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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.

What is Tax Increment Financing (TIF)?

March 25, 2011 in TIF

Tax Increment Financing (TIF) is defined as the ability to capture and use most of the increased local property tax revenues from new development within a defined geographic area for a defined period of time without approval of the other taxing jurisdictions. It is a tool that cities, counties, economic development authorities (EDAs), port authorities, and housing and redevelopment agencies (HRAs) can use to spur private development.

There are four main reasons for using TIF:

  • Redevelopment of substandard or obsolete buildings, such as revitalizing a downtown area or former industrial site
  • Provide affordable housing, including rental or owner occupied housing for low to moderate income persons
  • Create jobs and new tax base, such as develop an industrial park or other manufacturing facilities
  • Clean-up environmental issues, such as  remediating contamination in brownfield areas

Here’s an example of how TIF works. After a TIF district is established, the Authority collects a portion of the new taxes generated by the development and uses them to pay for specific development costs. The taxes being paid at the time of the establishment of the district continue to be distributed to the city, county, and school district, as done prior to the establishment of the TIF district.

Now assume a blighted piece of property is paying $5,000 in property taxes in 2011.  Let’s also assume a new business wants to relocate on this piece of property and projects paying total local property taxes of $50,000 after construction is complete.  The community could reimburse the business the incremental taxes, or $45,000 per year, to help offset the costs of demolition and environmental remediation

Only a portion of the increase in taxes will be captured as increment and used for the project. Tax increment does not capture the base (existing) taxes, State commercial/industrial property taxes, or market value based property taxes.

It is important to note that the development will pay the same amount of taxes it would if it were not in a TIF district; TIF is not a reduction in taxes. The increase in taxes is being redirected to pay for eligible development expenses.

The maximum amount of time the increased taxes are redirected to the project varies from 9 years to 26 years, depending upon the type of district and depending upon the community’s TIF policies.

One of the most important concepts in TIF is the “but for” test.  A community must believe that the project would not have gone forward but for or without the use of TIF.  There are a variety of ways to demonstrate the need for TIF, including a thorough review of the project’s finances, comparable land prices, and/or extraordinary development costs.

Declining Values and “Frozen” Tax Rates for TIF Districts

March 22, 2011 in TIF

The National Association of Realtors released its monthly data on existing home sales yesterday.  If you have never spent any time looking at the details of the reports, spending a few moments on the NAR website is worthwhile.  One chart in this month’s report shows the median home values by major metropolitan markets.  The Minneapolis/St. Paul region is down from $159,000 in February, 2010 to $142,500 one year later.

This points to continuing slides in the valuations for property tax purposes and higher tax rates just to keep the same level of income for local governments.  TIF districts will also continue to see lower income if values slide and if you have a TIF district that is near its maximum or “frozen” tax rate.  All newer districts have a tax rate that is capped based upon the tax year in which authority requested certification of the district.  If you are projecting future increment steams, knowing the maximum tax rate will provide more accurate number.

How Do You Establish a TIF District?

March 17, 2011 in TIF

How does one know what kind of tax increment district to establish?  It’s easier than you think. Although there are pages in the law defining different types of districts, they all relate to two sets of facts:  What is on the site now, and what is going to be developed.

Tax increment is a financing tool to assist communities in redeveloping aging parts of their community, clearing obsolete and substandard buildings and reconfiguring parcels for new development.  Therefore, several types of districts are determined by current site conditions.  How much of the site is improved with buildings, parking lots, and roads? How many buildings and how many of them are substandard?

The general rule of thumb is that the worse the existing site conditions are, the longer you can collect increment. The two most common districts that qualify based on site conditions are the Redevelopment District, which has a 26 year term and more than 50% of the buildings are considered to be substandard, and the Renewal and Renovation District which has a 16 year term and more than 20% of the buildings are considered to be substandard.

In addition, Tax increment is a financing tool to assist in providing affordable housing and the development of manufacturing facilities. Thus we have two types of districts – Housing and Economic Development districts – that qualify based on what’s being built.

Housing Districts have a 26 year term and can be used to assist affordable owner-occupied and rental housing developments.  Economic Development Districts have a 9 year term, and can be used to assist manufacturing, tourism facilities, and call centers.

For more detail on the different kinds of district, check out our future blog posts.

