Meeting #1 SR 02-05-2001City of
River
MEMORANDUM
TO:
FROM:
Mayor & City Council
Economic Development Authority
Housing & Redevelopment Authority
Cathy Mehelich, Director of/Eff~ic
Development
DATE:
February 5, 2001
SUBJECT: Agenda Memo for Worksession
I$$i.~e
This is a joint meeting of the City Council, Economic Development Authority, and
Housing and Redevelopment Authority for the purpose of reviewing two primary
economic development finance tools.
Sid Inman, from Ehlers and Associates, Inc. will be at the meeting to present a
summary of how the Tax Increment Financing and Tax Abatement programs work
and an update on recent statutory changes. Requirements under the Business Subsidy
Law and impacts of legislative proposals will also be discussed.
Background
The City of Elk River currently administers ten active tax increment financing
districts. One of the ten active districts is a housing district, and the others consist of
four redevelopment districts and five economic development districts. For the year
2000 the City's percentage of captured TIF/total tax capacity was 1.06%. This
percentage is among the lowest as compared to area cities such as Monticello (3.85%)
and Anoka (16.45%). Elk River's percentage of TI_F/total tax capacity is also among
the lowest compared to similar metro and non-metro cities. Attached is a summary of
tax increment finance statistics among other cities as listed in the League of MN Cities
Magazine (Sept. 2000).
13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330 · TDD & Phone (763) 441-7420 · Fax (763) 441-7425
Tax abatement is a relatively new economic development finance tool to the City of
Elk River. The attached Tax Rebate Financing Policy was adopted by City Council
action on April 10, 2000. The City's first use of the tax rebate program was used
shortly thereafter in May 2000.
A Tax Increment Financing Policy was adopted by the City Council in August 1991.
In March 2000, the attached TIF Policy was revised to comply with new state statutes
and to more clearly state the City's position for the use of TIF.
The primary purpose of these finance tools continues to be to encourage desirable
development or redevelopment that would not otherwise occur but for the assistance
provided. Staff feels the tax increment financing and tax abatement programs have
proven to be significant economic development finance tools for the City of Elk River
over the past couple of years. It is appropriate for the City to review its policies for
these two programs on a regular basis to comply with statutory changes and to reflect
the development priorities of the City of Elk River.
It is anticipated that this worksession will last between 60 and 90 minutes.
Attachments
· Tax Increment Finance Statistics
· Tax Rebate Financing Policy
· Tax Increment Financing Policy
Tax Increment Finance
Statistics
Andover 24,358 16,305,885 975,339 5.98%
Anoka 18,145 12,116,647 1,992,928 16.45%
Brooklyn Center 28,597 21,416,992 2,533,878 11.83%
Champlin 21,042 12,939,431 2,375,189 18.36%
Chanhassen 18,772 24,021,572 5,087,790 21.18%
Chaska 15,801 15,964,059 4,408,029 27.61%
Columbia Heights 18,714 9,381,330 971,992 10.36%
Cottage Grove 31,137 17,460,420 281,269 1.61%
Crystal 23,662 13,267,027 1,258,222 9.48%
Fridley 28,623 26,633,816 2,475,455 9.29%
Golden Valley 21,037 31,080,832 4,430,295 14.25%
Hopkins 17,055 15,771,599 1,670,794 10.59%
Inver Grove Heights 30,322 24,481,819 2,380,252 9.72%
La keville 40,315 32,665,479 1,695,186 5.19%
Lino Lakes 15,760 11,398,762 804,752 7.06%
Mendota Heights 10,300 16,925,410 1,847,078 10.91%
Mounds View 12,950 7,403,151 1,645,539 22.23%
New Brighton 22,905 17,014,820 2,421,517 14.23%
New Hope 21,632 17,131,818 889,372 5.19%
North St. Paul 12,836 6,393,178 202,523 3.17%
Oakdale 26,331 18,096,231 2,531,457 13.99%
Ramsey 18,833 13,313,541 2,179,390 16.37%
Richfield 34,289 24,057,761 3,761,748 15.64%
Robbinsdale 14,079 7,528,022 1,207,662 16.04%
Rosemount 13,544 12,577,186 541,607 4.31%
Roseville 34,548 44,681,928 7,008,689 15.69%
Savage 18,071 15,180,766 1,617,266 10.65%
Shakopee 17,251 20,132,479 1,211,989 6.02%
Shoreview 26,545 22,609,574 1,380,984 6.11%
South St. Paul 20,194 10,919,757 1,220,717 11.18%
Stillwater 16,193 13,297,959 1,577,363 11.86%
Vadnais Heights 13,483 12,849,581 1,330,599 10.36%
West St. Paul 19,648 14,101,890 285,104 2.02%
White Bear Lake 26,643 17,897,247 1,114,354 6.23%
Woodbury 42,342 45,106,537 149,181 0,33%
Source: Minnesota Cities Magazine; September 2000Nol. 85, Issue 7 finance/99tif
City of Elk River, Minnesota
Economic Development Tax Rebate Financing
Policy & Application
Adopted: April 10, 2000
Table of Contents
II.
III.
IV.
V.
VI.
VII.
Policy Purpose
Difference Between TRF & TIF
Objectives of Tax Rebate Financing
Policies for the Use of TRF
Project Qualifications
Subsidy Agreement & Reporting Requirements
Application Process
City of Elk River 6
Application to Other Political Subdivisions 6
Application
Applicant Information
Project Information
Public Purpose
Sources & Uses
Checklist & Additional Information
7
8
8
9
10
Application Review Worksheet
Exhibits
A
B
C
D
E
Corporation/Partnership Description
Project Description
Shareholders
But-for Analysis
Prospective Lessees
Sample But-For Analysis
3
3
3
4
5
6
6
7
11
13
15
2
I. POLICY PURPOSE
For the purposes o£ this document, the term "City" shall include the Elk River City
Council, Economic Development Authority, and Housing and Redevelopment Authority.
The purpose of this policy is to establish the City of Elk River's position
relating to the use of Tax Rebate Financing (TRF), otherwise referred to
as Tax Abatement, for private development above and beyond the
requirements and limitations set forth by State Law. This policy shall be
used as a guide in the processing and review of applications requesting
tax rebate assistance. The fundamental purpose of tax rebate financing in
Elk River is to encourage desirable development or redevelopment that
would not otherwise occur but for the assistance provided through TRF.
The City of Elk River is granted the power to utilize TRF by the
Minnesota Tax Abatement Act, as amended. It is the intent of the City to
provide the minimum amount of TRF, as well as other incentives, at the
shortest term required for the project to proceed. The City reserves the
right to approve or reject projects on a case by case basis, taking into
consideration established policies, project criteria, and demand on city
services in relation to the potential benefits from the project. Meeting
policy criteria does not guarantee the award of TRF to the project.
Approval or denial of one project is not intended to set precedent for
approval or denial of another project.
II. DIFFERENCE BETWEEN TRF & TIF
The primary difference between Tax Rebate Financing (TRF) and Tax
Increment Financing (TIF) is the way in which the dollars are awarded to
the project. When TIF is awarded to a project by the city, the other
political subdivisions (the school district and the county) are required to
contribute their portion of the increased taxes to the project. Conversely,
when TRF is requested, each political subdivision has the option of
granting its portion of the increased taxes to the project. Subsequently,
the dollars generated for the project with TRF are generally less than the
dollars generated with TIF.
III. OBJECTIVES OF TAX REBATE FINANCING
As a matter of adopted policy, the City will consider using TRF to assist
private development projects to achieve one or more of the following
objectives:
· To retain local jobs and/or increase the number and diversity of
jobs that offer stable employment and/or attractive wages and
benefits.
· To enhance and diversify the city of Elk River's economic base.
· To encourage additional unsubsidized private development in the
area, either directly or indirectly through "spin off' development.
3
IV.
To facilitate the development process and to achieve development
on sites which would not be developed without TRF assistance.
To remove blight and/or encourage redevelopment of commercial
and industrial areas in the city that result in high quality
redevelopment and private reinvestment.
To offset increased costs of redevelopment (i.e. contaminated site
clean up) over and above the costs normally incurred in
development.
To create opportunities for affordable housing.
To contribute to the implementation of other public policies, as
adopted by the city from time to time, such as the promotion of
quality urban or architectural design, energy conservation, and
decreasing capital and/or operating costs of local government.
POLICIES FOR THE USE OF TRF
ao
TRF assistance will be provided to the developer upon receipt of
taxes by the City, otherwise referred to as the pay-as-you-go
method. Requests for up front financing will be considered on a
case-by-case basis.
bo
Any developer receiving TRF assistance shall provide a
minimum of twenty percent (20%) cash equity investment in the
project.
c. TRF will not be used in circumstances where land and/or
property price is in excess of fair market value.
d. Developer shall be able to demonstrate a market demand for a
proposed project.
so
TRF will not be utilized in cases where it would create an unfair
and significant competitive financial advantage over other
projects in the area.
TRF shall not be used for projects that would place
extraordinary demands on city services or for projects that
would generate significant environmental impacts.
go
The developer must provide adequate financial guarantees to
ensure completion of the project, including, but not limited to:
assessment agreements, letters of credit, personal guaranties,
and etcetera.
4
ho
The developer shall adequately demonstrate, to the City's sole
satisfaction, an ability to complete the proposed project based on
past development experience, general reputation, and credit
history, among other factors, including the size and scope of the
proposed project.
For the purposes of underwriting the proposal, the developer
shall provide any requested market, financial, environmental, or
other data requested by the City or its consultants.
V. PROJECT QUALIFICATIONS
All TRF projects considered by the City of Elk River must meet each of
the following requirements:
a. The project shall meet at least one of the objectives set forth in
Section III of this document.
bo
The use of TRF will be limited to:
· Industrial development, expansion, redevelopment, or
rehabilitation; or
· Commercial redevelopment or rehabilitation; or
· Office or research facilities that satisfy Business Park
zoning requirements;
· Residential development and redevelopment may be
eligible for TRF under a separate set of policies and only
with the recommendation of the HRA.
· New commercial or retail development is not eligible for
TRF.
c. The developer shall demonstrate that the project is not
financially feasible but-for the use of TRF.
do
The project shall comply with all provisions set forth in the
state's Tax Abatement Law, statues 469.1812 to 469.1815, as
amended.
e. The project must be consistent with the City's Comprehensive
Plan, Land Use Plan, and Zoning Ordinances.
The project shall serve at least two of the following public
purposes:
· Job creation.
· Increase oftaxbase.
· Enhancement or diversification of the city's economic base.
· Development or redevelopment that will spur additional
private investment in the area.
5
Fulfillment of defined city objectives, such as those
identified in the Strategic Plan for Economic Development
or the city's Comprehensive Plan, among others.
Removal of blight or the rehabilitation of a high profile or
priority site.
VI. SUBSIDY AGREEMENT & REPORTING REQUIRMENTS
All developers/businesses receiving Tax Rebate Financing assistance
from the City of Elk River shall be subject to the provisions and
requirements set forth by state statute 116J.993 and summarized
below.
All developers/businesses receiving TRF assistance shall enter into a
subsidy agreement with the City of Elk River that identifies: the reason
for the subsidy, the public purpose served by the subsidy, and the goals
for the subsidy, as well as other criteria set forth by statute 116J.993.
