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Minnesota Tax Increment Financing Glossary

Click on the term for a definition, including statutory citations.

Administrative expenses are all expenditures of a development authority other than the direct cost of physical improvements, including architectural and engineering fees. They include expenses such as bond counsel and fiscal consultant fees and the development authority's operating costs (employee salaries, overhead, and so forth). Minn. Stat. § 469.174, subd. 14. The tax increment financing act limits the amount of tax increments that may be expended for administrative expenses. For most districts, the limit is 10 percent of the lesser of the (1) expenditures authorized in the TIF plan or (2) the district's tax increments (property taxes paid by captured value only). Minn. Stat. § 469.176, subd. 3. Special rules apply to districts certified after August 1, 1979, and before July 1, 1982. For districts for which the request for certification was made after July 1, 2001, the limit applies based on the district, not the project, and is the lesser of: (1) 10 percent of expenditures of increment authorized by the TIF plan, or (2) 10 percent of the narrow definition of the increments from the district.

An assessment agreement binds the developer to a minimum market value for property tax purposes, regardless of the development's actual market value. Minn. Stat. § 469.177, subd. 8. Assessment agreements are binding on a purchaser of the property; they "run with the land." Minnesota courts have, in several cases, held developers and other property owners to the terms of these agreements. Assessment agreements reduce the risk to the authority and city that the tax increments will not be sufficient to pay obligations of the project (e.g., bonds). Since the liability for property taxes has priority over the mortgage lenders' liens, property taxes generally will be paid even in a foreclosure. Although assessment agreements reduce the risk to the city, they do not eliminate it. Increments may still fall short of projections if the legislature changes class rates or the taxing districts' tax rates drop. In addition, temporary cash shortfalls may occur if a developer goes bankrupt and the mortgage lender does not step in immediately to make property tax payments.

Blight or blighted areas are redevelopment jargon for areas that contain (or conditions that cause) high percentages of dilapidated buildings or otherwise deteriorating and substandard structures. The term was originally used largely to refer to slum housing and its effects on the quality of housing and commercial structures in adjoining areas. The law requires TIF redevelopment districts, TIF renewal and renovation districts, and HRA project areas to meet statutory tests for blight. The Minnesota tax increment law defines blight reference to the percentage of the district's area that is occupied by buildings, streets, utilities, or similar structures and the percentage of these that are "structurally substandard." See, e.g., Minn. Stat. § 469.174, subd. 10.

Capitalized interest is the issuance of additional TIF bonds to pay the interest on the project's debt until increments begin to be received. TIF involves an inherent mismatch in costs and revenues. Most costs are incurred at the beginning of development. However, increments are collected only when the development begins paying increased property taxes–two or more years later. This mismatch can be overcome by borrowing money to cover these interest payments. In TIF jargon, these interest payments are "capitalized."

Captured tax capacity is the current property tax capacity of the parcels of property in the TIF district area, less the original tax capacity. Minn. Stat. § 469.177, subd. 2. Captured tax capacity multiplied by the original local tax rate yields the amount of increment.

A compact development district is a type of TIF district that may be established in only an area where 70 percent of the parcels are occupied by buildings and the planned redevelopment will increase the square footage of the commercial and industrial buildings by at least three times. Minn. Stat. § 469.174, subd. 10c. Increments from a compact development district may not be used to fund automobile-related public infrastructure, such as streets, roads, and parking improvements. Minn. Stat. § 469.176, subd. 1i. Compact development districts have a 25-year duration limit. Minn. Stat. § 469.176, subd. 1b. Authority to establish these districts expires on June 30, 2012.

Credit enhanced bonds are TIF revenue bonds that are secured by pledges of increments from several TIF districts. Minn. Stat. § 469.174, subd. 21. Credit enhanced bonds are used to finance improvements in a TIF district and rely, first, on the increments from that district for repayment. However, if those increments (contrary to initial estimates) are not sufficient, increments from other districts may be used to pay the bonds. These payments do not violate the percentage limits on pooling of increments applicable to post-1990 districts–i.e., payment of credit enhanced bonds are considered to be payments for improvements located in the TIF district. Minn. Stat. § 469.1763, subd. 2(a); 5. To qualify as credit enhanced bonds: (1) 75 percent of the proceeds of the bonds must be used to finance improvements in the district and (2) the issuer must estimate (at the time of issuance) that the revenues from the district will be sufficient to the pay the bonds. Minn. Stat. § 469.174, subd. 21.

