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<br /> Page 8 • Minnesota Re .tate Journal Decem 10, 2001
<br /> REPORTS
<br /> TIF still viable tool, but court decision is warning to cities
<br /> A CASE STUDY ON goz n wi
<br /> , ���,� � �r � * .��-^ that Walser could not challenge the inclu-
<br /> WALSER BEST BUY t� s i sion of its property in the district. Never-
<br /> ' � theless, the Court found that a May 15,
<br /> 2000, amendment to the statute created a
<br /> by Eric Galatz and Kathryn Hahne „ right to sue a municipality for wrongly
<br /> including or retaining a property in a TIF
<br /> •
<br /> - , 17" 1 • district. Because the Walser property con-
<br /> Last month, the Minnesota Court of tinued to be retained in the Interchange
<br /> Appeals issued a decision that jeopar- : i " West TIF district after May 15, 2000, the
<br /> dizes the availability of public assistance ' • Court held that Walser could challenge the
<br /> for the Best Buy Corp. headquarters now '...'4,g1:444'.4.43,111.444, retention of its property in the district.
<br /> GU � under con- ti4_ 54 a+ This decision puts municipalities on
<br /> struction in the notice that for districts created before or
<br /> Columnists city of Rich- after May 15, 2000, they are at risk of a
<br /> field. In very • g 't1 ' t lawsuit for retaining in a district any prop-
<br /> strong language, the Court of Appeals '"` xFF • erty that should not have been included in
<br /> found that Richfield violated the statute y 4 i' 0 t the first place.
<br /> that gives municipalities authority to use ,-fr _-.� d,4.,„- ,- - ! ti, Public purpose. The TIF act requires a
<br /> tax increment financing (TIF) to encour- PHOTOS COURTESY OF LEONARD,STREET AND DEINARD municipality to find the TIF assistance pri-
<br /> age development: Eric Galatz Kath n Hahne manly serves a public purpose. In the
<br /> Exhibiting a particular municipal mean- rY Walser case, the Court of Appeals found
<br /> ness, [Richfield] completely ignored the that the district court had only considered
<br /> statutory prerequisites for exercise of this has specific requirements for creating the The Court found that,even if Richfield's whether the TIF assistance served some
<br /> financing tool. The provisions of Minn. district and restrictions on the use of TIF reasoning was correct, Richfield was public purpose, without determining
<br /> Stat. § 469.1771 (2000) are intended to funds. wrong to use nonstructural defects,inflat- whether the primary purpose was public.
<br /> provide a means to ensure that such a bla- ed cost factors and unsupported assump- The Court of Appeals remanded the ques-
<br /> tant disregard for limits on municipal How not to create a tions about the condition of the buildings tion to the district court for further consid-
<br /> authority will be answerable. TIF redevelopment district to reach its conclusion that 91 percent of eration.
<br /> It may be some time before the case is The Court of Appeals found that several the buildings that could not"by any means Critics of TIF often complain that TIF
<br /> finally resolved. Whatever the final out- aspects of Richfield's TIF district creation be regarded as `rundown"'were neverthe- provides more of a direct benefit to a spe-
<br /> come,the case will affect the way munici- were"fundamentally flawed" less structurally substandard. cific developer than to the taxpayers.
<br /> palities provide public assistance to private To qualify as a redevelopment district, The Court found that Richfield failed to Future municipal findings about TIF dis-
<br /> development throughout the state. more than 50 percent of the existing build- follow the statutory requirement to use tricts will almost certainly contain very
<br /> ings in Best Buy's path had to be "struc- "best efforts to obtain permission” from specific findings about the relative weight
<br /> Walser and the Best Buy project turally substandard." Richfield retained property owners to do interior inspections of public and private purposes.
<br /> Richfield's Housing and Redevelopment consultants to evaluate the 74 residential to determine whether the buildings were
<br /> Authority contracted to provide$48 mil- and 16 commercial properties in the dis- structurally substandard. Richfield sent TIF will go on
<br /> lion in direct subsidy and another$7 mil- trict.In their proposal to Richfield,the con- property owners two letters requesting a Tax increment has become a significant-
<br /> lion for construction of a new bridge at sultants noted that the residential proper- "voluntary inspection,"allowing one week ly less valuable development tool in recent
<br /> Penn Avenue and Interstate 494 to assist ties in the proposed district were generally to respond to each letter.There were no fol- years for reasons unrelated to the Walser
<br /> development of a$160 million corporate in good condition and could not"by any low-up telephone calls.No door knocking. litigation.The Minnesota Legislature has
<br /> headquarters for Best Buy. The project is means be regarded as `rundown.— The The Court found that failure to use other placed substantial restrictions on TIF
<br /> in the northeast quadrant of I-494 and Penn consultants recommended using an"alter- methods that were readily available and throughout the last decade to address real
<br /> Avenue, in the Interchange West redevel- native approach" to reach the "desired often used in other TIF districts,along with and perceived abuses of the financing tool.