The developer/business shall file a report annually for two years after
the date the benefit is received or until all goals set forth in the
application and performance agreement have been met, whichever is
later. Reports shall be completed using the format drafted by the
State of Minnesota and shall be filed with the City of Elk River no
later than March I of each year for the previous calendar year.
Businesses fulfilling job creation requirements must file a report to
that effect with the city within 30 days of meeting the requirements.
The developer/business owner shall maintain and operate its facility
at the site where TRF assistance is used for a period of five years after
the benefit is received.
In addition to attaining or exceeding the jobs and wages goals set
forth in the Subsidy Agreement, the borrower shall achieve at least
one of the objectives set forth in Section III of this document.
Developers / Businesses failing to comply with the above provisions
will be subject to fines, repayment requirements, and be deemed
ineligible by the State to receive any loans or grants from public
entities for a period of five years.
6
VII. APPLICATION PROCESS FOR TRF
A. CITY OF ELK RIVER
1. Applicant submits the completed application along with all
application fees.
2. City staff reviews the application and completes the Application
Review Worksheet.
3. Results of the Worksheet are submitted to the appropriate
governing authorities for preliminary approval of the proposal.
If preliminary approval is granted, all necessary notices,
resolutions and certificates are prepared by City staff and/or
consultants.
Public hearing(s) on the proposed project are held.
The EDA or HRA recommends approval or denial of the proposal to
the City Council.
7. The City Council grants final approval or denial of the proposal.
B. APPLICATIONS TO OTHER POLITICAL SUBDIVISIONS
It is recommended that applicants intending to seek TRF from
Sherburne County and/or School District 728 make their applications
to those bodies concurrent with their application to the City of Elk
River. For more information on applying for TRF through Sherburne
County and/or School District 728, contact:
Alex Wikstrom
Sherburne County Budget / Economic Development Coordinator
763-241-2700
Dr. David Flannary
Superintendent - School District 728
763-241-3400
7
VII. APPLICATION FOR TAX REBATE FINANCING
A. APPLICANT INFORMATION
Name of Corporation/Partnership
Address
Primary Contact
Address
Phone Fax Email
On a separate sheet, please provide the following:
Brief description of the corporation/partnership's business,
including history, principal product or service, etc... Attach as
Exhibit A.
· Brief description of the proposed project. Attach as Exhibit B.
List names of officers and shareholders/partners with more than
five percent (5%) interest in the corporation/partnership. Attach as
Exhibit C.
but-for analysis and narrative. Attach as Exhibit D.
Attorney Name
Address
Phone
Accountant Name
Address
Fax Email
Phone
Contractor Name
Address
Fax Email
Phone
Engineer Name
Address
Fax Email
Phone
Architect Name
Address
Fax Email
Phone
Fax
Email
B. PROJECT INFORMATION
1. The project will be:
Industrial: New Construction __ Expansion Redevelopment / Rehab.
__Office/research facility that conforms to business park standards
Commercial Redevelopment/Rehabilitation
Other
2. In addition to the City of Elk River, applicant is requesting TRF funds
from: __ Sherburne County __ School District 728
3. The project will be: __Owner Occupied Leased Space
· If leased space, please attach a list names and addresses of future lessees and
indicate the status of commitments or lease agreements. Attach as Exhibit E.
4. Project Address
· Include Legal Description and PID Number. Attach as Exhibit F
5. Site Plan Attached: Yes No
6. Total Amount of TRF Requested: $ over
City Portion of TRF: Annual $
County Portion of TRF: Annual $
ISD 728 Portion of TRF: Annual $
years.
Total $.
Total $.
Total $.
Current Real Estate Taxes on Project Site: $.
Estimated Real Estate Taxes upon Completion: Phase I $.
Phase II $
o
Construction Start Date:
Construction Completion Date:
If Phased Project:
Year % Completed
Year % Completed
Ce
PUBLIC PURPOSE
It is the policy of the City of Elk River that the use of Tax Rebate
Financing should result in a benefit to the public. Please indicate how
this project will serve a public purpose.
Job Creation: Number of existing jobs
Number of jobs created by project
Average hourly wage of jobs created
New industrial development which will result in additional private
investment in the area.
Enhancement and/or diversification of the city's economic base.
__The project contributes to the fulfillment of the City's Strategic
Plan for Economic Development.
__Removal of blight.
Rehabilitation of a high profile or priority site.
Other:
9
D. SOURCES & USES
SOURCES
Bank Loan
Other Private Funds
Equity
Fed Grant/Loan
State Grant/Loan
EDA Micro Loan
Tax Rebate Financing
ID Bonds
TOTAL
NAME
AMOUNT
USES
Land Acquisition
Site Development
Construction
Machinery & Equipment
Architectural & Engineering Fees
Legal Fees
Interest During Construction
Debt Service Reserve
Contingencies
TOTAL
AMOUNT
$
$.
10
E. ADDITIONAL DOCU'MENTATION AND CHECKLIST
Applicants will also be required to provide the following documentation.
__ A) Written business plan, including a description of the business,
ownership/management, date established, products and services, and
future plans
B)
Financial Statements for Past Two Years
Profit & Loss Statement
Balance Sheet
c)
Current Financial Statements
Profit & Loss Statement to Date
Balance Sheet to Date
__.D) Two Year Financial Projections
F) Personal Financial Statements of all Major Shareholders
Profit & Loss
Current Tax Return
__G) Letter of Commitment from Applicant Pledging to Complete
During the Proposed Project Duration
__H) Letter of Commitment from the Other Sources of Financing,
Stating Terms and Conditions of their Participation in theProject
__I) Application fee of $5000 (to be returned upon project
completion.)
J) Attach the following documentation as Exhibits __ Exhibit A - Corporation/Partnership Description
__ Exhibit B - Description of Project
Exhibit C - List of Shareholders/Partners
__ Exhibit D - But-For Analysis
__ Exhibit E - List of Prospective Lessees
__ Exhibit F - Legal Description
Note: All Major shareholders will be required to sign personal guarantees if up front
financing of the project is required.
The undersigned certifies that all information provided in this application is true and correct
to the best of the undersigned's knowledge. The undersigned authorizes the City of Elk
River to check credit references, verify financial and other information, and share this
information with other political subdivisions as needed. The undersigned also agrees to
provide any additional information as may be requested by the City after the filing of this
application.
Applicant Name
Date
By
Its
11
TAX REBATE FINANCING PROPOSAL REVIEW WORKSHEET
TO BE COMPLETED BY CITY STAFF
1. The project meets the criteria set forth in Section V of the Tax
Rebate Financing policy.
__ a) Meets at least one of the objectives in Section III.
__ b) Demonstrates need for TRF with the but-for analysis.
__ c) Consistent with all city plans and ordinances.
__ d) Serves at least two public purpose as defined in Section V.
2. Ratio of Private to Public Investment in Project:
$ Private investment
$ Public Investment
Ratio Private: Public Financing
Less than
Points:
5:1 5
4:1 4
3:1 3
2:1 2
2:1 I
3. Job Creation in the City of Elk River:
__ Number of new jobs as a result of the project.
__ Number of existing/retained jobs divided by 10.
Total
Less than
Points:
25+ 5
20+ 4
15+ 3
10+ 2
10 I
4. Ratio of TRF to new jobs created:
$ TRF request
Number of new jobs created
$ of TRF per new job created
Points:
$8,000 or less
$10,000 or less
$12,000 or less
$15,000 or less
Over $15,000
5
4
3
2
1
5. Wage Level of jobs created:
Average hourly wage
of jobs created:
Points:
Over $21/hour 5
$18-21 / hour 4
$14-17 / hour 3
$10-13 / hour 2
Under $10/hour I
6. Project size:
The project will result in the construction
of square feet
Points:
40,000+ 5
30,000+ 4
20,000+ 3
10,000+ 2
10,000 orless 1
12
7. Type of Project:
__ 100% Owner Occupied
__ Mix Owner Occupied & Investment
__ Investment Property
Points:
5
4
3
8. Use:
__ Industrial or Business Park Project
__ Commercial Rehabilitation/Redevelopment
Points:
5
4
9. The project will pay annual
property taxes in the first fully
assessed year of $
Points:
35,000+ 5
25,000+ 4
15,000+ 3
10,000+ 2
Under $10,000 I
10. Likelihood that the project will result in
unsubsidized, spin-off development.
Points:
__High 5
Moderate 3
Low I
Sub - Total Points:
of a possible 45 points.
9. Bonus Points
Bonus Points:
__ The project will be 100% Pay-as-you-go TRF.
__ The project contributes to the goals of Energy City. · Product promotes sensible use of energy, OR
· Project utilizes significant energy efficient design &/or
materials in construction.
3 points
2 points
Total Points:
Overall project analysis:
High 45-38 points
Moderate 37-29 points
Low 28-20 points
Not Eligible 19-0 points
13
EXHIBIT A
Description of the corporation or partnership
EXHIBIT B
Description of the proposed project
EXHIBIT C
Names of officers and shareholders/partners with more than five
percent (5%) interest in the corporation/partnership.
EXHIBIT D
But-for analysis
EXHIBIT E
Prospective Lessees
EXHIBIT F
Legal Description and PID Number
14
XI. SAMPLE BUT-FOR ANALYSIS
Mortgage
Equity
Tax Rebate Financing
TOTAL SOURCES
Land
Site Work
Soil Correction
Demolition
Relocation
Subtotal Land Costs
Construction
Finish Manufacturing
Subtotal Construction Costs
Soft Costs
Taxes
Finance Fees
Project Manager
Developer Fee
Contingency
Subtotal Soft Costs
TOTAL USES
Rent-Space 1
Rent-Space 2
Rent-Space 3
Other
Mortgage
Net Income
Total Return on Equity
WITH NO
TAX REBATE FINANCING
WITH
TAX REBATE FINANCING
SOURCES AND USES SOURCES AND USES
SOURCES SOURCES
9,600,000 8,667,000
2,400,000 2,400,00
0 933,000
12,000,000 12,000,000
USES USES
1,500,000
300,000
468,000
100,000
65,000
2,433,000
6,750,000
250,000
7,000,000
350,000
35,000
850,000
542,000
540,000
250,000
2,567,000
1,500,000
300,000
468,000
100,000
65,000
2,433,000
6,750,0OO
250,000
7,000,000
350,000
35,000
850,000
542,000
540,000
250,000
2,567,000
12,000,000 12,000,000
Income Statement Income Statement
Sq. Ft. PerSq. Ft.
100,000 $8.00 800,000
25,000 $8.50 212,500
25,000 $9.00 225,000
o $o.oo o
1,237,500
20 Term
9.00% Interest
9,600,000 Principal
1,051,646
Sq. Ft. Per Sq. Ft.
100,000 $8.00 800,000
25,000 $8.50 212,500
25,000 $9.00 225,000
o $o.oo o
1,237,500
20 Term
9.00% Interest
8,667,000 Principal
949,439
185,854 288,061
7.74% 12.00%
15
City of Elk River, Minnesota
Tax Increment Financing
Policy & Application
Adopted: August, 1991
Revised: March, 2000
Table of Contents
II.
III.
