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Legislature > House of Representatives > House Research > Property Taxes > Tax Increment Financing

Hazardous Substance Subdistricts

Definition

What are hazardous subdistricts?

Hazardous substances subdistricts are a TIF financing mechanism that allows use of the original tax capacity in a TIF district to pay for the cost of clean-up of pollution and contamination. Subdistricts also allow extension of a TIF district’s duration to permit recovery of pollution clean-up costs for the subdistrict area.

What are the unique features of the subdistrict mechanism?

Hazardous substance subdistricts are unique entities under the TIF law. Three factors distinguish them:

  1. They are not technically a separate type of district, but rather are a subpart of another TIF district, the host or overlying district. A subdistrict cannot be created without first creating a regular or host TIF district.
  2. The law permits the original tax capacity (the frozen tax value) to be reduced or "written-down" by the cost of clean-up. This allows increment to be collected on existing tax base. No development or increase in value is needed to generate increment. Certification of a subdistrict will yield immediate increment in the next year.
  3. A subdistrict requires state approval before certification. The Pollution Control Agency must approve a plan to clean up the pollution.

Duration Limit

How long can increments be collected from a hazardous substance subdistrict?

Increments from a hazardous substance subdistrict may be collected for the lesser of

  1. 25 years or
  2. the time necessary to recover the cost of clean-up of the site. Minn. Stat. § 469.176, subd. 1e.

This period begins to run after the subdistrict is certified and begins to generate increments higher than in the year of certification of the subdistrict. Unlike the other TIF duration limits, the first year of increment does count. Thus, the maximum limit is 25 years of increment (not 26 years, as is the case with housing and redevelopment districts).

What is the effect of the subdistrict on the duration limit for the host or overlying TIF district?

A subdistrict must be created in another, regular TIF district. The duration limit for the subdistrict operates independently of the duration limit for the overlying or host district. The duration limit of the subdistrict only limits the ability to collect increments that result from the "write-down" of original tax capacity. Creation of a subdistrict may extend the duration for parcels of the host district in the subdistrict. Minn. Stat. § 469.176, subd. 1e.

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Geographic Areas That Qualify

Where can a hazardous substance subdistrict be established?

A hazardous substance subdistrict must be located in a TIF district. A subdistrict may not be created as a stand-alone district. Minn. Stat. § 469.175, subd. 7(a). The subdistrict is limited to parcels that:

  1. Consist of a hazardous substance site or
  2. Are contiguous to a hazardous substance site. Parcels qualify as contiguous, even if they are separated by a right-of-way from the hazardous substance site.

What areas qualify as a hazardous substance site?

An area must meet three basic requirements to qualify as a hazardous substance site.

  1. The parcels must contain hazardous substances, pollutants, or contaminants. The definitions of these terms are from the Minnesota Environmental Response and Liability Act; they exclude petroleum. Minn. Stat. §§ 469.174, subd 18; 115B.02, subd. 8, 13.
  2. The authority must have an agreement (e.g., the developer has agreed to clean up the site) or a plan to use increments or other moneys to fund a removal or remedial actions. Minn. Stat. § 469.174, subd. 16.
  3. The Minnesota Pollution Control Agency must have approved a development action response plan for the parcels. Minn. Stat. § 469.174, subd. 16, 17. This plan will generally specify the method by which the hazardous substance or pollutants will be cleaned up.

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Permitted Uses of Increments

For what purposes may increments from a subdistrict be used?

These increments may be used only for four purposes relative to properties in the subdistrict:

  1. Removal or remedial actions for either hazardous substances or petroleum (Note: The presence of petroleum cannot be used to justify creating a hazardous substance subdistrict. But if petroleum is present, increments may used to pay for its clean-up.)
  2. Pollution testing, demolition, and soil compaction
  3. Purchase of environmental insurance or making deposits to a guaranty fund to indemnify against environmental liability
  4. Administrative and legal costs Minn. Stat. § 469.176, subd. 4e.

What increments are subject to the subdistrict spending limits?

Parcels in a hazardous substance subdistrict can generate two types of increments:

  1. Increments subject to the subdistrict spending limits. Increments are subject to the spending limits if they meet either of two criteria:
    • The increments are collected because of the "write-down" of original tax capacity.
    • The increments are collected as a result of the extension of the duration limit beyond that of the host district.
  2. Increments that may be spent in any way permitted under the law for the host or overlying district. In general, these are increments that the overlying or host TIF district would have collected whether or not a subdistrict was certified.

The distinction between these types of increments can be confusing. The calculations for an example parcel illustrate the distinctions between the two types of increments. Assume that a parcel has a tax capacity of $100,000 and clean-up costs of $5,000,000. The parcel pays $125,000 in annual taxes (i.e., the local tax rate is 125%). The parcel is certified as part of a redevelopment district and hazardous substance subdistrict. The parcel is cleaned up and a new building is built and the total tax capacity of the parcel increases to $400,000. The total taxes paid after the development are $500,000. The table summarizes the division between the two types of increment. Row #5 is the redevelopment district increment and row #6 is the subdistrict increment. This increment would, in all cases, be subject to the spending restrictions. After the end of the legal duration limit of the redevelopment district, the amount displayed in row #7 (total increment for the parcel) would be subject to the subdistrict spending rules as increment during the period of the extended subdistrict.

Hazardous Substance Subdistrict Example Calculation
1. Original tax capacity of redevelopment district $100,000
2. Cost of removal and remedial actions $5,000,000
3. Original tax capacity of subdistrict (= 1 – 2 but not < 0) 0
4. Current tax capacity of parcel $400,000
5. Captured tax capacity of redevelopment district (= 4 – 1) $300,000
6. Captured tax capacity of subdistrict (= 1 – 3) $100,000
7. Local tax rate 125%
8. Redevelopment district increments (= 5 * 7) $375,000
9. Hazardous substance subdistrict increments (= 6 * 7) $125,000
10. Total increment (= 5 + 6) $400,000

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Data on Use of Hazardous Substance Subdistrict Districts

How many hazardous substance subdistricts have been created?

The subdistrict law has been used infrequently. The State Auditor's 2017 report indicates that there were 26 hazardous substance subdistricts, all but two of these were in the seven-county metropolitan area.

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July 2017

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