You Win Some, You Lose Some

March 14, 2011 in TIF

As the legislative session plugs along it seems it is an on-going battle of you win some, you lose some, and then you wait to see if you really lost.  Back in January, a bill was introduced in both the House (HF195) and Senate (SF205) to extend the temporary TIF pooling authority under the JOBS bill that was enacted during the 2010 legislative session.  The extension would go until December 31, 2013 and would allow cities to continue to pool some of their TIF district cash balances to projects in order to stimulate private construction.

This past Saturday, the House Property Tax Committee released its property tax section of the omnibus tax bill and did not include this provision.  Essentially, there were two major opponents, Representative Ann Lenczewski (Bloomington and former chair of the House Tax Committee) and Rep. Dianne Loffler (Minneapolis). It seems that some of their concern was due to cities using TIF for housing projects and in particular, assisted living facilities.

Unfortunately, it seems the only developments getting financed and constructed these days are multi-family rental projects, including assisted living facilities.  Many communities have projects they were hoping to see developed if the legislative deadline was extended.

We will have to wait and see if the Senate includes the TIF extension in its version of the omnibus tax bill and then see what happens from there.  In the meantime, contact your local legislators if this is a tool your community needs to get some projects done.

Budgets within TIF Plans

March 10, 2011 in TIF

TIF Plans – those documents collecting dust on the shelves – contain useful little gems of information you can use to administer your tax increment districts.  Most importantly, the TIF Plan contains a maximum budget of how much increment you may collect, and how it will be spent.  The budget is prepared in advance of the project and, as with all budgets, needs amending from time to time to keep pace with changing development.

There are two ways to amend a TIF budget – an administrative amendment which is needed if you are staying within the original, maximum budget amount.  This amendment is adopted by the TIF authority governing board (HRA, EDA or Council) via a resolution and there is no public hearing required.  The second is a budget modification which is needed if you are increasing the budget above the maximum originally set.  This process is the same as creating a new TIF district and requires a 30 day notice to the county and school district for fiscal implications, review by Planning Commission and a public hearing.

Here are three budget tips:

  • You can move costs between line items in your project budget, so long as you do not exceed the total budget.  There are two key exceptions: bonded indebtedness and interest. To increase principal expense you need a full budget modification.  Click here to read more about the discussion of project costs in the Office of the State Auditor’s (OSA) newsletter.
  • The TIF Plan budget limits the amount of increment you can collect and increment in excess of the authorized budget must be returned to the County. Review your TIF balances annually against the budget in the plan to make sure you are within your original budget.  If it looks like you may go over, you will have to amend the TIF Plan budget as discussed above.
  • Review your budget prior to decertification to make sure you won’t have to pay back any increment.  No retroactive budget changes can be made following decertification.

Property Tax Freeze Bill Moving in House

March 9, 2011 in TIF

A bill is moving in the Minnesota House that would freeze city, county, towns and special district’s tax levies for next year. HF 481 is sponsored by Local and Property Taxes Chair Representative Linda Runbeck.  This bill would restrict increases in both operating and debt levies for local governments for taxes payable in 2012 and 2013 unless the bonds were issued or the projects contracted for by June 1, 2011.  Special districts defined in Minnesota Statutes, Section 275.066 and include HRAs, EDAs, transit agencies, etc.

At this time, it does not appear that TIF would be limited by this bill.  Tax increment financing payments are not included in a city or county property tax levy.  This type of freeze would be new territory for Minnesota.

However, any new property tax abatements under Chapter 469 would likely run into trouble if the freeze occurs.

MinnPost has a few comments from the author in a story from last week.  The League of MN Cities also added a page with its advice on the bill.

Check for Property Tax Petitions Before You Finalize TIF Payments

March 3, 2011 in TIF

Property taxes cannot be appealed, but the market value of a property can.  A tax court petition is a method of appealing your market value and in today’s economic environment, the number of tax court petitions is increasing.  Property owners who have seen their property’s market value fall, but not their taxes, are trying to do something about it.  More owners are challenging market values they believe don’t reflect the depressed state of the real estate market.