IV.
V.
VI.
VII.
Policy Purpose
Objectives of Tax Increment Financing
City of Elk River Policies for the Use of TIF
Qualifications
Subsidy Agreement & Reporting Requirements
Application Process
Application
Applicant Information
Project Information
Public Purpose
Sources & Uses
Checklist & Additional Information
8
9
9
10
11
Application Review Worksheet
Exhibits
A
B
C
D
E
Corporation/Partnership Description
Project Description
Shareholders
But-for Analysis
Prospective Lessees
3
3
4
5
6
7
8
12
14
I. POLICY PURPOSE
For the purposes of this document, the term "City" shall include the Elk River City
Council, Economic Development Authority, and Housing and Redevelopment Authority.
The purpose of this policy is to establish the City of Elk River's position
relating to the use of Tax Increment Financing (TIF) for private
development above and beyond the requirements and limitations set forth
by State Law. This policy shall be used as a guide in the processing and
review of applications requesting tax increment assistance. The
fundamental purpose of tax increment financing in Elk River is to
encourage desirable development or redevelopment that would not
otherwise occur but/'or the assistance provided through TIF.
The City of Elk River is granted the power to utilize TIF by the Minnesota
Tax Increment Financing Act, as amended. It is the intent of the City to
provide the minimum amount of TIF at the shortest term required for the
project to proceed. The City reserves the right to approve or reject
projects on a case by case basis, taking into consideration established
policies, project criteria, and demand on city services in relation to the
potential benefits from the project. Meeting policy criteria does not
guarantee the award of TIF to the project. Approval or denial of one
project is not intended to set precedent for approval or denial of another
project.
II. OBJECTIVES OF TAX INCREMENT FINANCING
As a matter of adopted policy, the City will consider using TIF to assist
private development projects to achieve one or more of the following
objectives:
To retain local jobs and/or increase the number and diversity of
jobs that offer stable employment and/or attractive wages and
benefits.
· To encourage additional unsubsidized private development in the
area, either directly or indirectly through "spin off' development.
· To facilitate the development process and to achieve development
on sites which would not be developed without TIF assistance.
To remove blight and/or encourage redevelopment of commercial
and industrial areas in the city that result in high quality
redevelopment and private reinvestment.
To offset increased costs of redevelopment (i.e. contaminated site
clean up) over and above the costs normally incurred in
development.
· To create opportunities for affordable housing.
III.
To contribute to the implementation of other public policies, as
adopted by the city from time to time, such as the promotion of
quality urban or architectural design, energy conservation, and
decreasing capital and/or operating costs of local government.
POLICIES FOR THE USE OF TIF
a. When possible, TIF shall be used to finance public
improvements associated with the project. The priority for the
use of TIF funds is:
1. Public improvements, legal, administrative, and
engineering costs.
2. Site preparation, site improvement, land purchase, and
demolition.
3. Capitalized interest, bonding costs.
bo
It is the City's policy to establish the following types of TIF
districts:
1. Economic Development Districts
· It is desired that the project result in a minimum
creation of one full time job per $25,000 of TIF.
2. Redevelopment Districts
· The market value of a redeveloped site shall
increase by a minimum of 50% of the current
market value.
Other types of TIF districts, along with specific criteria, may be
considered on a case by case basis.
Co
TIF assistance will be provided to the developer upon receipt of
the increment by the City, otherwise referred to as the pay-as-
you-go method. Requests for up front financing will be
considered on a case by case basis.
do
A maximum of ten percent (10%) of any tax increment received
from the district shall be retained by the City to reimburse
administrative costs.
eo
Any developer receiving TIF assistance shall provide a
minimum of twenty percent (20%) cash equity investment in the
project.
f. TIF will not be used in circumstances where land and/or
property price is in excess of fair market value.
go
Developer shall be able to demonstrate a market demand for a
proposed project. TIF shall not be used to support purely
speculative projects.
4
ho
TIF will not be utilized in cases where it would create an unfair
and significant competitive financial advantage over other
projects in the area.
TIF shall not be used for projects that would place extraordinary
demands on city services or for projects that would generate
significant environmental impacts.
jo
The developer must provide adequate financial guarantees to
ensure completion of the project, including, but not limited to:
assessment agreements, letters of credit, personal guaranties,
etcetera.
ko
The developer shall adequately demonstrate, to the City's sole
satisfaction, an ability to complete the proposed project based on
past development experience, general reputation, and credit
history, among other factors, including the size and scope of the
proposed project.
For the purposes of underwriting the proposal, the developer
shall provide any requested market, financial, environmental, or
other data requested by the City or its consultants.
IV. PROJECT QUALIFICATIONS
All TIF projects considered by the City of Elk River must meet each of the
following requirements:
ao
To be eligible for TIF, a project shall result in:
i. The new construction of a minimum of 25,000 square feet;
ii. A minimum increase of $25,000 per year in property
taxes; and,
iii. Have a market value of at least $1,000,000 upon
completion.
bo
The project shall meet at least one of the objectives set forth in
Section II and satisfy all the provisions set forth in Section III of
this document.
c. The developer shall demonstrate that the project is not
financially feasible but-for the use of TIF.
d. The project must be consistent with the City's Comprehensive
Plan, Land Use Plan, and Zoning Ordinances.
eo
The project shall serve at least two of the following public
purposes:
· Creation of jobs with livable wages and benefits.
· Increase of tax base.
· Enhancement or diversification of the city's economic base.
· Industrial development that will spur additional private
investment in the area.
· Fulfillment of the City's Strategic Plan for Economic
Development.
· Removal of blight or the rehabilitation of a high profile or
priority site.
V. SUBSIDY AGREEMENT & REPORTING REQUIRMENTS
All developers/businesses receiving tax increment financing assistance
from the City of Elk River shall be subject to the provisions and
requirements set forth by state statute 116J.993 and summarized below.
All developers/businesses receiving TIF assistance shall enter into a
subsidy agreement with the City of Elk River that identifies: the reason
for the subsidy, the public purpose served by the subsidy, and the goals
for the subsidy, as well as other criteria set forth by statute 116J.993.
The developer/business shall file a report annually for two years after the
date the benefit is received or until all goals set forth in the application
and performance agreement have been meet, whichever is later. Reports
shall be completed using the format drafted by the State of Minnesota
and shall be filed with the City of Elk River no later than March I of each
year for the previous calendar year. Businesses fulfilling job creation
requirements must file a report to that effect with the city within 30 days
of meeting the requirements.
The developer/business owner shall maintain and operate its facility at
the site where TIF assistance is used for a period of five years after the
benefit is received.
In addition to attaining or exceeding the jobs and wages goals set forth in
the Subsidy Agreement, the applicant shall meet the qualifications set
forth in Section IV of this document.
Developers / Businesses failing to comply with the above provisions will
be subject to fines, repayment requirements, and be deemed ineligible by
the State of Minnesota to receive any loans or grants from public entities
for a period of five years.
6
Vie
o
APPLICATION PROCESS
Applicant submits the completed application along with all
application fees.
City staff reviews the application and completes the Application
Review Worksheet.
Results of the Worksheet are submitted to the appropriate
governing authorities for preliminary approval of the proposal.
If preliminary approval is granted, the Tax Increment Financing
Plan, along with all necessary notices, resolutions and certificates
are prepared by City staff and/or consultants.
Notices are published and sent to the county and school board.
Public hearing(s) on the proposed project are held.
The EDA or HRA recommends approval or denial of the project to
the City Council.
8. The City Council grants final approval or denial of the proposal.
7
VII. APPLICATION FOR TAX INCREMENT FINANCING
A. APPLICANT INFORMATION
Name of Corporation/Partnership
Address
Primary Contact
Address
Phone Fax Email
On a separate sheet, please provide the following:
Brief description of the corporation/partnership's business,
including history, principal product or service, etc... Attach as
Exhibit A.
· Brief description of the proposed project. Attach as Exhibit B.
List names of officers and shareholders/partners with more than
five percent (5%) interest in the corporation/partnership. Attach as
Exhibit C.
· A but-for analysis. Attach as Exhibit D.
Attorney Name
Address
Phone
Accountant Name
Address
Fax
Email
Phone
Contractor Name
Address
Fax
Email
Phone
Engineer Name
Fax
Email
Address
Phone
Architect Name
Fax
Email
Address
Phone
Fax
Email
B. PROJECT INFORMATION
The project will be:
Industrial Greenfield:
Commercial Redevelopment:
Industrial Redevelopment:
Other
New Construction
New Construction
New Construction
__ Expansion
Rehabilitation
Rehabilitation
The project will be: Owner Occupied Leased Space
If leased space, please attach a list names and addresses of future lessees and indicate
the status of commitments or lease agreements. Attach as Exhibit E.
Project Address
Legal Description
Site Plan Attached:
Yes No
Amount of Tax Increment Requested for:
Land Purchase $
Public Improvement $
Site Improvement $
Current Real Estate Taxes on Project Site: $
Estimated Real Estate Taxes upon Completion: Phase I $.
Phase II $
Construction Start Date:
Construction Completion Date:
If Phased Project:
Year % Completed
Year % Completed
C. PUBLIC PURPOSE
It is the policy of the City of Elk River that the use of Tax Increment
Financing should result in a benefit to the public. Please indicate how
this project will serve a public purpose.
Job Creation: Number of existing jobs
Number of jobs created by project
Average hourly wage of jobs created
New industrial development which will result in additional private
investment in the area.
Enhancement or diversification of the city's economic base.
The project contributes to the fulfillment of the City's Strategic
Plan for Economic Development.
Removal of blight or the rehabilitation of a high profile or priority
site.
Other:
D. SOURCES & USES
SOURCES
Bank Loan
Other Private Funds
Equity
Fed Grant/Loan
State Grant/Loan
EDA Micro Loan
Tax Increment
ID Bonds
TOTAL
NAME
AMOUNT
USES
Land Acquisition
Site Development
Construction
Machinery & Equipment
Architectural & Engineering Fees
Legal Fees
Interest During Construction
Debt Service Reserve
Contingencies
TOTAL
AMOUNT
10
E. ADDITIONAL DOCUMENTATION
Applicants will also be required to provide the following documentation.
A) Written business plan, including a description of the
business, ownership/management, date established,
products and services, and future plans
B) Financial Statements for Past Two Years
Profit & Loss Statement
Balance Sheet
c)
Current Financial Statements
Profit & Loss Statement to Date
Balance Sheet to Date
D) Two Year Financial Projections
F)
Personal Financial Statements of all Major Shareholders
Profit & Loss
Current Tax Return
G) Letter of Commitment from Applicant Pledging to Complete
During the Proposed Project Duration
H)
Letter of Commitment from the Other Sources of Financing,
Stating Terms and Conditions of their Participation in
Project
.I) Application fee of $5000 (to be returned upon project
completion.)
Note: All Major shareholders will be required to sign personal guarantees if
up front financing of the project is required.
The undersigned certifies that all information provided in this application is true and correct
to the best of the undersigned's knowledge. The undersigned authorizes the City of Elk
River to check credit references and verify financial and other information. The undersigned
also agrees to provide any additional information as may be requested by the City after the
filing of this apphcation.
