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).
Minn. Stat. § 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) the district's tax increments (property taxes
paid by captured value only).
Minn. Stat. §
469.176, subd. 3. 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.
An assessment agreement binds the developer to a
minimum market value for property tax purposes, regardless of the development's
actual market value.
Minn. Stat. § 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. 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.,
Minn. Stat. § 469.174, subd. 10.
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."
Captured tax capacity is the current property tax
capacity of the parcels of property in the TIF district area, less the original
tax capacity. Minn. Stat. § 469.177, subd. 2.
Captured tax capacity multiplied by the original local tax rate yields the amount of increment.
A compact development district is a type of TIF
district that may be established in only an area where 70 percent of the parcels
are occupied by buildings and the planned redevelopment will increase the square
footage of the commercial and industrial buildings by at least three times.
Minn. Stat. § 469.174,
subd. 10c. Increments from a compact development district may not be used to
fund automobile-related public infrastructure, such as streets, roads, and
parking improvements.
Minn. Stat. § 469.176,
subd. 1i. Compact development districts have a 25-year duration limit.
Minn. Stat. § 469.176,
subd. 1b. Authority to establish these districts expires on June 30, 2012.
Credit enhanced bonds are TIF revenue bonds that are
secured by pledges of increments from several TIF districts.
Minn. Stat. § 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.
Minn. Stat. § 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.
Minn. Stat. § 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:
- transferring surplus increments from other districts,
Minn. Stat. § 469.176, subd. 6
- increasing the original local tax rate to the current rate,
Minn. Stat. § 469.1792, subd.3(1)
- changing fiscal disparities options,
Minn. Stat. § 469.1792, subd.3(2)
- extending how long the district can legally collect increment
Minn. Stat. § 469.1793.
A development authority or authority is a government
entity authorized by the TIF law to exercise tax increment financing powers. Minn. Stat. §
469.174, subd. 2. Authorities include cities (exercising powers under
the city development district law or the municipal industrial development act),
economic development 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.
Minn. Stat. §§ 469.174, subd. 25(5).
District area is the area containing properties from
which increment is collected.
Minn. Stat. § 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.
Minn. Stat. §§ 469.090 - 469.108;
469.174, subd. 4. EDAs are typically created by a city, although
counties are also permitted to establish EDAs. See
Minn. Stat. § 469.1082.
An economic development district is a type of TIF
district that may be established in any geographic area.
Minn. Stat. § 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.
Minn. Stat. § 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.
Minn. Stat. § 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. Minn. Stat. §
469.176, subd. 2. 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 may trigger recalculation 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.
Minn. Stat. § 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 may be 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.
Minn. Stat. § 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.
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.
Minn. Stat. § 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.
Minn. Stat. § 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.
Minn. Stat. §§ 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.
Minn. Stat. § 469.178, subd. 3. If the increment or other revenues prove
insufficient, the HRA must use any available authority revenues. However,
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.
Minn. Stat. § 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.
Minn. Stat. § 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.
Minn. Stat. § 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.
Minn. Stat. § 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.
Minn. Stat. § 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
moderate-income families.
Minn. Stat. § 469.174, subd. 11.
To qualify as a housing district, 80 percent or
more of the area of the assisted development must be used for low and
moderate-income housing. In addition, specified income guidelines apply to
individuals occupying the housing.
Minn. Stat. § 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.
Minn. Stat. §§ 469.001 - 469.047;
469.174, subd. 2.
Any city or county may establish an HRA.
Minn. Stat. §§ 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[.]"
Minn. Stat. §§ 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.
Minn. Stat. § 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.
Minn. Stat. § 469.179, subd. 7.
These loans must be authorized by 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.
Minn. Stat. §§ 469.174, subd. 6;
469.175, subd 3.
In most cases, the municipality is the city in which the project is located. 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 districts, increment is determined using
the current year local tax rates.
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 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.
Minn. Stat. § 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.
Port authorities are special purpose governmental
entities authorized to exercise a variety of development powers, including TIF powers.
Minn. Stat. §§ 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 required de-certification by
August 1, 2009 and prohibits enlargement of the district after August 1, 1984.
Minn. Stat. § 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.
Minn. Stat. § 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
local tax 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.
Minn. Stat. § 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.
Minn. Stat. § 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, 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.
Minn. Stat. § 469.174, subd. 10b.
These areas can be designated a redevelopment district with an original tax capacity equal to the value of the land.
Minn. Stat. § 469.177, subd. 1(g).
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.
Minn. Stat. § 469.174, subd. 10.
The duration of a redevelopment district is limited to 25 year from the receipt of the first increment.
Minn. Stat. § 469.176, subd. 1(e).
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. For more detail on economic development district rules on use of increment, go to
Economic Development TIF districts.)
To be a small city, the city's population must be 5,000 or less, it may not be located within five miles of a city with a population of
10,000 or more.
Minn. Stat. § 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.
Minn. Stat. § 469.176, subd. 4c(e).
In 2023, about 600 cities qualified as small cities. (Go to a list of
qualifying small cities
as of 2023.)
A soils condition TIF district is a type of TIF
district that is used to finance correction of hazardous waste or pollution clean-up.
Minn. Stat. § 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.
Minn. Stat. § 469.176, subd. 4b..
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.
Minn. Stat. §§ 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.
Minn. Stat. § 469.175, subd. 1.
The TIF plan must be approved by the municipality after a public hearing.
Minn. Stat. § 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.
Minn. Stat. § 469.175, subd. 4(a).
The geographic area of a TIF district cannot be increased five or more years after the district was created.
Minn. Stat. § 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.
Minn. Stat. § 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; (4) lease payments from property
acquired with tax increments; and (5) repayments of tax increments by the
developer or property owner (often called developer payments).
Minn. Stat. § 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.
Minn. Stat. § 469.177, subd. 3.
The three-year rule required 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.
Minn. Stat. § 469.176, subd. 1a
(2001). The three-year rule was repealed, effective June 2, 2005.
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 1, 2, 3, 4, or 5.