to a pool each year.  The value is then redistributed based upon relative value per capita and tax rates of local taxing jurisdictions.

A TIF Authority, at the establishment of the TIF District has the option of choosing “A Election”, which is the calculation of increment according to M.S. 469.177 subd. 3(a), otherwise known as “outside the TIF District”.  This option is not available for economic development districts.  In effect, this option allows for the maximum captured value and resulting increment.  However, this option will increase the tax rate for the county, city, and special districts.  Because the contribution portion of the increment is paid first to the fiscal disparities pool and second, the total increment is paid to the TIF Authority, those two amounts are usually more than the total taxes generated in the District.  That requires the tax rate to be increased to make up the difference between the total of the increment and contribution and the actual taxes generated in the District.

The second option is ”B Election,” which reduces the captured value by the value that is contributed to the Fiscal Disparities pool.  This option results in less increment and theoretically no impact on the local tax rate because the TIF district is contributing its share of CIU growth to the pool.

So, what circumstances would cause the Authority to choose one option over the other?  The election only affects the tax rate if there is commercial and/or industrial property in a District.  So, housing districts, or redevelopment and renovation and renewal districts with only housing, would not be effected by the election.

If the Authority were issuing General Obligation TIF Bonds, it may consider “A Election” to minimize the term of the bonds and save interest costs.  Also, “A Election” may be considered if the Authority wants to retire a TIF Note, Interfund Loan or other obligation sooner.  If the project is of a nature that the community is befitted and the gap analysis proves that the additional increment is needed, then the “A Election” could be the choice.  However, the overall policies of the City should be taken into consideration as part of the analysis.

“B Election” is often chosen by the TIF Authority when a Pay-As-You-Go TIF note is issued.  This election will provide the actual increment generated by the parcels to be paid to the Developer or TIF note holder, with no additional impact on the taxpayers.

So, there’s the story on to “B or Not to B.”

When to Request Certification for a TIF District?

May 5, 2011 in TIF

Though the current weather patterns may not be a good indicator of impending summer, we are busily preparing for one of our summertime deadlines here at Ehlers.  Prior to June 30th of each year, any city with a new TIF district must decide if they will request certification of their district.  So how does a city decide if they want to request certification of their TIF District?  There are a few factors to consider.

Original Net Tax Capacity of the TIF District:

If a request for certification of a TIF District is made prior to June 30th, under Minnesota Statutes, Section 469.174, subd. 7, the Original Net Tax Capacity (ONTC) of the district will be certified using the current year value, established during the previous assessment year.  This value is almost always fixed for the life of the TIF district and will be used each year to calculate the ONTC of the TIF district. If a district is certified on June 29, 2011, the base tax year will be taxes payable 2011.  If it is requested on July 2, 2011, the base year will be taxes payable 2012.

So what does that mean?  Captured Tax Capacity of a TIF District is determined each year by taking the current year tax capacity and subtracting the ONTC of the TIF district. To maximize the amount of TIF dollars a city receives with each payment, the lowest ONTC possible is desired.  If a city knows the market value placed on a property in the TIF District is slated to increase for the next assessment year, it would be wise to request certification of the TIF District prior to June 30th.

Completion of Construction:

In redevelopment, renewal and renovation and housing TIF districts, a city is able to elect (within four years of approval of the TIF district) the first year of increment received.  However, for economic development TIF districts, the first increment will be paid out the first year following an increase in the ONTC of the parcels within the district.  This often creates an issue with a city receiving partial increment in the first year.  To avoid receiving partial increment, a city will need to think about when construction of the project will be completed within the TIF district.  If only a small increase in value is expected, due to partial completion of a project, the city may want to consider the benefit of waiting until the following assessment year to certify the TIF district.

Challenges to Creation of a TIF District:

An owner of taxable property within the city may challenge the creation of a TIF district.  To challenge the creation, an owner must file an action within the later of (1) 180 days after the city’s approval of the TIF District (public hearing); or (2) 90 days after the request for certification of the district is filed with the County Auditor.  If a city believes for any reason that there may be a challenge to the creation of their TIF district, they may want to request certification of the TIF district as soon as possible, regardless of the two previous considerations.

With the forecast finally showing some promise of warmer weather, cities are encouraged to take a look at their new TIF districts and determine if now is the correct time to request certification with the County Auditor.