Applicant Name
Date
By
Its
11
TAX INCREMENT FINANCING PROPOSAL REVIEW WORKSHEET
1. The project meets the criteria set forth in Section III of the City's
Tax Increment Financing policy.
__a)
__c)
Meets minimum thresholds for size, value, and tax capacity.
Meets at least one of the objectives in Section III and satisfies
the provision set forth in Section IV.
Demonstrates need for TIF with the but-for analysis.
Consistent with all city plans and ordinances.
Serves at least two public purpose as defined in Section IV.
2. Ratio of Private to Public Investment in Project:
$. Private investment
$ Public Investment
Ratio Private: Public Financing
Less than
Points:
5:1 5
4:1 4
3:1 3
2:1 2
2:1 I
3. Job Creation in the City of Elk River:
__ Number of new jobs as a result of the project.
__ Number of existing/retained jobs divided by 10.
Total
Less than
Points:
40+ 5
30+ 4
20+ 3
10+ 2
10 I
4. Ratio of TIF to new jobs created:
$ TIF request
Number of new jobs created
$ of TIF per new job created
Points:
$15,000 or less
$20,000 or less
$22,000 or less
$25,000 or less
Over $25,000
5
4
3
2
1
5. Wage Level of jobs created:
Average hourly wage
of jobs created:
Points:
Over $21/hour 5
$18-21 / hour 4
$14-17 / hour 3
$10-13 / hour 2
Under $10/hour I
6. Project size:
The project will result in the construction
of square feet
Points:
80,000+ 5
65,000+ 4
50,000+ 3
35,000+ 2
25,000+ I
12
7. Type of Project:
__ 100% Owner Occupied
__ Mix Owner Occupied & Investment
__ Investment Property
8. Use:
__ Manufacturing
__ Research & Development
__ Commercial Redevelopment
Warehouse/Distribution
__ Housing
9. The project will pay annual
property taxes in the first fully
assessed year of $
10. Likelihood that the project will result in
unsubsidized, spin-off development.
Points:
5
4
3
Points:
5
4
3
2
1
Points:
85,000+ 5
70,000+ 4
55,000+ 3
40,000+ 2
25,000+ I
Points:
__High 5
Moderate 3
Low 1
Sub - Total Points:
of a possible 45 points.
9. Bonus Points
Bonus Points:
__ The project will be 100% Pay-as-you-go TIF.
__ The project contributes to the goals of Energy City.
· Product promotes sensible use of energy, OR
· Project utilizes significant energy efficient design &/or
materials in construction.
3 points
2 points
Total Points:
Overall project analysis:
High 45-38 points
Moderate 37-29 points
Low 28-20 points
Not Eligible 19-0 points
13
EXHIBIT A
Description of the corporation or partnership
EXHIBIT B
Description of the proposed project
EXHIBIT C
Names of officers and shareholders/partners with more than five
percent (5%) interest in the corporation/partnership.
EXHIBIT D
But-for analysis
EXHIBIT E
Prospective Lessees
14
SAMPLE BUT-FOR ANALYSIS
Mortgage
Equity
Tax Increment Financing
TOTAL SOURCES
Land
Site Work
Soil Correction
Demolition
Relocation
Subtotal Land Costs
Construction
Finish Manufacturing
Subtotal Construction Costs
Soft Costs
Taxes
Finance Fees
Project Manager
Developer Fee
Contingency
Subtotal Soft Costs
TOTAL USES
Rent-Space 1
Rent-Space 2
Rent-Space 3
Other
Mortgage
Net Income
Total Return on Equity
WITH NO
TAX INCREMENT
WITH
TAX INCREMENT
SOURCES AND USES SOURCES AND USES
SOURCES SOURCES
9,600,000 8,667,000
2,400,000 2,400,00
0 933,000
12,000,000 12,000,000
USES USES
1,500,000
300,000
468,000
100,000
65,000
2,433,000
6,750,000
250,000
7,000,000
350,000
35,000
850,000
542,000
540,000
250,000
2,567,000
1,500,000
300,000
468,000
100,000
65,000
2,433,000
6,750,000
250,000
7,000,000
350,000
35,000
850,000
542,000
540,000
250,000
2,567,000
12,000,000 12,000,000
Income Statement Income Statement
Sq. Ft. Per Sq. Ft.
100,000 $8.00 800,000
25,000 $8.50 212,500
25,000 $9.00 225,000
0 $0.00 0
1,237,500
20 Term
9.00% Interest
9,600,000 Principal
1,051,646
Sq. Ft. Per Sq. Ft.
100,000 $8.00 800,000
25,000 $8.50 212,500
25,000 $9.00 225,000
0 $0.00 0
1,237,500
20 Term
9.00% Interest
8,667,000 Principal
949,439
185,854 288,061
7.74% 12.00%
15
Elk~River
City of Elk River
Special Meeting
of the
City Council
Economic Development Authority
Housing and Redevelopment Authority
Monday, February 5, 2001
6:00 p.m.
Elk River City Hall
1. TIF Basics
2. How to Calculate TIF
3. The But/For Test
4. Abatement
5. Business Subsidies
6. Questions
EHLERS
ASSOCIATES INC
Captured Tax Capacity
Original Tax Capacity
This document provides a primer on the use of tax increment financing (TIF) for Minnesota cities. It is
intended to provide a basic understanding of the concepts related to the use of TIF.
Original Tax Capacity
The tax capacity (taxable) value of the parcels within a tax increment financing district at the time the district
is created. Also known as the "base" value. While this amount is typically frozen over the life of the TIF
district, certain factors may change the Original Tax Capacity. These factors include, but are not limited to,
changes in the classification of the property.
Captured Tax Capacity
The difference between the current tax capacity of parcels within the TIF district and the Original Tax Capacity.
This value is captured by the City and serves as the basis for producing tax increment.
Original Tax Rate
The total property tax rote for all jurisdictions (with taxing authority over property in the District) at the time
the TIF District is created.
Tax Increment
Property tax revenues created by Captured Tax Capacity multiplied by the lesser of the current tax rate or the
Original Tax Rate.
EHLERS & ASSOCIATES, INC. 3060 Centre Pointe DHve, Roseville, Minnesota 55113 651.697.8500
Pro~¢ct Ar~Q
PROJECTS AND DISTRICTS
Projects.
Tax increment financing is used in conjunction with underlying development and redevelopment powers. Tax increments
must be spent within particular geographic areas created under the development statutes. The basic planning area is often
referred to as a "Project Area," "Development District" or "Redevelopment Project" which also has other names according
to the authorizing statute of the authority under which it was created. Typically, the following types of authorities can
administer tax increment districts:
City Council: Development District Act
City or County HRA: HRA Act
EDA: EDA Act
Port Authorities or County EDA: Special Legislation
All Projects require a general development or redevelopment plan, approved after a public hearing held by the City Council.
The boundaries tend to be large areas within which the authority intends to promote development or redevelopment.
TIF Districts.
TIF Districts are the specific parcels within a Project area from which tax increment will be captured. Following is a
description of the general types of TIF districts:
Redevelopment Districts
Qualifications: "Redevelopment district" means a type of tax increment financing district consisting of a project, or portions
of a project, within which the authority finds by resolution that one or more of the following conditions, reasonably
distributed throughout the district, exists:
1. parcels consisting of 70 percent of the area of the district are occupied by buildings, streets, utilities, or other
improvements and more than 50 percent of the buildings, not including outbuildings, are structurally substandard
to a degree requiring substantial renovation or clearance; or
2. the property consists of vacant, unused, underused, inappropriately used, or infrequently used railyards, rail storage
facilities, or excessive or vacated railroad rights-of-way; or
3. tank facilities, or property whose immediately previous use was for tank facilities, as defined in section 115c.02,
subdivision 15, if the tank facilities:
(i) have or had a capacity of more than 1,000,000 gallons;
(ii) are located adjacent to rail facilities; and
(iii) have been removed or are unused, underused, inappropriately used, or infrequently used.
Ehlers & Associates - TIF Basics
Term and restrictions. Redevelopment districts may collect increment for twenty-five years after the date of receipt of the
first increment. May designate commencement in the year when the market value reaches an agreed-upon minimum (no more
than four years after date of certification), in which case the district duration is 20 years after such commencement date.
At least 90% of the increment must be used to finance the cost of correcting conditions that allow designation of
redevelopment districts.
Renovation and Renewal Districts
Qualifications. The same parcel and area requirements apply as for a redevelopment district, but only 20% of the buildings
need be structurally substandard; another 30% of the buildings must require renovation or clearance to remove conditions
such as inadequate street layout, incompatible land uses, or obsolete buildings not suitable for improvement or conversion
to other uses (that is, a lesser standard of blight).
Term, Restrictions. May collect increment for fifteen years after the date of receipt of the first increment. At least 90% of
the increment must be used to finance the cost of correcting conditions that allow designation of renovation and renewal
districts.
Housing Districts
Qualifications. Must be a facility intended for occupancy in part by persons or families of low and moderate income. Up to
20% of the fair market value of the improvements may be for uses other than low and moderate income housing.
Term and Restrictions. May collect increment for twenty five years after the date of receipt of the first increment, subject
to the same exception as for redevelopment districts. To maintain qualification as a housing district, residents' income must
be limited. The rental income requirements apply for the life of the district. If the income requirements are violated, the
district duration is reduced to that of an economic development district.
Qualified Housin~ District: Additional restrictions apply for a "qualified housing district" that is exempt from state aid
penalties.
Economic Development Districts
Qualifications. The district does not meet the qualifications for any other type of district, and the municipality must find that
the district will (I) discourage business from moving to another state or municipality; (2) increase employment in the state;
or (3) preserve and enhance the tax base of the state.
Term and Restrictions. May collect increment for eight years after the date of receipt of the first increment.
Increment may not be used to assist developments if more than 15% of the buildings and facilities (on a square footage basis)
are used for a purpose other than:
(a) manufacturing;
(b) warehousing, storage and distribution of tangible personal property (excluding retail sales);
(c) research and development related to the aforementioned activities;
(d) telemarketing if that activity is the exclusive use of the property;
(e) "tourism facilities;"
(f) qualified border retail facilities; or
(g) space necessary for and related to the above.
Ehlers & Associates - TIF Basics 3
Tourism Facility Economic Development Districts: The term "tourism facility" was substantially restricted for districts
created after May 31, 1993. Now, such a facility means property that: (1) is located in a county where the median income
is no more than 85 percent of the state median income; (2)is located in a county in development region 2, 3, 4, or 5, as defined
in section 462.385; (3) is not located in a city with a population in excess of 20,000; (4) is acquired, constructed, or
rehabilitated for use as a convention and meeting facility that is privately owned, marina, hotel, motel, lodging facility, or
nonhomestead dwelling unit that in each case is intended to serve primarily individuals from outside the county.
Tourism counties include Aitkin, Becker, Beltrami, Carlton, Cass, Clay, Clearwater, Cook, Crow Wing, Douglas, Grant,
Hubbard, Itasca, Koochiching, Lake, Lake of the Woods, Mahnomen, Morrison, Otter Tail, Pope, St. Louis, Stevens, Todd,
Traverse, Wadena, and Wilkin.