The Minnesota Tax Court is part of the State executive branch and was created under Minnesota Statute, Section 271.01 to settle disputes relating to Minnesota tax laws.  Minnesota Statutes Chapter 278 lays out the statutory requirements for filing a petition.  A couple of key points to know: all petitions must be filed by April 30th of the year the taxes are due AND the property taxes must be paid in full (unless you have an agreement to the contrary with the County).

Resolutions to pending tax court petitions can take well over a year.  The timing of when the petition is dismissed, settled, or granted, along with the administrative process for your county, will impact the cash flow to your TIF district.  Because property taxes need to be paid in full for a petition to be considered, the TIF district would receive a full year’s TIF payment that could be subsequently reduced if a reduction in market value is awarded.

Remember, it may take a year or more before a petition is settled or granted.  If the petition request is granted, the new market value will result in a reduction in property taxes due, often retroactively.  This will result in a refund to the property owner, which the County will deduct from the TIF district with the next tax settlement (M.S 278.12).

For example, let’s assume a TIF district has one parcel in it and the annual TIF generated is $50,000.   Let’s also assume a petition is filed for a reduction in value for taxes payable 2008, 2009 and 2010, but not decided until the end of 2011.  Finally, let’s also assume the decision results in $20,000 of tax total refund annually for those three years, or a total of $60,000.

This reduction in tax increment should result in a reduction in the payment to the developer on their next scheduled payment date.  Things get complicated if the amount refunded under the tax petition is more than the amount of increment received in your tax settlement and due to the developer.  (This can happen if there are petitions for multiple years.)   In our example above, the $60,000 refund is more than the annual TIF of $50,000.   In that case, the County may take the remaining $10,000 refund from other City funds, if there is inadequate funds in that particular TIF District.  This means the developer would receive no payment in that year and the payment in the following year would need to be reduced by $10,000 accordingly, in order to make the city whole.

If the TIF district has an outstanding bond, a reduction in the tax increment can have a significant impact on the bond payment.  If the TIF district does not have funds on hand in 2012 in our example above when the TIF is reduced to make up the difference, the City will need to find resources from other funds (perhaps in the form of an Interfund Loan, as discussed in a previous blog). In addition, the new reduced valuation could have impacts on future bond payments as well.

A tax court petition which has been filed but hasn’t been resolved can be particularly troublesome if your TIF district is about to expire…or has expired.  How do you know how much is going to be refunded, if anything?  Unfortunately, no one knows for sure until it’s all said and done.  The best you can do is estimate.

That estimate is important because if your TIF district has expired, the OSA requires that all remaining funds be returned to the County within nine months of expiration.  Unfortunately, the petition and possible refund may not be completed by then.  Therefore you’ll need to know if the estimated refund is more or less than the amount of TIF left in the district.  Either way you will want to delay returning those TIF funds until the petition has been completed. Overall it is important for a city to keep an eye on their pending tax court petitions.  A list should be provided by the County Attorney (M.S. 272.71(a)(3)) of all parcels in a TIF district for which a petition has been filed.  If you are not getting this list, you should contact your county.

In addition, when drafting the Development Agreement you may want to consider discussing some of the following options with your TIF attorney:

  • Requiring notification of all petitions filed by the developer
  • Prohibit the developer from filing any petitions for the duration of the TIF Note or Bond
  • Include language for a Minimum Assessment Agreement in M.S. Seciton 469.177, subd. 8
  • Withhold all or a portion of the TIF payment until the petition has been completed
  • Include language for a tax deficiency payment by the developer if the amount of increment isn’t enough to pay outstanding bonds

Prognosis for the Real Estate Market….This Week

March 1, 2011 in TIF

Employment drives everything, many economists say.  Certainly employment drives real estate.  More workers means more office development.  More disposable income means more retail.  More stable income means more housing needs.  Tax increment financing only works if someone is building something new.

However, there is another dimension to real estate that relates to consumer confidence.  Should I buy a home if I am worried that I may lose money in the future?  The Wall Street Journal is not optimistic this week in a new article.

Due to demographic changes with one of the largest graduating high school classes and a lack of trust in the home-ownership investment, we continue to see rental housing as one of the most vibrant portions of the real estate market.  This includes all sectors of the rental market, affordable, senior, and general occupancy.  We are working on several projects underway or soon to be underway in the metro area and in Greater Minnesota.  A recent report in the Star Tribune confirms this local trend on a national scale.