What is a Pay-As-You-Go Note?

April 27, 2011 in TIF

Tax increment financing is really a series of promises.  If the developer promises to build a project, the TIF Authority promises to use a portion of future taxes to pay for project costs.  Sounds reasonable.  But the project costs are incurred today, and the tax increment won’t even start for two or more years. How does one convert the future increment revenue to money available today to build the project? The most common method is called a “Pay-As-You-Go” TIF Note, sometimes referred to as a PAYGO Note, which relies on the developer to pay for the up-front project costs with the promise of being reimbursed.

Here’s an example of how a “Pay-As-You-Go” TIF Note works in Minnesota.  Let’s say that Wonder City, located on the unflooded banks of Lazy River, wants to spur new senior housing construction.  The City reaches an agreement with Integrity Honest Abe Development Company to pay for $300,000 of redevelopment costs for a downtown site.  After the housing project is completed, the Developer proves the actual amount spent on making the site ready for development, and the City issues a Note to the Developer promising to pay up to $300,000, with interest, but only from 80% of the increment over 25 years (assuming it’s a redevelopment district).  The City retains 20% of the increment for administrative expenses (up to 10%) and other redevelopment projects.

“Pay-As-You-Go” TIF Notes protect cities and authorities from development risk.  The developer assumes the risk of tax increment going down in the future as market values fall or tax rates change.  The developer can hold the Note himself, getting repaid over time, or find a lender who will use it to secure a construction loan.  The city or authority’s obligation is limited to paying out a portion of future increment, based on new development. With a “Pay-As-You-Go” TIF Note, the developer assumes the development risk, and the City protects its bond rating and borrowing capacity.  Now that sounds reasonable.

April Legislative Update – TIF Special Use Extensions?

April 25, 2011 in TIF

Many of you have been asking about the status of legislative efforts to extend the 2010 Jobs Bill provisions for allowing expanded use of economic development districts and opportunities for pooling from older districts.  The 2010 legislative provisions for TIF limited use for projects that start construction by July 1, 2011.  Given the state of the real estate market, many communities have stated that an extra year or two is more realistic for utilizing TIF for spurring development.

The Senate’s omnibus tax bill (Senate File 27) does contain a one year extension with one caveat.  Article 5 of the bill does eliminate housing from the special TIF provisions for projects commencing after July 1, 2011.  Three cities, Ramsey, Cohasset, and Lino Lakes are included in the Senate’s bill for specific circumstances in their respective communities.

The House’s companion bill does not contain any extensions of last year’s legislation.  House File 42 contains special bill provisions for Lino Lakes, Ramsey and Taylors Falls but no other TIF language.

Conference committee members are found here.  The conference committee is scheduled to meet April 26th and April 28th.

The League of Minnesota Cities also has a brief on this topic on its website.  The League highlights a 2010 effort to enable the use of TIF for market rate housing in foreclosure that was mistakenly left out of the 2010 tax bill.

Base Taxes – What Continues to Go to the Regular Taxing Districts During a TIF District?

April 21, 2011 in TIF

Tax increment financing, from a policy basis, is not complex.  TIF authorities must decide if they want to assist a development, and if so, how much.  Councils and boards must weigh the costs and benefits of TIF assistance.

What complicates TIF is the underlying property tax system in Minnesota.  It would be much simpler if we could tell a business and the TIF authority that existing taxes are $2,000 and new taxes will be $152,000, so the annual TIF will be $150,000.  In reality, many factors affect TIF calculations.  Depending upon the property type and tax rates, the TIF could be $80,000 or it could be $148,000. Factors that impact TIF include state taxes, class rates, tax rates, fiscal disparities, and market value taxes.  TIF authorities do need to keep track of the details of the original tax calculations to ensure they are capturing the appropriate amount of TIF.

A quick review on property taxes.  Most taxes are calculated on the basis of tax capacity.  Different types of property are designated by the state to have different “capacities” to pay taxes.  The market value of a property is multiplied by the class rate to get a tax capacity.  Residential homestead has a class rate of 1%, rental property 1.25%, and commercial/industrial is 2%.  More information on property tax basics can be found at the League of Minnesota Cities website and Hennepin County’s property tax information website.