Bedrock Soils Economic Development Districts: The 1995 legislature added language that allows revenue derived from tax
increment from an economic development district to be used for site preparation and public improvements for any type of
development if bedrock soils are present in 80 percent or more of the acreage of the district, the estimated costs of physical
preparation of the site exceeds the fair market value of the land before completion of the preparation, and revenue derived
from tax increments are expended only for the additional costs of preparing the site and installing public improvements
because of unstable soils and the bedrock soils condition. The 1995 legislature also removed a previous exception that
allowed use of tax increment to finance up to 5,000 square feet of commercial or retail facilities in cities of 5,000 people or
less.
Small Cities Economic Development Districts:. The 1997 legislature added language that permits revenues derived from tax
increment from an economic development district to assist small city commercial facilities up to 15,000 square feet, within
certain guidelines. The facilities must be separately owned and the city must have a population of 5,000 or less and must be
located more than 10 miles from a city with a population of 10,000 or more.
Soils Condition Districts
Qualifications:
1. the presence of hazardous substances, pollution, or contaminants requires removal or remedial action for use;
2. the estimated cost of the proposed removal and remedial action exceeds the fair market value of the land before
completion of the preparation.
The requirements of clause (b) need not be satisfied if each parcel either satisfied the requirements of that clause, or the
estimated costs of the proposed removal or remedial action exceeds $2.00 per square foot for the area of the parcel.
Term and Restrictions. May collect increment for 12 years after the date of approval of the TIF Plan; increment may be spent
only to: acquire parcels on which removal or remediation will occur; pay the cost of removal or remedial action, and pay
allocated administrative expenses, including the cost of preparation of the development action response plan.
Soils districts could be created before June 30, 1995 based on unusual terrain and soils conditions. The 1995 amendments
essentially changed a soils condition district to a hazardous waste district.
Hazardous Substance Subdistricts
Qualifications. Consists of parcels within a TIF District of any kind that are "designated hazardous substance sites" or are
contiguous parcels that the authority expects to be developed together with the hazardous substance site.
"Designated hazardous substance sites" are parcels for which there is a state-approved "development action response plan,"
and the authority has entered into an agreement providing for removal actions or otherwise certified that it will finance such
removal.
Term and restrictions. May collect increment from the subdistrict for up to twenty-five years after the date of receipt of the
Ehlers & Associates - TIF Basics 4
first subdistrict increment (which is, generally, the tax attributable to the "base value" of the parcel). This period overrides
any shorter duration for the underlying TIF District, except that during the extended period, the increment may be used only
to pay the cost of hazardous waste removal and related administrative costs, and the "base value" increment is no longer
collected.
Hazardous Waste Extension
The 1995 legislature added an alternative to hazardous substance subdistricts.
municipality, may extend the duration of any TIF district if:
1. contamination is discovered after the district was established;
An authority, with approval of the
2. the authority elects not to create a hazardous substance subdistrict; and
3. the municipality pays for the cost of removal or remediation out of general revenues and not from tax increments.
If those tests are met, the district may be extended for the lesser of (1) 10 years after the district would otherwise have
terminated; or (2) the number of additional years necessary to collect increment equal to the clean up costs paid by the
municipality from non-tax increment funds. Cleanup costs are restricted to actual costs of removal and remediation, including
testing and engineering but excluding financing or interest costs. Cleanup costs are also reduced by any reimbursements or
amounts recovered from private parties or other responsible parties.
This provision is available for any TIF district filed for certification after December 31, 1988.
Pre-1979 Districts
TIF districts created prior to August 1, 1979 are not generally subject to the TIF Act, except when the proposed development
extends beyond the "scope of activity" in the project plan after May 1, 1988. After April 1,2001, increment from a pre- 1979
district may be used only to pay bonds that were outstanding as of April 1, 1990, but in no event may increment be collected
after August 1, 2009.
TIF Special Taxing Districts
The 1998 Legislature authorized cities to establish special taxing districts within TIF districts and levy special taxes to make
up deficits caused by the 1997 and 1998 reductions in the property tax class rates. This authority is limited to TIF districts
for which the request for certification was made before June 2, 1997 (the enactment date of the 1997 class rate reductions).
Only property that is subject to either an assessment agreement or a development agreement is subject to the tax.
In order to qualify, the city must have a TIF district deficit caused by the 1997 and 1998 reductions in the class rates and used
any available increments from other TIF districts within the city. In order to establish a TIF special taxing district, the city
must adopt an ordinance after holding a public hearing on the question. A notice of hearing, containing specific information,
is also required. A copy of the ordinance must be sent to the commissioner of revenue.
Ehlers & Associates - TIF Basics 5
HOW TO SET UP A TAX INCREMENT DISTRICT
TIF Plan.
The use of increment must be spelled out in a TIF Plan approved by the City Council (or county board for a county HRA)
after public hearing, with 30-day notice to the County and School District including the proposed plan and estimated fiscal
implications, a published hearing notice with maps between 10 to 30 days from the hearing date, and review by the planning
commission. The TIF Plan must include a statement of objectives, list of property to be acquired, a list of proposed
development activities, identification of property to be included in the district, and a list of supporting studies and reports.
In addition, the plan must include estimates of the costs associated with the project, sources of revenue, amount of bonded
indebtedness, most recent net tax capacity of property within the district, estimate of captured net tax capacity upon
completion, duration of the district and impact on other taxing jurisdictions. When approving the TIF Plan, the Council or
Board must find (among other things) that the proposed development would not reasonably be expected to occur solely
through private investment in the reasonably foreseeable future (the "but for" finding).
TIF Plans may be modified using the same process as for approval of the initial plan. Generally, modifications that do not
increase expenditures or debt or call for new land acquisition may be approved simply by resolution. Modifications will not
trigger application of current statutes unless the boundary of the TIF district is expanded.
County Commissioner Notice
For housing and redevelopment districts, the county commissioner who represents the area of the TIF district must be notified
at least 30 days before the date of publication of the public hearing notice.
The "But for" test
Under a 1995 legislative change, the municipality must find that the increased market value of the site that could reasonably
be expected to occur without the use of tax increment financing (a hypothetical figure) would be less than the increase in the
market value of the proposed development after subtracting the present value of the projected tax increments for the
maximum duration of the district permitted by the TIF Plan (this requirement does not apply to qualified housing districts).
Example: If the development is estimated to add $500,000 in value, and the present value of the maximum stream of
increment at an assumed discount rate is $300,000, the municipality must find that no other development would add more
than $200,000 in market value at this site.
Ehlers & Associates - TIF Basics 6
HOW INCREMENT MAY BE USED
Eligible Uses.
In addition to the specific limitations for each type of TIF District, tax increment may be spent only for specified purposes
permitted in the underlying development statutes. Such purposes generally include:
land acquisition;
site improvements;
public and on-site utilities;
demolition;
relocation; and,
administration.
If the authority owns a Project, increment may be used to finance essentially any aspect of the Project. Because the
development statutes are often ambiguous, whether a particular activity is TIF-eligible may depend on the facts in each case.
Administrative Expense.
Administrative expenditures are limited to 10% of the expenditures authorized in the TIF Plan, or 10% of actual increment
expenditures, whichever is less. They are defined to mean all expenditures of the authority other than land acquisition and
relocation costs and costs "directly connected with the physical development of the real property in the district."
The County auditor may assess each TIF district for the county's costs of administrating the district, and the fee may be paid
from tax increment.
General Government Use.
Increment may not be used to finance buildings that are used "primarily and regularly for conducting the business" of any
unit of government, except for parking structures, a commons area used as a public park, or a facility used for social,
recreational or conference purposes.
Ifa TIF-financed social, recreational or conference facility is operated by an entity other than the authority, the authority's
governing body must approve operating policies for the facility. This would apply, for example, when an HRA finances a
city community center.
Guaranty Fund.
An authority may establish a guaranty fund to indemnity a person for liability for remediation costs under state or federal
environmental law. The maximum term of the indemnity is 25 years, and the maximum amount is one-half of the remediation
costs. The authority may deposit tax increments in the fund, and the municipality may also appropriate money for deposit
in the fund.
Ehlers & Associates - TIF Basics
OTHER CONSIDERATIONS
Geographic Restrictions.
Pooling Limits. For districts created after June 30, 1995, no more than 20 percent of the increment (25 percent in the case
of redevelopment districts) may be spent outside the boundaries of the TIF District. However, increment from housing TIF
districts may be spent to finance "housing projects" located anywhere in the broader Project area. Administrative costs are
considered spent outside the district.
Increment from districts created before May I, 1990 may be spent anywhere within the Project boundaries, which permits
"pooling" of increment from more than one district.
Time Restrictions (other than duration).
3-year rule. Within three years after the date of certification, one of three things must happen for the district to remain alive:
bonds are issued to aid the Project (excluding industrial revenue bonds); the authority acquires property within the TIF
District; or the authority causes public improvements to be constructed within the TIF District.
4-year knock down rule. Increment will not be collected from a particular parcel unless, within four years after the date
of certification, demolition, rehabilitation or renovation of property or other site improvements has taken place by either the
authority or the owner in accordance with the TIF Plan. Construction or major construction of an adjacent street qualifies
as an improvement to a parcel, but utility improvements do not. If the parcel is "knocked-down" and later improved, it is
re-instated in the TIF District but at the market value at the time of the reinstatement.
5-year rule. For increment to be considered a spent expenditure within the TIF District, one of the following must occur
within five years after certification of the district: (1) increment is paid to a "third party" for a TIF-eligible "activity"; (2)
bonds, the proceeds of which are used to finance an activity, are sold to a third party and proceeds are reasonably expected
to be spent within the five-year period (with certain limited exceptions); (3) binding contracts are entered with a third party
for performance of an activity, and increment is spent under the contract; or (4) costs are incurred by a "party" and revenues
are spent to reimburse a party.
The term "third party" excludes the party receiving TIF assistance and the "municipality or the development authority or other
person substantially under the control of the municipality." Therefore, clause (4) permits the typical "pay as you go"
reimbursement where the initial costs are incurred by the developer with the 5-year period. See Section III.B.
Note: The 5-year rule applies only to districts requested for certification after April 30, 1990.
Parcels Excluded from TIF Districts (the "Green Acre Exclusion").
For districts filed for certification after June 30, 1995, parcels in the seven-county metropolitan area may not be included in
a TIF district if they qualified for special tax treatment under green acre, open space, or agricultural preserves provisions in
any of the fiye calendar years before the request for certification. Outside the metropolitan area, such parcels may be included
in a TIF district if at least 85 percent of the planned facilities (on a square footage basis) are used in manufacturing.
Legislation in 1996 changes this rule and makes it uniform statewide for districts filed for certification on or after August
1, 1996. Now, any parcel receiving special tax treatment mentioned above in the five years before the request for certification
may be included in a TIF district anywhere iff
(1) At least 85 percent of the planned facilities (on a square footage basis) are for manufacturing or distribution
facilities (distribution facilities were added by the 1998 Minnesota Legislature); or
(2) The district is a "qualified housing district."
Ehlers g Associates - TIF Basics
Legislation in 1998 now requires that both manufacturing and distribution TIF projects on green acre parcels to pay 160
percent of the federal minimum wage to at least 90 percent of the employees.
TYPES OF FINANCING
Bonds.
