Five-Year Rule in TIF

What is the five-year rule?

The five-year rule essentially requires development activity for a TIF district to be finished within a five-year period that begins with certification of the district's original tax capacity. Minn. Stat. § 469.1763, subd. 3. After this five-year period has expired, increments may only be spent to pay off obligations that were incurred to fund work done during the five-year period or to the extent permitted under the pooling rules. When these obligations are paid (or enough money has been collected to pay them), the district must be decertified. Minn. Stat. §§ 469.1763, subd. 4; 469.177, subd. 12(4).

Does the five-year rule apply to all TIF districts?

No, it only applies to districts where the request for certification was made after April 30, 1990, the effective date of the statute imposing the rule. In addition, the 2009 legislative extended the five-year period to ten years for redevelopment and renewal and renovation districts certified after June 30, 2003, and before April 20, 2009. Minn. Stat. §§ 469.1763, subd. 3(c). This was done in response to development slowdown that occurred in the Great Recession.

Does it apply to all of the increments for these districts?

No, it only applies to the "in-district" portion under the pooling rules. For most districts, this is the 80 percent that must be spent on activities within the district. (For redevelopment districts and for any district for which the request for certification was made before June 30, 1995, the percentage is 75 percent.) Minn. Stat. § 469.1763, subd. 2(a). Also, the law allows the pooling percentages to be increased for specific purposes, such as low-income housing projects. In addition, the definition of increment for the five-year rule excludes secondary revenues derived from investments, e.g., interest earned on increments, repayment of increments, developer payments, and so forth. Minn. Stat. § 469.1763, subd. 1(d). The rest of the increment is not subject to the five-year rule.

When does the five-year period begin?

The five-year period begins with certification of the original tax capacity of the district by the county auditor. This will generally occur within a short time after the authority submits a request to the auditor. The period ends five years and one day after this date.

How may increments be spent after the five-year period?

In general, the five-year rule requires that the activities on which increments will be spent must be completed within the five years - i.e., land must have been acquired, contractors must have been paid to clear the land, public improvements installed, and so forth. However, the costs may have been financed (e.g., bonds issued) and increments may be used after the five-year period to pay off the financing.

After the five-year period has run, increments may be spent only on four items:

1. To pay bonds that were issued during the five-year period, if the bond proceeds were spent to fund the activity within five years. This five-year period can be extended, if the proceeds are spent within "a reasonable temporary period under the federal tax exempt bond arbitrage rules." I.R.C. § 148(c)(1). Generally this allows up to a six-month extension from the date of the bond sale.
2. To pay binding contracts with a third party (i.e., someone other than the developer or owner of the property). Again, the activity financed under the contract must have been performed within the five-year period.
3. To reimburse the developer or owner of the property for costs incurred, if the developer or owner incurred the costs within the five-year period. This covers "pay-as-you-go" type financing arrangements.
4. To decertify the district by defeasing the bonds ("defeasing" means setting aside money in a dedicated account to pay future bond obligations or pre-pay contracts).

What was the policy rationale for the five-year rule?

In many instances, TIF districts produce more increment than is needed to pay for the development or redevelopment as originally conceived. Development authorities have tended to use these "surplus" increments for other purposes, rather than to decertify the TIF districts before their maximum duration limits. Both of the Legislative Auditor's program evaluations of TIF have pointed this out as a policy concern. Individual legislators have echoed these concerns. The overlying taxing districts (counties and schools) have also regularly expressed concern about the failure of development authorities to use surplus increments to decertify districts and return them to the tax rolls. The five-year rule, adopted in 1990, was one effort to address this concern.

November 2009