Even the original taxes will vary.  The original tax is not frozen for the life of the TIF district.  The original market value is almost always fixed for the life of the TIF district.  If a building is worth $200,000 when a TIF district is built and it is a residential homestead property, the current taxes are likely to be around $2,000. This $2,000 will continue to be paid to the city, county, school, and other smaller taxing jurisdictions for the first few years of the TIF district.  If a new commercial building is built, the original taxes will actually increase to $4,000.  Therefore the taxes are not “frozen”, only the value.  Original taxes may go up or down depending upon the change in use.

A few things for TIF authorities to keep in mind.  One is to make sure that the county auditor is properly tracking changes in class rates.  Counties must keep track of tens of thousands of parcels and they are not able to verify every single lot.  If they did, TIF administration would be much more expensive.  One of the most common problems is when a property that was taxable is purchased by a tax-exempt entity.  If the TIF district contains several parcels, the actual TIF income may drop if the county is not made aware of the change to a tax-exempt use.  TIF authorities should annually verify that the county’s parcel lists reflect the current uses. TIF authorities should track changes in TIF income from year to year and understand the reasons for the changes.

How Do These Blight and Coverage Tests Work for Redevelopment Districts?

April 14, 2011 in TIF

There are a multitude of TIF districts:  housing, economic development, soils, compact development, hazardous substance, redevelopment, and renewal and renovation.  Each of these districts have different terms and different qualifications.  When creating a renewal and renovation district or redevelopment district, there are certain findings that a city or a county must make.

First is the coverage test.  Seventy percent of the area of the district must contain parcels that are “occupied”.  Occupied means having buildings, paved or gravel parking areas, sidewalks, utilities or other similar structures.  In order for a parcel to be considered “occupied”, at least 15% of the individual parcel must be covered by one of the aforementioned items.  If it is, then the entire parcel is considered to be “occupied”.

Let’s assume we have two parcels in a proposed district.  If Parcel A is 300,000 s.f. in size and the other  (Parcel B) is 100,000 s.f., then the 300,000 s.f. Parcel A must be “occupied” to qualify.  This gives us 75% of the district with “occupied parcels”.

If 15% of the larger parcel must contain improvements, at least 45,000 s.f. of Parcel A must be covered by a building or parking lot.  The 100,000 s.f. Parcel B can be vacant and still qualify for inclusion in the district.  Parcel B will need to be developed with Parcel A, however, to meet another restriction.

The coverage test is required because the purpose of providing longer terms for these two TIF districts is because there are existing structures and/or improvements on the site that warrant providing more public assistance to remove and clean up.  If the land is predominately vacant, not as much public assistance should be required (i.e. that is why economic development districts are only 9 years).

Second is the substandard building test.  For redevelopment districts (26 years), more than 50% of the buildings need to be considered substandard.  For renewal and renovation districts, which have a shorter term (16 years), the substandard test is reduced to more than 20% of the buildings with the remaining 30% of the buildings being “obsolete”.  Buildings are considered to be substandard if they have defects in structural elements, etc., and the cost to correct these issues is more than 15% of the cost to construct a new building of the same size and type.   Please note the key words more than above.  For example, if a potential redevelopment district has 2 parcels with 4 buildings, in order to qualify as a redevelopment TIF district, 3 of the 4 buildings would need to be considered to be substandard.

TIF authorities are required to use their best efforts to gain access to interiors of buildings to complete an inspection in order to determine if a building would meet the substandard test.  If a TIF authority is unable to obtain access, they should document their efforts to obtain permission to gain access.  If a TIF authority is unable to obtain access to a couple of buildings, then they can utilize other documentation to make these findings as stated in 469.174, Subdivision 10 (c).

In order to determine parcel coverage and substandard building status, it is recommended to hire a third party architect or an experienced building official that is experienced in completing these types of inspection and analysis.  In addition, it is important to have your TIF Attorney review the findings for compliance with the law.

As a footnote, redevelopment districts can also be created on railroad property, tank facilities or a disaster area without the coverage or blight requirements.  See Minnesota Statutes, Section 469.174, subd. 10.