<br /> opment area in Richfield. result." the fact that the city obtained access to only The 2002 property tax reform significantly
<br /> Interchange West is an approximately 20 percent of the buildings,was"powerful reduces the source of revenues for TIF by
<br /> 40-acre parcel that included 7 acres owned evidence that `best'efforts were not uti- reducing everyone's property taxes. In
<br /> by members of the Walser family. The The Court'
<br /> s holdings on lized." most districts, the reform will result in
<br /> Walsers leased their property to two auto- The TIF statute requires that the strut- approximately 40 percent Jess in h F rev-
<br /> mobile dealerships, which are also owned Richfield's use of TIF for Best turally substandard buildings be"reason- enues.
<br /> by members of the family. Richfield took ably distributed" throughout the district. The Court's holdings on Richfield's use
<br /> the Walser property by condemnation,dis- The Court found Richfield failed this test of TIF for Best Buy are instructive for
<br /> placing both Walser dealerships for the Buy are instructive for cities because all of the allegedly substandard cities undertaking similar projects and a
<br /> Best Buy project. buildings were in the northern 60 percent warning to those who would by-pass statu-
<br /> The Walsers challenged the condemna- undertaking similar projects of the proposed district, almost all were tory requirements to achieve a "desired
<br /> tion,TIF subsidy,adequacy of the environ- residential properties and"the city conve- result."
<br /> mental review,municipal zoning and land- niently drew the TIF district lines to But the decision should not alarm
<br /> use approvals, Minnesota Pollution Con and a warning for those include the valuable property with 1-494 municipalities that have diligently followed
<br /> trol Agency(MPCA) indirect source per- frontage,even though none of the alleged- the statute.The decision does not place any
<br /> mits and the failure of the Metropolitan who would by-pass ly substandard buildings were found with- new restrictions on a city's use of TIF.
<br /> Council to conduct a Metropolitan Signify- in this region." Indeed,TIF is alive and well, and remains
<br /> cance Review.This article addresses only The Court found that "even a cursory a viable tool for development. However,
<br /> the TIF lawsuit. statutory requirements to review of the exhibits submitted reveals the Walser decision should make everyone
<br /> that the allegedly substandard properties involved in publicly assisted real estate
<br /> TIF in a nutshell achieve a "desired result." were not `reasonably distributed'through- projects more aware and respectful of the
<br /> TIF is one of the few tools a municipal- out the district at all." rules that govern this valuable development
<br /> ity can use to provide financial assistance tool. J
<br /> to a private development. TIF allows a Standing and public purpose
<br /> municipality to divert the increase in prop- The consultants determined that almost The Court's holdings with respect to Eric Galatz is an attorney in the real
<br /> erty tax revenues generated by a project all of the residential structures were"strut- standing and public purpose may have a estate, construction and public law groups
<br /> from the general fund to pay for specified turally substandard,"almost entirely on the broader effect on existing and future TIF of Leonard,Street and Deinard PA.He rep-
<br /> project costs. assumption that the buildings built in the projects than its holdings on creation of this resents developers of publicly assisted pm-
<br /> The TIF statute imposes strict limits on 1960s and 1970s were not insulated up to particular TIF district. jects and has lectured on TIF,smart growth
<br /> how a municipality can use TIF.A munici- the standards for new construction in the Standing. Standing is the right to sue. and new urbanism.
<br /> pality must find the subsidy primarily current energy code.The Court of Appeals The TIF act specifically grants "owners of
<br /> serves a public purpose and that, "but for" rejected the alternative approach,in part, taxable property located in the city" the Kathryn Hahne, also anattorney at the
<br /> the subsidy, the developer would not pro- because substandard insulation is not a right to bring suit against a municipality for firm,practices in the areas of government
<br /> ceed with the project. The municipality structural defect. failure to comply with the TIF act, with relations, real estate and public law. She
<br /> must also establish a TIF district,defining The Court criticized Richfield for"flip- limits on what the property owner can represents developers and public agencies
<br /> the geographic area in which the project ping" a statutory guideline. The statute recover from the municipality. In the on tax increment and other types of devel-
<br /> will be located and from which the munic- says that a building that can be brought into Walser case, the Court found that before opment projects.
<br /> ipality will take the TIF funds for the pro- compliance with the building code for 15 May 15,2000,a property owner could sue
<br /> ject. percent of its replacement cost is not struc- a municipality for wrongly including or Leonard, Street and Deinard and Malk-
<br /> The TIF statute creates different types of turally substandard. Richfield took the retaining a property in a TIF district. erson Gilliland &Martin LLP represent
<br /> TIF districts for different purposes,includ- view that a building that cannot be brought Because Richfield included the Walser Walser in its several actions against the
<br /> ing housing,redevelopment and hazardous in compliance for that cost is then struc- property in the Interchange West TIF dis- city of Richfield.
<br /> waste cleanup. Each type of TIF district turally substandard. trict before May 15, 2000,the Court held
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