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6.0. HRSR 01-28-2002 Item 6. • City of Elk River MEMORANDUM TO: Economic Development Authority Housing & Redevelopment Authority Mayor & City Council FROM: Catherine Mehelich, Director of Economic Development DATE: January 14, 2002 SUBJECT: NE Corner of Hwy 169 & Main Street Redevelopment Update Attachments * Court of Appeals overturns Walser district court decision,LMC, Nov. 21,2001. • * TIF still viable tool, but court decision is warning to cities,MN Real Estate Journal, Dec. 10,2001 Issue Developer, Kraus-Anderson Realty,has been considering a redevelopment of the NE Corner of Hwy 169 &Main Street since Spring 2001. The developer has suggested consideration of tax increment finance assistance from the City to fund extra-ordinary costs, such as acquisition and demolition, related to completing a redevelopment project. Background In September 2001 the developer submitted a preliminary site plan for staff review. The proposed redevelopment area included the former Ron's Foods, City Emporium, and two adjacent apartment buildings along Third Street. When asked to consider the use of TIF, the HRA, EDA and City Council members strongly suggested that the developer also consider including the adjacent single family homes located to the north for a larger redevelopment concept. The developer indicated to staff a willingness to consider the larger area,but again noted the importance of the City's consideration of tax increment financing for the larger project. One of the first steps in evaluating the proposed redevelopment project for tax increment financing is a "structurally substandard" finding required by statute. Staff offered to complete an initial assessment of the proposed redevelopment area for its eligibility. The City Building Official reported that based upon past inspections and knowledge of the properties that there is "minimal structural deterioration", not considering building or energy code compliance. • In light of recent litigation activity involving a municipality's interpretation of the statutory TIF qualifications redevelopment ualifications and definition of"structurally City substandard", the Ci staff believes that there is not substantial evidence to qualify the proposed area for a TIF redevelopment district. Attached are two recent articles,which provide background to the recent scrutiny of TIF redevelopment qualifications. Recommendation Staff has notified the developer in writing of the following recommendation being presented before the EDA, HRA and City Council: Based upon the initial assessment of redevelopment qualifications, staff recommends that tax increment financing not be considered to assist a redevelopment project for a redevelopment project of the NE corner of Hwy 169 and Main Street. The City has had inquiries about smaller projects at this intersection—specifically just the City property and Ron's Foods. Staff has indicated that the City Council, EDA, and HRA desire a larger redevelopment area,but has also indicated that the City would consider selling its site for a smaller project that meets some of the City's economic development goals. Staff suggests an asking price of$400,000 for the City's .76-acre parcel. As an alternative to TIF, the City may consider the use of Tax Rebate Financing for projects that meet the City's economic development goals. • `•Page 8 Minnesota Reo. ._s Journal December T7t, 2001 REPORTS TIF still viable tool, but court decision is warning to crties A CASE STUDY ON that Walser could not challenge the inclu- WALSER, BEST BUY f , lion of its property in the district. Never t, �r nd theless, the Court found that a May 15, �� 2000, amendment to the statute created a by Eric Galatz and Kathryn Hahne f t£ right to sue a municipality for wrongly F r" d t "j '_' t� - Including or retaining a property 111 a TIF district. Because the Walser property con- w" ,1ti L ast mouth, the Minnesota Court of , „f tinned to be retained in the Interchange Appeals issued a decision that je.opar �� West TIF district after May 15, 2000, the• dines the availability of public assistance * Court held that Walser could challenge the for the Best Buy Corp. headquarters now ; 4 • retention of its property in the district. Guest under con This decision puts municipalities on con- struction in the a ; . notice that for districts created before or ur HVu Sts city of Rich ,,` after M.ay 15, 2000, they are at risk of a field. In very AEARgo F V lawsuit for retaining in a district any prop- strong language, the Court of Appeals erty that should not have been included in found that Richfield violated the statute � � 1 the first place. that gives municipalities authority to use , , =•,t , . ,`t ".._ 'r_ .