RE Basics: Tax Increment Financing

Tax increment financing (TIF) is a method of financing real estate development costs for projects in Minnesota. TIF allows local governmental units to provide financial assistance to developers by using additional property taxes, or "tax increment," paid as a result of the development.

Eligible Expenses

Depending on the type of TIF district, TIF can be used by developers for a variety of costs, including costs associated with land acquisition, site improvements, environmental remediation, public and on‑site utilities, and demolition. Minn. Stat. § 469.174, et. seq.

Payment of TIF Proceeds

Local governmental units to which the state grants the power to use TIF are referred to as "Authorities." Traditionally, Authorities have generated TIF proceeds, which they then pay to developers for eligible costs, through the issuance of bonds (also known as "up-front" financing). TIF bond proceeds are used to pay development costs and interest, and are paid back from tax increments as they are received. The type of TIF bond issued is important, as the amount of benefit received depends on whether the TIF obligation bears interest that is taxable or tax-exempt.

As an alternative to bond financing, TIF assistance may consist of a "pay-as-you-go" note given to the developer by the Authority and payable from the tax increment generated by the project. Often, to monetize the TIF note, developers will pledge their TIF notes to third-party lenders, enabling the lenders to provide additional financing for development costs.

TIF District Types

To qualify for TIF, a project must be located within a TIF district. A TIF district is the geographic area from which the Authority captures tax increment. The number of years tax increment will be available for a project depends on the type of TIF district within which the project is located. The types of TIF districts include the following:

• Redevelopment Districts. For an Authority to create a Redevelopment District, it must find that: (i) at least 70 percent of the land comprising the district has been developed, and more than 50 percent of the buildings are "structurally substandard" within the meaning of the statute; (ii) the property consists of inappropriately used rail yards, rights-of-way or storage facilities; (iii) the property contains certain unused tank facilities; or (iv) the area is a qualified disaster area. These districts last up to 25 years. Minn. Stat. § 469.174, subd. 10.
  


• Renewal and Renovation Districts. For an Authority to create a Renewal and Renovation District, at least 70 percent of the area must be developed, at least 20 percent of the buildings in the district must be deemed structurally substandard and at least 30 percent of the buildings must require substantial renovation or clearance as described in the statute. These districts last up to 15 years. Minn. Stat. § 469.174, subd. 10a.
  


• Housing Districts. Housing Districts consist of projects intended for occupancy, in part, by persons or families of low and moderate income. See Minn. Stat. § 469.1761 for applicable income limits. These districts may last up to 25 years. Minn. Stat. § 469.174, subd. 11.
  


• Economic Development Districts. For an Authority to create an Economic Development District, it must find that the district is in the public interest because: (i) it will discourage commerce, industry or manufacturing from moving operations to another state or municipality; (ii) it will result in increased employment in the state; or (iii) it will result in the preservation and enhancement of the tax base of the state. These districts last up to eight years. Minn. Stat. § 469.174, subd. 12.
  


• Hazardous Substance Subdistricts and Soil Conditions Districts. These districts can be used for removal or remediation of hazardous substances, pollution or contaminants if certain criteria are met. They last for 25 and 20 years, respectively. Minn. Stat. § 469.174, subd. 23; Minn. Stat. § 469.174, subd. 19.

 "But For" Test

Before creating a TIF district, the local government must find that, in its opinion, the proposed development would not have happened "but for" the use of TIF. More specifically, to satisfy Minn. Stat. § 469.175, subd. 3, the local government must find that: (a) the development would not happen solely though private investment within the "reasonably foreseeable future," and (b) the development will yield a net increase in market value for the site. If this test is satisfied, a developer could be on its way to enjoying the benefits of TIF.

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Further details are necessary for complete understanding of the subjects covered by this article. For that reason, the specific advice of legal counsel is recommended before acting on any matter discussed in these pages.