Bonds secured by tax increments are issued when there is a need for initial capital to finance public or private improvements.
Typically, the bonds are general obligation bonds backed by the full faith and credit of the municipality. As long as at least
20% of the debt service on the bonds is reasonably expected to be paid with tax increments, the bonds may be issued without
election.
Pay As You Go.
An alternative to bond financing is a "pay as you go" arrangement with the developer. The developer pays for various
TIF-eligible costs initially, and the authority promises to reimburse the developer from tax increment over time as it is
generated. The developer (rather than an unrelated bondholder) bears the risk that the increments will be insufficient to repay
the costs incurred.
This arrangement may be structured as a revenue note or bond issued to the developer, with an interest component to
compensate the developer for costs of financing the improvements up front.
LOCAL GOVERNMENT AID PENALTY
Generally.
The penalty applies only to districts requested for certification after April 30, 1990. The penalty is tied to the state school
aid formula. When an authority creates a TIF District, the state calculates how much less the school aids would have been
had the captured property value been available to the school district. That amount is then deducted from the municipality's
local government aid (LGA) and if necessary from the homestead and agricultural credit aid (HACA).
Amount.
The LGA/HACA loss varies, but is usually about 30% of the tax increment collected annually when the maximum penalty
applies. Note that the penalty does not change the amount of increment collected; it changes the amount of state aid the
municipality receives. The amount of aid loss depends on the type of TIF district.
Penalty Recapture.
For districts created between May 1, 1990 and July 31, 1993, the municipality may obtain reimbursement from the developer
for lost aid. However, tax increment may not be directly expended to reimburse the general fund for such aid loss.
For districts requested for certification after July 31, 1993, new restrictions apply. If any agreement or "arrangement"
provides for the developer to repay any part of the tax increment assistance provided, such developer payments are subject
to restrictions imposed by law on tax increment itself. Thus, a municipality may not deposit such payments in the general
fund, but rather must maintain them in the TIF district account for use only on TIF eligible activities. As a practical matter,
this severely limits the ability to fill the aid-loss hole in the municipality's general fund.
Ehlers & Associates - TiF Basics 9
LGA/HACA Exemptions.
Qualified housing districts, which meet certain income and rent limits, are exempt from the LGA/HACA penalty altogether.
Local match option: A TIF district is exempt from the LGA/HACA penalty if the municipality elects at the time of approval
of the tax increment financing plan to make a "qualifying local contribution" each year, equal to the following percentages
of increment from the district:
10 percent, for an economic development or renewal and renovation district;
5 percent, for a redevelopment, housing, hazardous substance subdistrict, or soils condition district.
If the municipality elects the local match option but fails to make a contribution in any year, there will be a state aid reduction
equal to the greater of (1) the required local contribution or (2) the LGA/HACA penalty reduction that otherwise applies
under the statute.
If, in any year, the combined local contributions for that year from districts in the municipality reaches two percent of the
city net tax capacity (excluding the captured tax capacity in any TIF district), then only a minimum additional contribution
is required in that year. In addition to the overall two percent of tax capacity (which may be allocated among the
municipality's TIF districts at its discretion), the municipality must contribute .25 percent of the city's net tax capacity or
three percent of the tax increment revenues from the districts in question, whichever is less. If those contributions are made,
no LGA/HACA penalty will apply that year for any TIF districts subject to the local match option.
The local contribution must be made out of unrestricted money of the authority or municipality (including any unrestricted
grant), and cannot include tax increments or developer payments. The contribution ~nust be used to pay project costs and
not improvements that the authority or city planned to incur absent the project. Cities, counties, towns and schools are
authorized to contribute towards this local match. If the project received a direct state grant or similar state incentive, the
required local contribution is reduced by one-half of the dollar amount of the grant or incentive.
The contribution may be made in the first year or so, and that amount will be carried forward to offset the contribution
required in later years. However, no interest will be imputed on such an up-front contribution.
Other exemptions.
Certain ethanol production facilities and agricultural processing facilities outside the seven-county metro area are exempt
from the LGA/HACA penalty.
Ehlers & Associates - TIF Basics 10
The State of Minnesota has one of the most complicated property tax systems
in the nation. There are three factors that affect a property owner's property
tax: the estimated market value of the property, the classification of the property (how
the property is used), and the total local tax rate.
Market Value
The assessor's estimated market value is established by the county assessor on an annual basis with a
valuation as of January 2nd. The market value reflects only real property (land and buildings), with a
few exceptions including electrical utility personal property. Equipment value would not be taxed;
other states do levy a property tax on equipment.
Each year, the Minnesota Department of Revenue reviews the actual sales of various types of property
in the city or county and compares the sales to the assessor's estimated market value. This process is
known as a sales ratio study. If the assessor's market value is found to be higher than 105 percent of
the actual sales price or lower than 90 percent the actual sales price, the current year's assessment of
property may be unilaterally adjusted.
Individual property owners also retain the ability to contest their level of valuation through a Board of
Equalization process or other appeal processes.
Working with the local assessor to determine his/her opinion on the market value is always
recommended before proceeding with any type of financing for a tax increment project.
Class Rates to Taxes - The Minnesota Two-Step
Each property type (rental property, homestead, commercial, etc.) is subject to a conversion from
market value to tax capacity according to state statute. The conversion from market value to tax
capacity is based on the classification, or use of the property. Each type of property is assigned a class
rate, or percentage, as determined by the Legislature. Commercial, industrial and other business
property tend to have higher class rates than residential and agricultural property. See the attachment
showing the class rates for taxes payable 2001.
Tax Rates and Jurisdictions
The tax capacity is actually the taxable value of the property. This value is multiplied by the local tax
rate to determine the amount of property tax a piece of property pays. The local tax rate is a
combination of the city, county, school district and special taxing jurisdictions tax rates. This is the final
step to the calculation of taxes. The local tax rate is applied against the combined tax capacities of all
classes of property within their taxing jurisdictions to generate property taxes.
Local tax rates vary in Minnesota from 110% to 200%. Therefore, properties with the same market
values in neighboring cities could have property tax bills which vary by as much as to two times. The
local tax rates are often shown as decimals (1.3000) rather than percentages.
EHLERS & ASSOCIATES, INC. 3060 Centre Pointe Drive, Roseville, Minnesota 55113 651.697.8500
Market Value Taxes
A city, county, school district or special taxing district may choose to finance certain types of levies through the
referendum process. Ifa referendum passes, the taxes and tax rates are based on the market value of the property instead
of the tax capacity of the properly. However, not all property values are based on the straight market value. Any of the
property classifications that are at the .40 percent class rate for tax capacity will be at 40 percent of the market value,
thus giving some properties a lower market value tax base than others.
What effect does this have on the tax increment financing districts? The market value referendum portion of the
property taxes is not included in the tax capacity rate, which is applied to captured value, and therefore generates no
increment for the district. With the trend of(primarily) school districts to move from tax capacity based to market value
based ad valorem taxes, the current tax capacity rates may start decreasing as the market value referendum rates
increase.
TIF Example
Through TIF, a municipality or development agency is able to utilize the property taxes of a new development that result
from increased market values. These increased property taxes can be used to pay for the public costs related to that
development. The mechanics of tax increment financing are best described through the use of an example, as follows:
Within Authority A, Minnesota, there is a development project area known as Development District No. 1. Within
Development District No. I is a tax increment financing district called Tax Increment Financing District 1-1 that
includes a parcel of property known as Parcel X. A developer is proposing to demolish an old structure (a warehouse)
and build a new office building on Parcel X and has asked for tax increment financing assistance from the Authority.
The local assessor has determined that the current market value (including land and buildings) of Parcel X is $25,000.
The market value of the property is multiplied times the class rate to arrive at a tax capacity (some~vhat analogous to
the old system of assessed value). The class rate for commercial property for the first $150,000 of market value is 2.40%
and the class rate for the remaining market value is 3.40%. To arrive at a tax bill, the tax capacity is multiplied by the
local tax rate (or the old mill rate) which is 1.30 (or 130%) for the Authority. The taxes on the existing buildings and
the land are calculated as follows:
Sample Calculation of Current Tax Capacity and Taxes
Current Market Value of Land and Buildings:
$25,000
To calculate Tax Capacity, apply Class Rates to Market Value:
2.4 percent portion of Tax Capacity(First $150,000): $25,000 x 0.24: $600
3.4 percent portion of Tax Capacity(Over $150,000: $0 x 3.4 percent = $0
Total Tax Capacity: $600 plus $0 :$600
To calculate Taxes paid, apply Tax Rates to Tax Capacity:
Sample Tax Rate for Taxes Payable in 2001: 1.3000
Total Taxes Paid Annually: $600 * 1.3000 = $780
Ehlers and Associates - How to Calculate TIF
The developer's new office building is expected to have a market value upon completion of $3,860,000. Using the same
procedure employed above to calculate tax capacity, the annual taxes due on the new property will be $168,662.
Calculation of Tax Capacity and Taxes
Assessor's Estimated Market Value of New Project (Land and I~uilding):
$3,860,000
To calculate Tax Capacity, apply Class Rates to Market Value:
Market Value subject to 3.4 percent rate: $3,860,000 less $1§0,000 = $3,710,000
;>.4 percent Portion of Tax Capacity(First $150,000): $150,000 x ;>.4 percent = $3,600
3.4 percent Portion of Tax Capacity (Over $150,000: $3,710,000 x 3.4 percent = $1;>6,140
Total Tax Capacity: $3,600 plus $126,140 :$129,740
To calculate Taxes paid, apply Tax Rates to Tax Capacity:
Sample Tax Rate for Taxes Payable in ;>001:
Total Taxes Paid:
1.3000 (can also be shown as 130.00%)
$129,740 * 1.3000: $168,662
Calculation of Estimated Tax Increment
Future Annual Taxes $168,662
Original Annual Taxes - 780
Annual Tax Increment: $167,882
Upon completion, the $780 will be kno~vn as the original taxes (under state law, the method of calculation is based upon
the original tax capacity rather than original taxes - one of many complications in the specifics of TIF). The taxes
derived from the original taxes will continue to be paid to the school district, county, city, and other taxing jurisdictions
throughout the life of the TIF district. The tax increment estimated at $167,882 per year can be used for various project
costs allowed under the law. Over the next 11 years, the tax increment cashflow would look like this:
Year of District Annual Tax Increment
2000 (Pro'ect is built) 0
...~.!..(P~s~.!~.~ ................................................................................................................................... ~ .....
................................................................................................................ .....
...~P~ ........................................................................................................................................................... ~.51,~ .....
...~P~5 .......................................................................................................................................................... !.SZ~ .....
...~P~ ........................................................................................................................................................... ~.~!~ .....
...~P~ .......................................................................................................................................................... J. SZ~ .....
...~P~Z .......................................................................................................................................................... !.~!,~ .....
...~PP~ .......................................................................................................................................................... !.~Z,~ .....
...~P~ .......................................................................................................................................................... !.SZ:~ .....