Opportunities to Separate TIF and Non-TIF Balances – New TIF Reporting Rules and Sonic Booms

April 6, 2011 in TIF

When I was a kid, we’d spend just about every August traveling around the Southwest U.S visiting the state and national parks. One year, I remember that we were at the Craters of the Moon National Park. One morning we saw military planes streaking across the sky that didn’t make any sound as they passed overhead. My brothers and I didn’t quite know what we had just seen. Later we thought that they had broken the speed of sound because a few seconds after they were gone, there was a deep resonant boom that shook all the bones in your body. Something similar to this happened in the TIF world a couple of legislative sessions ago, although I didn’t realize it at the time, much like the planes.

In 2009, the State Legislature adopted changes to TIF reporting that reduced the requirements for reporting. These changes spilled over into how budgets were developed when adopting a TIF District or modifying an existing plan. At the time, I thought it was confined to TIF Plans.  A couple years have passed. Then came the boom.

In September of 2010, the Office of the State Auditor rolled out a draft of its revised forms at the Minnesota Governmental Finance Officer’s Annual Meeting.  TIF authorities will now need to check a box that says the Five Year rule was complied with. In addition, the method for ongoing reporting of new districts and budget modifications changed.  However, these two aren’t the biggest changes. There are a couple of sweeping changes that need highlighting.

The first big change is the requirement to report additional data regarding pay-as-you-go TIF notes. TIF authorities reported the amount spent by the developer in the past, but now TIF authorities are required to report developer costs by cost category. In the past, the reporting forms said that the developer spent X dollars in total.  TIF authorities now need to split those X dollars out by land, demolition, public improvements, etc. You will be required to dig back through your developer files and categorize the costs.

By far, the biggest change is the requirement to report only TIF activity. In the accounting world, revenues and expenditures are usually grouped by project. All the revenues associated with a project get dumped into a bucket (the fund) and all the expenditures for the project are taken out of the bucket. Some revenue sources for TIF projects could be TIF revenues, but other revenues may not be such as land sale proceeds, bond and loan proceeds, special assessments, grants and other miscellaneous sources. The definition of tax increment revenues is actually defined in MN Statute 469.174 sub 25.   Many of the sources used in projects located within TIF districts are not tax increment revenues and do not need to be reported on the new TIF reporting forms. Likewise, any expenditures that were paid for with those non TIF funds also do not need to be reported. This spills over into the balance sheet as well. The accounting world knows that it will be difficult, short of reconstructing a TIF district’s entire life history, to split out what’s been paid for from TIF and non TIF. The accounting world therefore, makes the logical leap that there may be some non TIF funds sitting in the balance sheet. The guidance coming from the OSA, as we understand it, is that TIF authorities are to make the best estimates they can of what portion of the balance sheet is TIF and non TIF. Quite the Gordion Knot.

The first thing a  TIF authority needs to do is to take a hard look at their TIF funds and determine if non TIF revenues have ever flowed through the fund. If not, they are lucky. If so, then they need to look at what that total may be and when it was received, look at fund balances over time to determine if those non TIF revenues remain or not. Then what? Well, that’s up to each community. We  suggest that  a TIF authority involve its TIF attorney and TIF financial advisor to sort through the issue.

At this point, we’ve seen draft reports that are fairly similar to those that were presented in September. We would strongly suggest you go through your developer files and accumulate those costs by cost category and analyze your TIF district for non-increment revenue.

Boom.

Housing TIF Districts – Less Complications but More Administration

March 31, 2011 in TIF

A “housing” district is a common types of TIF district.  The housing assisted by TIF must be intended for occupancy families of low and moderate income.  Housing districts are most often created on raw land sites. Housing districts do not need to meet the “blight criteria” required for a redevelopment district and, conversely, redevelopment districts are not subject to the income restrictions that apply to housing districts.  Both types of TIF districts may provide assistance to housing developments, but “housing” districts have some unique features unavailable to other types of TIF districts.

There are many types of affordable housing programs, and each program defines affordability differently.  In Minnesota TIF districts that help rental housing units, residents’ income must be limited for the life of the District.  But not all of the units need to be restricted.  The income limitations follow the low income housing tax credits guidelines. At least 20% of the units must be affordable at 50% of median income or 40% of the units at 60% of median income, adjusted for family size.  Limits vary by region.    TIF authorities do not have to, but often include limitations on rents as well.   TIF authorities should require annual verifications of income limits by the developers of the housing.