� ,_, - Public purpose. The 1 t1 act requires a• tax increment financing (TIF) to enconr- PHOTOS COURTESY Or LEONARD,STREET AND DDNARD illunicipality to find the TIF assistance prl- age development: • manly serves a public purpose. In the Kathryn Hahne Eric Galatz Exhibiting a particular municipal mean- Walser case, the Court of Appeals found tress, [Richfield) completely ignored the that the district court had only considered 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 financing tool. The provisions of Minn. district and restrictions on the use of TIF reasoning was correct, Richfield was public purpose, without determining Stat. § 469.1771 (2000) are intended to funds. wrong to use nonstructural defects, inflat- whether the primary purpose was public. provide a means to ensure that such a bla- ed cost factors and unsupported assump- The Court of Appeals remanded the ques- taut disregard for limits on municipal How not to create a tions about the condition of the buildings Lion to the district court for further consid- authority will be answerable. TIF redevelopment district to reach its conclusion that 91 percent of eration. It may be some time before the case is The Court of Appeals found that several the buildings that could not"by any means Caritics of TIF often complain that TIF 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- come, the case will affect the way munici- were"fundamentally flawed." less structurally substandard. cific developer than to the taxpayers. palities provide public assistance to private To qualify as a redevelopment district, The Court found that Richfield failed to Future municipal findings about TIP dis- development throughout the state. more than 50 percent of the existing build- follow the statutory requirement to use tricts will almost certainly contain very ings in Best Buy's path had to be "struc- "best efforts to obtain permission" from specific findings about the relative weight Walser and the Best Buy project turally substandard. Richfield retained property owners to do interior inspections of public and private purposes. Richfield's Housing and Redevelopment consultants to evaluate the 74 residential to determine whether the buildings were Authority contracted to provide $48 mil- and 16 commercial properties in the dis- structurally substandard. Richfield sent TIF will go on lion in direct subsidy and another$7 aril- trict.In their proposal to Richfield,the con- property owners two letters requesting a Tax increment has become a significant- 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 Penn Avenue and Interstate 494 to assist ties in the proposed district were generally to respond to each letter.There were no tot- years for reasons unrelated to the Walser 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 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 in the northeast quadrant of 1-494 and Penn consultants recommended using an "alter- methods that were readily available and throughout the last decade to address real Avenue, in the Interchange West redevel- dative approach" to reach the "desired often used in other TIF districts,along with and perceived abuses of the financing tool. opulent area in Richfield. result." the fact that the city obtained access to only The 2002 property tax reform significantly Interchange West is an approximately 20 percent of the buildings,was"powerful reduces the source of revenues for T!F by 40-acre parcel that included 7 acres owned s On The Court's holden evidence that 'hest' efforts were not uti- reducing everyone's property taxes. in by members of the Walser family. The g lined:' most districts, the reform will result in Walsers leased their property to two auto- The TIF statute requires that the surc- approximately 40 percent less in Tit rev- ' p turally substandard buildings be"reason- enues. t mobile dealerships, which are also owned Richfield s use of TIF for Best by members of the family. Richfield took ably distributed" throughout the district. The Court's holdings on Richfield's use the Walser property by condemnation,dis- The Court found Richfield failed this test of TIF for Best Buy are instructive for placing both Walser dealerships for the Buy are instructive for cities because all of the allegedly substandard cities undertaking similar projects and a Best Buy project. buildings were in the northern 60 percent warning to those who would by-pass statu- The Walsers challenged the condemna- undertaking similar pro ects of the proposed district, almost all were tory requirements to achieve a "desired lion,TiF subsidy, adequacy of the environ- residential properties and"the city conve- result." mental review, municipal zoning and land niently drew the TIF district lines to But the decision should not alarm. use approvals. Minnesota Pollution Con- and a Warning for those include the valuable property with 1-494 municipalities that have diligently followed trot Agency (MPCA) indirect source per- frontage,even though none of the alleged- the statute.The decision does not place any nuts 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. Council to conduct a Metropolitan Signifi- in this region" Indeed, TIF is alive and well, and remains cance Review.This article addresses only The Court found that "even a cursory a viable tool for development. However; the TIF lawsuit. statutory requirements to review of the exhibits submitted reveals the Walser decision should make everyone that the allegedly substandard properties involved in publicly assisted real estate TiF in a nutshell .a " esired result." were not 'reasonably distributed' through- projects more aware and respectful of the TiF is one of the few tools a municipal- out the district at all." rules that govern this valuable development ity can use to provide Financial assistance tool. to a private development. TIF allows a Standing and public purpose 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 erty tax revenues generated by a project all of the residential structures were"struc- standing and public purpose may have a estate, construction and public law groups 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- project costs. assumption that the buildings built in the projects than its holdings on creation of this resents developers of publicly assisted pin-' 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 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. parity