2010 167~882
Total Tax Increment 1,510,938
Total Present Value of Increment (@ 8.5%) 872,629
Ehters and Associates - How to Calculate TIF
Class
MINNESOTA CLASSIFICATION LAW
REAL PROPERTY: TAXES PAYABLE - 2001
Description
Rate
la
Residential homestead
first $76,000
over $76,000
1.00%
1.65%
lb
Blind/Paraplegic Veteran/Disabled homestead
agricultural:
first $32,000
nonagricultural:
first $32,000
0.45%
0.45%
1 c Commercial seasonal - recreational residential - under 250 days and includes homestead 1.00%
1 d Migrant Housing (Structures only)
first $76,000 1.00%
over $76,000 1.65%
2a Agricultural ho~nestead
House, Garage, One Acre:
first $76,000 1.00%
over $76,000 1.65%
Remainder of Farm:
first $115,000 0.35%
$115,000 - $600,000 0.80%
over $600,000 1.20%
2b Timberlands 1.20%
Nonhomestead agricultural land
1.20%
ga
ga
Commercial-Industrial and public utility
first $150,000
over $150,000
Public utility machinery
Real properly owned in fee by a utility for transmission line right-of-way
Transit Zone
first $150,000
over $150,000'**
2.40%
3.40%
3.40%
3.40%
2.40%
2.975%
3b
Employment property
competitive city or zone:
first $150,000
over $150,000
border city:
first $150,000
over $150,000
2.40%
3.40%
2.40%
3.40%
3b
Employment property
competitive city or zone:
first $150,000
over $150,000
border city:
first $150,000
over $150,000
2.40%
3.40%
2.40%
3.40%
Ehlers and Associates - How to Calculate TIF
Class Description Rate
4a Rental housing
four or more units, including private for-profit hospitals 2.40%
selected small cities, four or more units** 2.15%
4b(1) Single units not qualifying for 4bb and residential nonhomestead two and three units 1.65%
4b(2) Unclassified manufactured homes 1.65%
4b(3) Farm nonhomestead containing more than one residence but fewer than four along with 1.65%
the acre(s) and garage(s)
4b(4) Residential nonhomestead not containing a structure 1.65%
4bb(1)
Residential nonhomestead single unit
first $76,000
over $76,000
1.20%
1.65%
4bb(2)
Single house, garage and 1s' acre on ag nonhomestead land
First $76,000 1.20%
Over $76,000 1.65%
4c(1)
Seasonal recreational residential
commercial
1.65%
non-commercial
first $76,000 1.20%
over $76,000 1.65%
4c(2) Qualifying golf courses 1.65%
-- 4c(3) Nonprofit community service oriented organization
1.65%
4c(4) Post secondary student housing 1.20%
4c(5) Manufactured home parks 1.65%
4c(6) Metro non-profit recreational property 1.65%
4c(7) Certain leased or privately owned non-commercial aircraft storage hangars (includes 1.65%
land)
4d Qualifying 4d properties - land and buildings (includes qualifying units of structures of
1 - 3 units and qualifying units of structures of 4 or more units) 1.00%
5(2) Unmined iron ore 3.40%
Low recovery iron ore 3.40%
5(3) Ali other property not included in any other class 3.40%
** Cities of 5,000 population or less and located entirely outside the seven county metropolitan area and the adjacent
nine county area and whose boundaries are 15 miles or more from the boundaries of a Minnesota city with a population
over 5,000.
***Only those structures currently under development or planned for development can qualify.
Ehlers and Associates - How to Calculate TIF
Ehlers is often asked how cities justify the amount of tax increment assistance
that is given to developers. It has been our experience that there are two
questions that cities grapple with when providing tax increment assistance.
The first is what is referred to as the "but/for analysis." That simply says that
the project would not go forward without tax increment. In most cases, the
answer to that question does not require numerical analysis but relies upon
specific economic ans site factors affecting the development.
Once a city has established that the development needs tax increment, the tougher question is "how
much." Cities use a variety of methods to analyze this question depending on a number of factors. Some
cities have determined that due to the number of positive attributes that their city has, they simply will
not provide any tax increment assistance for any reason. Other cities have determined that their objective
is to attract as many jobs and as much tax base as they can and therefore will provide the maximum
amount of tax increment available. Most cities are somewhere in between.
The question then is how do you determine the amount of assistance. Real estate transactions are
extremely complicated and difficult for a citizen to understand in the context of a council meeting.
Therefore when we have been asked to conduct an analysis we have determined that the best way to
present the material is to reduce it down to a simple proforma analysis. We attempt to display the
amount of return on equity that the developer will receive with and without the use of tax increment.
Using this method, people analyzing the transaction will be able to identify those retums with their own
personal investments. This gives the reviewer the opportunity to quantify the amount of tax increment
that their city is providing in terms that are understandable to them.
Attached is of a project proforma with and without tax increment assistance for your review. You will
note that without tax increment, the project returns a little over 7.74% to equity parmers. This is to say
that anyone investing in this project could expect to receive around 7.74% return. When one understands
that real estate transactions are highly speculative and risky venture for the investors, you quickly arrive
at the conclusion that 7.74% is not sufficient enough return to attract any equity capital.
When one evaluates the pro forma with tax increment assistance, the return is almost 12%. When
reviewing this return in today's market, it is our opinion that this approaches a level sufficient to attract
equity capital to a project.
It is important to understand that when evaluating these types of transactions, no one can be totally
accurate as to the eventual returns or outcome of the project. The simple objective is to try within certain
variables to come up with an analysis that provides a comfort level to all those participating in the
project.
EHLERS & ASSOCIATES, INC. 3060 Centre Pointe Drive, Roseville, Minnesota 55113 (651) 897-8500
WITHOUT TAX INCREMENT WITH TAX INCREMENT
Mortgage
Equity
Tax Increment
TOTAL SOURCES
Land
Sitework
Soil Correction
Demolition
Relocation
Subtotal Land Costs
Construction
Finish Manufacturing
Subtotal Const Costs
Soft costs
Taxes
Finance Fees
Project Manager
Developer Fee
Contingency
Subtotal Soft Costs
TOTAL USES
Rent- Space 1
Rent - Space 2
Rent - Space 3
Other
Mortgage
Net Income
Total Return on Equity
SOURCE
USES
INCOME
9,600,000
2,400,000
0
12,000,000
1,500,000
300,000
468,000
100,000
65,000
2,433,000
6,750,000
250,000
7,000,000
350,000
35,000
850,000
542,000
540,000
250,000
2,567,000
12,000,000
Sq. Ft. $/Sq. Ft.
100,000 $8.00 800,000
25,000 $8.50 212,500
25,000 $9.00 225,000
0 $0.00 0
1,237,500
20 Term
9.00% Interest
9,600,000 Principal
1,051,646
185,854
7.74%
Sq. Ft.
100,000
25,000
25,000
0
20
9.00%
9,600,000
SOURCES
USES
INCOME
$/Sq. Ft.
$8.OO
$8.50
$9.00
$0.00
Term
Interest
Principal
8,667,000
2,400,000
933,000
12,000,000
1,500,000
300,000
468,000
100,000
65,000
2,433,000
6,750,000
250,000
7,000,000
350,000
35,000
850,000
542,000
540,000
250,000
2,567,000
12,000,000
800,000
212,500
225,000
0
1,237,500
949,439
288,061
12.00%
What is a project proforma?
Historical trends show that government is increasingly entering into "partnerships" of various sorts with the
private sector. This is particularly true in cases of housing, economic development and redevelopment. With
this trend comes an increasing need for government to make judgements on the strength of private sector
promises, leases, guarantees, etc... Also, ~vhen public incentives are provided, it is important to ensure that
the level of assistance is sufficient, but not excessive. One way you better make such judgements is through
the review of the development pro forma.
A pro forma is a basic financial feasability model of the project. It is the developers cash flow analysis of
how the project will work. It should:
[]
[]
[]
[]
[]
[]
C3
C3
[]
[]
[]
include project cost detail
include total debt detail
include ongoing revenues sources
include ongoing expenditure items
allow for inflation analysis
allow for vacancy analysis
allow for tax analysis
allow for sale of project analysis
include profitability, risk and interest rate of return ratios
include the time period of public participation
allo~v for the testing of various financial assumptions.
A pro forma will give the public sector partner a better view of the project financial strength. It will also
show the return to the developer to ensure an appropriate level of public participation.
When use in conjunction with a market analysis, it can be a powerful tool in evaluating the public partner's
risk.
Ehlers & Associates - The But/For Test
In the 1997 legislative session, Representative Ron Abrams from Minnetonka
authored legislation to allow individual political subdivisions (county, city,
town, or school district) to retum their proportional share of all or a portion of a
building's property taxes (see H.F. 2163, Laws of Minnesota, Article 2, Sections 45-48, or Minnesota
Statutes, Section 469.1812 to 469.1815). Abatements were designed to give each jurisdiction a voice in
economic and redevelopment efforts, limit the state's financial liability through the school finance system,
and enable new business retention efforts.
Complications arose in the mechanics of abatements and, more importantly, from the reintroduction of levy
limits for taxes payable in 1998 and 1999. The 1998 Legislature passed legislation to exempt these
abatements from the levy limits and also allow bonds to be issued as a means to finance the development.
The 1999 and 2000 Legislatures, in an effort to make abatement a more viable economic development tool,
has further expanded the scope of abatement authority.
The nuts and bolts of the abatement program are as follows:
[] The abatement is a tax rebate rather than an exemption from paying taxes.
The taxpayer pays taxes on the abated property in the same manner it would if the taxes were not being
abated. The county pays the abatement to the general fund of the political subdivision without
identifying the amount of the abatement.
The 1999 Legislature expanded the meaning of the term abatement to encompass agreements to defer
property taxes without interest or penalties. The city, town, county or school district can levy taxes
as usual, defer payments for up to ten years, impose a set repayment schedule, and abate the penalties
and interest.
Towns may take action on tax abatement only at their annual meeting. The 1999 Legislature gave the
town board the power to approve the abatement resolution at other times, but, unfortunately, the new
legislation did not change the definition of"goveming body." For towns, the goveming body remains
the annual meeting, and several key abatement provisions require approval of the governing body.
As of May 26, 1999, a school district may abate its entire tax capacity based levy (previously could
only abate 60% to 75%). A school district may not abate market value based levies. School boards,
also as of May 26, 1999, may now grant abatements for the entire term of the abatement (previously
they could only approve the abatement one year at a time). School districts may levy an additional
property tax to pay for their abatements. The school district will not lose net revenue by using the
program.
The maximum term of the abatement is ten years if the city (or town), county, and school all
participate. If one or more entities decline, the maximum term is 15, under legislation passed in 2000.
The maximum that an entity can abate is the greater of $100,000 per year or 5% of the entity's levy.
Taxes payable from the market value of a new or existing building, and, as of May 26, 1999, the value
of land and any fiscal disparities contributions (for metro and taconite credit areas only) may be
abated. The maximum annual abatement equals the political subdivision's local tax rate multiplied
by the net tax capacity of the parcel.
EHLERS & ASSOCIATES, INC. 3060 Centre Pointe Drive, Roseville, Minnesota 55113 651.697.8500
Abatements are authorized to finance public infrastructure, whether or not the benefitted infrastructure is on or adjacent
to the parcel for which the tax is abated. The owner of a parcel for which taxes are abated need not consent. Thus, a
political subdivision may approve an abatement for certain parcels and use the retained taxes to finance public
improvement projects.
