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INFORMATION
<br /> September 3, 2001 � Minnesota Real Estate Journal
<br /> i
<br /> TIF: The painful side
<br /> of propetly tax relief 01
<br /> THE IMPACT OF significant financial issues for developers
<br /> and cities.To raise cash for a project,many 41,11P. • 6-floor'
<br /> TAX REFORM ON TIF developers holding pay-as-you-go notes
<br /> sold them on the secondary market after • 74,400
<br /> by Peter Berrie guaranteeing the stated principal and inter-est. 13 a c�
<br /> In addition, cities that issued general U • Close p
<br /> The Minnesota obligation TIE bonds for projects often Enterprises, I t 1 c. MKE In
<br /> Omnibus Tax Act, insisted on developer guarantees of tax
<br /> passed by the Legisla- payments,land leases or minimum assess- • $4.2 111
<br /> ture just in time to ment agreements to reduce taxpayer risk
<br /> -:: for any shortfalls in future tax increment 4615 Washburn Ave. S.
<br /> Guest receipts.It's a safe bet that both cities and Minneapolis, MN 55410
<br /> Columnist 1 developers are reviewing the terms of their phone: 612 860 2467
<br /> contracts to determine where they stand.
<br /> avert a state shut- ==� s Fax: 612.929.7862
<br /> . Legislative remedies
<br /> down, delivers his Peter Berrie To ease the pain of tax reform,the Act
<br /> reform.toric property. the. authorizes cities to use several measures to '
<br /> While the
<br /> Act's substantial provide relief to distressed TIF districts.
<br /> property tax relief is welcome news to Cities may use these remedies to help
<br /> many businesses,it may be bad news for themselves,as well as developers and oth �'real estate developers'who rely .on tax ers holding"pay-as-you-go"notes.How Ly
<br /> -
<br /> increment financing(In-). ever, developers have no direct access to 1 -.City
<br /> Not onlywill this development tool be . these remedies,which each city may use -
<br /> p at its discretion. Nevertheless, distressed
<br /> 0
<br /> less effective in the future,developers who developers will want to consider strategies
<br /> have guaranteed or relied upon pre reform to encourage cities to use the relief avail- ( :. tits' c t
<br /> tax increment streams may be left holding able.The Act requires a city to exhaust the
<br /> the bag. remedies the law provides a variety ofemedies in the order described below.
<br /> remedies for cities whose TIF districts are These remedies are generally only avail- Servicing thesefa,
<br /> adversely affected by the landmark reform. able for TIF obligations that were entered
<br /> into before Aug. 1,2001.
<br /> What exactly did the Legislature do? Pooling.The first remedy cities must use
<br /> Take over,the general education levy. is"pooling,"a technique that allows cities • CORPORATE
<br /> The state has assumed responsibility for to use tax increments"from other TIF dis-
<br /> education funding and eliminated the gen- tricts to eliminate deficits caused by the COMMERCIAL
<br /> eral education levy for local school dis- property tax reform,including shortfalls in
<br /> tricts,as well as the first$415-per-pupil of the increment available for pay-as-you-go MULTI—TENA
<br /> each district's referendum levy.This will notes. A city needs the approval of the
<br /> dramatically lower tax increment revenues Commissioner of Revenue to utilize this r
<br /> generated by school district taxes. remedy. Even if a pay-as-you-go note t • MEDICAL
<br /> Impose a new state-wide property tax. states that it is only payable from incre
<br /> To help offset the loss of local school dis-, ment generated by a certain TIF district, PHARMACEUTICAL
<br /> trict property taxes,the state is imposing a the law allows pooling to pay it,but only
<br /> new state-wide education property tax on to the extent that all other payments due BIO—TECHNI(
<br /> C/I property and seasonal recreational and owing on that city's TIP bonds and LABORA7
<br /> property(cabins). other pay-as-you-go notes have been made
<br /> Cut rates.The tax law compresses prop- for that calendar year. CLEJ
<br /> erty class rates so that the remaining prop- Uncapping the original tax rate or
<br /> erty tax burden falls more evenly on all changing,the fiscal disparities option. If a
<br /> properties.The table with this article shows city uses its pooling authority to the fullest • TELECOMMUNICATIC
<br /> the changes in class rates for the major extent possible and there is still a shortfall, ,,
<br /> property classifications. it may exercise either or both of the folCC+MPUTER
<br /> lowing options:
<br /> 1110 Effect of property tax reform on TIF a) Uncapping the original tax rate.TIF MEDIA TECH
<br /> laws generally do not allow cities to gen
<br /> Lower property taxes mean less tax
<br /> increment to pay existing TIF bonds and erate more increment by increasing the
<br /> combined city,county and school district
<br /> "pay-as-you-go"notes,as well as less pub tax rate beyond the combined tax rate in
<br /> lic assistance for new development or rede- effect when the TIF district was formed. • INDUSTRIAL
<br /> velopment projects. To make matters However, this.remedy allows a city to
<br /> worse,the new state-wide property tax onMANUFACTURING
<br /> C/I property will not be available for TIE. increase the"original tax rate"to the new
<br /> As a result, available tax increment is combined tax rate.If the new rate is high- CORPQRATIC
<br /> expected to decrease by about 30 to 40 per- er than the original tax rate (despite the
<br /> cent.The exact drop for any give} 1'IN dis—
<br /> trictis currently difficult to I calculate
<br /> ment available for the TIF district.
<br /> because it depends upon the new tax b)Fiscal disparities option. Minnesota' '#f
<br /> law requires governmental units located in
<br /> c apacity,of each property within a munici- _ t
<br /> certain areas(generally the seven-county f
<br /> p In addition,the Legislature eliminated metropolitan area and the Iron Range)to =l`r i
<br /> the "LGA/HACA" penalty that forced contribute a portion of their C/I property Piq:
<br /> taxes to area-wide funds that are then redis- "'- ;
<br /> most cities to contribute a"local match"to r == , I
<br /> TIF projects(from non-TIF sources)equal tributed among the governmental units in ;!•31.7743:1--1 I
<br /> p J q order to smooth out imbalances in their rel- • I = l i
<br /> to 5 percent of the tax increment.Unless r { '
<br /> 0 the city contracted to pay the local match ative tax revenues.These revenue-sharing 11,I};
<br /> mechanisms are often referred to as"Fish! t -
<br /> regardless of any statutory requirement, , "' l '" '
<br /> cal Disparities"contributions. i ` ,f Ii1
<br /> this change will probably further.reduce p �� 1� , � ��'
<br /> the amount of public'funds used to pay When a new TIF district is created, a ` ;
<br /> city can elect to pay the fiscal disparity ;1111•111111.1111, 1, '_<" ' ;
<br /> existing TIF obligations. (On the other * r ��
<br /> hand,this change eliminates a disincentive contribution from all property in the city — _ _ 4 K
<br /> to cities to enter into TIF deals.) instead of solely from the applicable TIF 4,
<br /> Due to the reduction in tax increment, district.If a city did not do so originally,it 7276 Commerce Circle Ease
<br /> most "pay-as-you-go" notes will not be may now choose that option as another it 4 C
<br /> „f ,7
<br /> paid as quickly as originally projected,and remedy to make more tax increment avail- \ .1 lr) .
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