must find the subsidy primarily cutrent energy code.The Court of Appeals The TIF act specifically grants "owners of serves a public purpose and that, but for" rejected the alternative approach, in part, taxable property located in the city" the Kathy'ii Hahne, also an attorney at the the subsidy, the develop er would not pro- because substandard insulation is not a right to bring suit against a municipality for firm,practices in the areas of,government teed with the project. The municipality structural defect. failure to comply with the TIF act, with relations, real estate and public lane. She must also establish a TIF district, defining The Court criticized Richfield for"flip- bouts on what the property owner can represents developers and public agencies the geographic area in which the project Ping" a statutory guideline. The statute recover from the municipality. In the on tax inc ernent and other times of level- will be located and from which the munic- says that a building that can be brought into Walser case, the Court found that before opnrent projects. ipality will take the TIF funds for the pro- compliance with the building code for 15 May 15, 2000, a property owner could sue ject. percent of its replacement cost is not stoic- a municipality for wrongly including or Leonard, Street and Deinard and Aialk- The TIF statute creates different types of turally substandard. Richfield took the retaining a property in a TIF district. ersorr Gilliland &Martin LLP represent 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 ing housing,redevelopment and hazardous in compliance for that cost is then struc- property in the Interchange West TIF dis- city of Richfield. waste cleanup. Each type of TIF district turally substandard. trict before May 15, 2000, the Court held III • _ „ • • Court of Appeals overturns Walser district court decision Andrea Hedtke On Tuesday,November 13,the Min- Appeals disagreed and stated that • Methods for determining nesota Court of Appeals overturned a "...several aspects of the TIF-district conditions of buildings district court decision involving the creation were fundamentally flawed." Finally,the laws governing redevel- city of Richfield and the Walser In its rationale, the Court of opment TIF districts require that family.The district court had dis- Appeals highlighted three primary more than 50 percent of the missed a lawsuit filed by the Walser issues: best efforts,distribution of buildings be"structurally substan- family alleging the city acted improp- buildings,and methods for determin- dard."The statutes provide a fairly erly when it established a redevelop- ing conditions of buildings: lengthy definition of structurally ment tax increment financing(TIF) • Best efforts substandard.The Court of Appeals district that included property on In establishing a redevelopment TIF found that the methodology used by which Walser's automobile dealership district and making structurally the city's architectural firm in operations stood. substandard findings, a city must use determining the buildings at issue In the underlying decision,the its best efforts to obtain permission to be structurally substandard was district court found that the TIF from the property owner to gain "rife with inaccuracies."Of the five district created by the city met the access for an interior inspection. points discussed by the Court, it statutory public purpose requirement The Court of Appeals determined appeared particularly concerned since expenditures would be used for that the two letters,sent to property with the fact that the basis for the land acquisition and public improve- owners by the architectural firm structurally substandard determina- ments. In its decision, the Court of hired by the city,requesting access Lion often related to whether the Appeals stated that the key question is for the purpose of an interior building was in compliance with whether the public purpose served by inspection,without subsequent the state energy code.The Court a TIF district is primary as compared phone calls and door knocking, did stated that the city was in error in with any private interest served.The not constitute best efforts. considering energy code compli- . Court of Appeals directed the district • Distribution of buildings ante in the structurally substandard court to revisit the issue of whether The TIF laws also require that determination. the TIF expenditure was primarily for structurally substandard buildings be It is likely the city of Richfield a public purpose and to conduct a "reasonably distributed throughout will appeal the Court of Appeals' comparative analysis. the district."The Court of Appeals decision to the Minnesota Supreme The district court also found that found that the buildings the city Court. In the meantime,in light of the redevelopment TIF district was determined to be structurally this important decision, cities may be lawful in all respects, including the substandard were not reasonably well advised to evaluate how their "structurally substandard" findings distributed because they were all procedures in establishing redevelop- required by statute.The Court of located in the north 60 percent of ment TIF districts compare with those the TIF district. followed by the city in this case.Y Visit the League on the Web: www.lmnc.org 0 for all the latest information about how your city can participate and benefit from LMC and LMCIT services, resources, and training opportunities. November 21, 2001 Lei y we o m N CG,f es ��..el C) Page 7 .. L,if-i es 13 4 1'e-h rl —