For owner-occupied housing, at least 95% of the units assisted with TIF must be initially purchased and occupied by individuals whose family income is less than or equal to the applicable income restrictions.  The income limits for owner occuped units are higher – 100% to 115% of median income – or $65,000 up to $85,000 depending upon where you live.  After the first occupant moves, the home can stay in the TIF district even if the second resident has higher incomes.  A limited amount of additional homes can be included in the TIF district, but cannot be assisted with TIF.  A common method to utilizing TIF for owner occupied housing is to write down the costs of special assessments related to construction of the streets and utilities.   Some TIF authorities will require repayment of TIF from homeowners if they do not live in the home for a certain number of years.  This strategy helps to avoid a subsidy for very short-term affordability.

TIF can cause confusion for some homeowners, however, because their annual property tax bill includes a line item for “tax increment financing”.  Some homeowners think that their taxes would go down if the TIF district went away.  Unfortunately, this is not true.

Expanded Eligible Costs: Local governments can only use TIF to pay for certain costs of qualifying improvements (“eligible costs”) necessary to create new development.  Land acquisition, demolition, public improvements and site grading are typical eligible costs. However, in a housing district, most attorneys allow for the building itself to be an eligible cost.

No Pooling Limits: Housing districts are exempt from the pooling rules (which for most other types of districts requires that at least 75% to 80% of the increment be spent within the boundaries of the district).

No Five Year Rule: An authority is allowed to retain increment and spend for new affordable housing buildings, even after five  years.

So, if a TIF authority has an existing housing district, it may amend the TIF plan to authorize expenditures for additional “housing projects” anywhere within the same project area.  After expiration of the five-year period from certification of the district, a TIF authority may make new expenditures, enter new contractual obligations and issue new bonds related to housing projects.

TIF is a financing tool which captures and redirects new property taxes paid by private development to promote development which would not occur “but for” assistance.  Creating a new TIF district usually takes 60-90 days (if everything goes well). This process also includes opportunities  for public input.

Landbanking – Still A Good Idea for Local Governments?

March 29, 2011 in TIF

Almost 20 years ago several key pieces of property were put on the auction block by the Resolution Trust Corporation, the federal agency charged with dissolving assets of failed savings and loans.  The City of Richfield purchased the site in the NE corner of 35W and I-494.  After considering and rejecting proposals including a big box retailer, the City sold the land to a private developer who constructed Meridian Crossings, two office buildings totaling over 400,000 s.f. and spurred other redevelopment in the area.

The City of St. Louis Park conducted a community planning process in the 1990s which resulted in the City purchasing multiple pieces of property along Excelsior Boulevard.  The City considered and rejected a proposal from a national real estate investement trust.  After conducting a developer request for proposal, the City sold the land in pieces to the developer of Excelsior and Grand.

These two success stories demonstrate how a patient community can meet its community goals by purchasing and holding land.  But, does land banking still work?

To decide, you may first need to answer the following questions:

1.  Do you have patient money to invest in the land?  A red flag is thinking that you can ”flip” a piece of property in a matter of a few years, or thinking you can issue bonds and defer payments until you sell the land.  Trouble may occur in these scenarios without an alternative source of revenue to make debt payments if the sale takes longer than expected.

2. Did you conduct sufficient soil and environmental tests to determine suitability for new construction?  A city that buys a piece of property without realizing there is 35 feet of peat below the surface may be in for a surprise.  On the other hand, a brownfield may require some public intervention or risk staying underutilized for decades.

3. Is this a key piece of property that can be developed on its own?  Land banking does not need to occur only for large scale redevelopment.  Citizens often appreciate small scale redevelopment in key commercial nodes as much as the large scale projects.  Land banking, or purchasing when a seller is willing, to assemple a couple of lots over five or more years may make a project possible.

4. Is there a financial upside to consider with not much downside?  There are pieces of property that, unfortunately, are selling for next to nothing or are actually tax forfeit.  Local governments can buy property and hold with very little carrying costs.

5. Can a local government accomplish its goals through a change in zoning instead of a change of ownership?   It depends upon how long you think you can wait.

There is no one right way to accomplish development goals.  There are still times, however, where a local government may want to consider strategic buy and hold.