[] The notification requirements include a public hearing with a 10 to 30 day publication notice.
The findings required by a council or board include general statements of tax base, preservation, employment, public
facilities, blight, or access to services.
G.O. Abatement Bonds can be issued without affecting net debt and can be issued without a referendum under certain
conditions.
Abatement does not require a property owners consent.
Abatements cannot be used in concert with tax increment financing, but can be utilized after a TIF district is
decertified.
Another issue which complicates the abatement program is the specific authority of a governmental body to pledge its
abatements to the debt of another governmental entity, if the debt is not a G.O. Abatement Bond. Many attorneys differ on
the interpretations of the pledges allowed and what exactly constitutes a G.O. Abatement Bond.
We recommend that abatement always be utilized in conjunction with a development agreement that clearly spells out the
developer's responsibilities with respect to improvements and job and wage goals.
Abatement is a "business subsidy" and as such is subject to Minnesota Statutes § 116J.993 - § 116J.995.
Ehlers & Associates - Abatement
In 1999, the State Legislature adopted new regulations for the granting of business
subsidies by state and local government. These requirements replace the current
wage and job goal reporting. The Business Subsidies Statutes are codified as
Minnesota Statutes, Section 116J.993 through 116J.995. This summary highlights
the statutory requirements for business subsidies as amended by the Legislature in the
2000 session.
The regulation of business subsidies adds new complexities to the development process. Make sure that you
understand the statutory requirements before providing direct or indirect assistance to any for-profit or
non-profit entity. If in doubt, ask questions. Many of these provisions are subject to interpretation.
Who is subject to the Business Subsidy Statutes?
Any state or local government agency or public entity may be a "Grantor" under the Statutes. Potential
Grantors include cities, counties, school districts, townships, economic development authorities, housing and
redevelopment authorities, port authorities, and municipal utilities. Multiple grantors may exist within a
single jurisdiction. Each Grantor must comply with the Statutes.
What is a business subsidy?
The Statutes set forth a definition and the specific exclusions for business subsidies. Both must be considered
in determining if a specific action is a business subsidy and subject to the Statutes.
A business subsidy is defined as "grant, contribution of personal property, real property, infrastructure, the
principal amount of a loan at rates below those commercially available to the recipient, any reduction or
deferral of any tax or any fee, any guarantee of any payment under any loan, lease, or other obligation, or any
preferential use of government facilities given to a business". This definition covers many different forms of
economic assistance.
The Statutes specifically excludes twenty-two items from the definition. The following are not business
subsidies:
(a)
(b)
a business subsidy of less than $25,000;
assistance that is generally available to all businesses or to a general class of similar businesses,
such as a line of business, size, location, or similar general criteria;
(c) public improvements to buildings or lands owned by the state or local government that serve a
public purpose and do not principally benefit a single business or defined group of businesses at
the time the improvements are made;
(d) redevelopment property polluted by contaminants as defined in section 116J.552, subdivision 3;
(e) assistance provided for the sole purpose of renovating old or decaying building stock or bringing
it up to code and assistance provided for designated historic preservation districts, provided that
the assistance is equal to or less than 50% of the total cost;
(f) assistance to provide job readiness and training services if the sole purpose of the assistance is to
provide those services;
(g) assistance for housing;
(h) assistance for pollution control or abatement, including assistance for a tax increment financing
hazardous substance subdistrict as defined under 469.174, subdivision 23;
(i) assistance for energy conservation;
O) tax reductions resulting from conformity with federal tax law;
(k) workers' compensation and unemployment compensation;
(1) benefits derived from regulation;
EHLERS & ASSOCIATES, INC. 3060 Centre Pointe Drive, Roseville, Minnesota 55113 651.697.8500
(m) indirect benefits derived from assistance to educational institutions;
(n) funds from bonds allocated under chapter 474A, bonds issued to refund outstanding bonds, and bonds issued for the
benefit of an organization described in section 501 (c) (3) of the Internal Revenue Code of 1986, as amended through
December 31, 1999;
(o) assistance for a collaboration between a Minnesota higher education institution and a business;
(p) assistance for a tax increment financing soils condition district as defined under section 469.174, subdivision 19;
(q) redevelopment when the recipient' s investment in the purchase of the site and in site preparation is 70 percent or more
of the assessor's current year's estimated market value;
(r) general changes in tax increment financing law and other general tax law changes of a principally technical nature;
(s) federal assistance until the assistance has been repaid to, and reinvested by, the state or local government agency;
(t) funds from dock and wharf bonds issued by a seaway port authority;
(u) business loans and loan guarantees of $75,000 or less; and
(v) federal loan funds provided through the United States Department of Commerce, Economic Development
Administration.
What are business subsidy criteria?
Each Grantor must adopt criteria before granting a business subsidy. The statutory requirements for business subsidy criteria
include:
[] The criteria must be adopted following a public hearing.
[] The criteria may not be adopted on a case by case basis.
[] The criteria must set specific minimum requirements that recipients must meet in order to be eligible to receive business
subsidies.
[] The criteria must include a policy regarding specific wage floor for the wages to be paid for the jobs created. The wage
floor may be stated as a specific dollar amount or may be stated as a formula that will generate a specific dollar amount.
~ A grantor may deviate from its criteria by documenting in writing the reason for the deviation and attaching a copy of the
document to its next annual report to the Department of Trade and Economic Development.
[] A copy of the criteria must be submitted to the Department of Trade and Economic Development.
The minimum requirements and wage floor provisions were added in 2000. Grantors that adopted criteria before May 1, 2000
have until May 1, 2003 to bring their criteria into compliance with the Statutes.
What are the steps for approving a business subsidy?
[] Determine that the proposed assistance is a business subsidy. A careful analysis of the assistance may find that all or
part of the assistance qualifies under the specific exclusions.
[]
[]
Comply with the criteria. Each proposed subsidy should be connected back to the adopted business subsidy criteria.
Enter into a subsidy agreement. The Statutes require an agreement for every business subsidy. The subsidy agreement
may be a stand alone document or made part of a overall development agreement for a project. The subsidy agreement must
address:
· a description of thc subsidy, including thc amount and type of subsidy, and type of district if the subsidy is tax
increment financing;
· a statement of the public purposes for thc subsidy;
· measurable, specific and tangible goals for the subsidy;
· a description of the financial obligation of the recipient if thc goals arc not met;
· a statement of why the subsidy is needed;
· a commitment to continue operations at thc site in the jurisdiction where the subsidy is used for at least five
years after thc benefit date;
· thc name and address of the parent corporation of thc recipient, if any; and
· a list of all financial assistance by all grantors for the project.
Thc Statutes set forth specific requirements for the failure to meet the goals set forth in thc subsidy agreement.
Hold a public hearing. If the amount of the business subsidy exceeds $100,000, the Grantor must hold a public hearing.
The Statutes contains specific requirements for publishing the notice of hearing. If the recipient of a business subsidy will
receive assistance from more than one local grantor, then a single grantor may hold the public hearing.
Are there ongoing responsibilities?
The Statutes establishes a set of subsidy reporting procedures. The recipient of the assistance is required to provide information
to the grantor for two years after the benefits date or until the goals are met, whichever is later. The Statute requires reporting
for certain types of assistance that are otherwise excluded from the definition of business subsidy. The information shall be
reported on forms developed by DTED. The Statutes create penalties for failure to provide the appropriate reports.
The Statutes create additional reporting requirements for the Grantor. All local govermnent agencies of a local government with
a population of more than 2,500, regardless of whether or not they have awarded any business subsidies, must file a report
by April 1 of each year with the Commissioner of Trade and Economic Development. Local government agencies of a local
government with a population of 2,500 or less are exempt from filing this report if they have not awarded a business subsidy
in the past five years.
Kick Off Workshop February 5, 2001
I City of Elk River t
Kick Off Workshop
February 5, 2001
Even if you're on the right track, you'll
get run over if you just sit there.
- Will Rogers
A wise man makes more opportunities
than he finds.
- Francis Bacon
Don't be afraid to take big steps. You
can't cross a chasm in two small jumps.
- David Lloyd George
Eh/ers & Assoc/ates, Inc.
K/ck OR~ Workshop February S, 2001
i
~ ~°.b!ems and identify
~ opportunities
- Increase continuity
;
Process for Elk River
- Built on series of four workshops
· Present information
· Get input
· Answer questions
· Reach consensus
- Last Monday of each month
Eh/ers & Assoc/ates, Inc. 2
Kick Off Workshop February 5, 2001
Identify issues
~: Finalize process
Set workshop calendar
· History tells a lot about Elk River
today
· History builds the foundation for
the futUre
° Trend areas:
- Community growth
- City reVenues and expenditures
- City debt
Eh/ers & Associates, I~c. 3
Kick Off Workshop February 5, 2001
· Future sUbject to many Variables - Pace and form of new development
Local decisions
- LegiSlative actions
- Mandates
InflatiOn
· These variables influence to
ability to predict future
· Important to make projections as
basis for planning
· Test sensitivity to change in
assumptions
Ehlers & Associates, Inc. 4
Kick Off Workshop February 5, 2001
Conduct policy inventory
- current practices
Need for new policies
- Potential changes from planning
process
· Review trend analysis
- Identify follow-up areas
· Review projections
- Agree on assumptions and approach
· Review policy inventory
- Identify gaps
Workshop
2
Eh/ers & Associates, Inc. 5
Kick Off Workshop Februar~ 5, 2001
Identify options for funding each
project
- Local revenues
- Reserves
- Intergovernmental revenues
- Debt
Eh/ers & Associates, Inc. 6
Kick Off Workshop February ~, 2001
capital improvements
- Property taxes [~
_ Other revenues ~
- Rese~es ~
- Indebtedness
· Review capital improvement
projects and fiscal analysis
· Build consensus on preferred
plan
· Identify areas for further analysis
Workshop
3
Eh/ers & Associates, Ina 7
Kick Off Workshop February 5, 2001
improvements analysis
I I Follow-up
· Analyze operating issues facing
city
- Funding General Fund services
- Utility rates
- Reserves
- Tax rate management
- Budgeting and planning
Operations
Eh/ers & Assoc/ates, Inc. 8
K/ck Off ~Vorkshop February 5, 2001
· Analyze other issueS raised
during planning prOCeSs
Other
Create policies to support results
of planning process
- New policies
- Changes to existing policies
POlicies
Eh/ers & Assoc/ates, Inc. 9
Kick Off Workshop February 5, 2001
' Final c.apital_im.P, roveme, ntS. Plan
- Operations funding projections
- Approach for other issues
- Financial management policies
Identify steps for on-going
financial management planning
Eh/ers &Assoc/ates, Inc. 10
K/ck Off Workshop Februark, 5, 2001
- Presents action plan for
implementing the steps identified in
process
· Present plan report
· Agree on final changes
Eh/ers &Assoc/ates, Inc. 11
Kick Off Workshop February S, 2001
Understanding
What do
You want
to know?
Issues
What
issues
need to be
addressed?
Eh/ers &Assoc/ates, Inc. 12
K/ck Off Workshop February 5, 2001
ue io
i
have any
~other
questions?
Eh/ers & ,4ssoc/ates, Inc. 13