Deficit reduction provisions authorize a development authority or municipality with a preexisting district to take steps to increase increments, if the 2001 property tax reform reduced the district's increments by so much that it cannot pay the preexisting (pre-2001) obligations. The permitted deficit reduction options include:

  1. transferring surplus increments from other districts, Minn. Stat. § 469.176, subd. 6
  2. increasing the original local tax rate to the current rate, Minn. Stat. § 469.1792, subd.3(1)
  3. changing fiscal disparities options, Minn. Stat. § 469.1792, subd.3(2)
  4. extending how long the district can legally collect increment Minn. Stat. § 469.1793.

A development authority or authority is a government entity authorized by the TIF law to exercise tax increment financing powers. Minn. Stat. § 469.174, subd. 2. Authorities include cities (exercising powers under the city development district law or the municipal industrial development act), economic development authorities (EDAs), housing and redevelopment authorities (HRAs), port authorities, and rural development finance authorities. The most common development authorities are HRAs and EDAs.

Developer payments are repayment (or payment for) by a developer of assistance financed with tax increments. The recipient development authority must treat these payments in the same manner as increments, i.e., they may only be spent on items that the law permits increments to be spent on. Minn. Stat. §§ 469.174, subd. 25(5).

District area is the area containing properties from which increment is collected. Minn. Stat. § 469.174, subd. 9. The area is defined by the TIF plan and need not be contiguous. The total property tax value (tax capacity) of the properties in the district is certified when the district is created. This value is the original tax capacity for the district.

Economic development authorities (or EDAs) are special purpose governmental entities authorized to exercise a variety of development powers, including tax increment financing powers. Minn. Stat. §§ 469.090 - 469.108; 469.174, subd. 4. EDAs are typically created by a city, although counties are also permitted to establish EDAs. See Minn. Stat. § 469.1082.

An economic development district is a type of TIF district that may be established in any geographic area. Minn. Stat. § 469.174, subd. 12. They are not restricted to "blighted areas" or to areas with development difficulties. Economic development districts may only be used to retain a business in Minnesota or the city, to increase employment in the state, or to preserve and enhance the state's tax base. Put another way, an economic development district is not to be used to assist a development that otherwise would locate in Minnesota, unless it is done to prevent a business from leaving the city and moving elsewhere in Minnesota. The duration of an economic development district is limited to eight years from the receipt of the first increment. Minn. Stat. § 469.176, subd. 1(e). Increments from economic development districts may be used to assist limited types of business facilities: (1) manufacturing, (2) warehousing, (3) research and development, (4) telemarketing, and (5) tourism in tourism counties. Minn. Stat. § 469.176, subd. 4c(a).

Excess increments are increments that exceed the amount needed to pay the costs authorized under the TIF plan for the year. Minn. Stat. § 469.176, subd. 2. The law requires excess increments either to be used to pay outstanding bonds or to be shared proportionately among the city, county, and school district. Excess increment distributions to a school district may trigger recalculation of the school's state aid payments.

Excess taxes must be distinguished from excess increments. Excess taxes are created when the tax rate imposed on properties in a TIF district exceeds the certified original local tax rate. Minn. Stat. § 469.177, subd. 9. The amount of excess taxes equals the actual tax capacity rate, less the original local tax rate, multiplied by the captured tax capacity. Excess taxes are distributed to the three main taxing districts (city-town, county, and school district) in proportion to the respective increases in their tax rates. If a school district is a recipient of a distribution of excess taxes, the school's state aid may be recalculated.

The four-year knock-down rules require development activity to occur on a parcel located in a TIF district within four years after its creation or the parcel will be dropped from the tax increment district. Minn. Stat. § 469.176, subd. 6. The parcel will be re-instated if development activity occurs, but at its current value (not the value at the time of certification of the district). The knock-down rules can be satisfied by demolition, rehabilitation, or renovation (public or privately financed) of improvements on the parcel or by improvement of a public street adjacent to the parcel. Installing utilities (e.g., sewer and water service) does not qualify.

The five-year rule requires 80 percent (75 percent for redevelopment districts) of tax increment revenues derived from a TIF district after the fifth year to be spent to decertify the district. After the fifth year, money may only be spent to (1) pay bonds or contracts that financed improvements, if bonds were issued before the end of the five-year period or (2) reimburse the developer for costs it paid to make improvements in the district during the first five years. Minn. Stat. § 499.1763, subd. 3. When sufficient money has been set aside, the district is decertified.

General obligation tax increment bonds are TIF bonds to which the municipality (usually a city) pledges its general obligation. Minn. Stat. § 469.178, subd. 2. If the tax increment or other pledged revenues are insufficient to meet the debt service obligations, the city must levy a property tax to make up the difference. Although these bonds are general obligation city bonds, they are not subject to the election or referendum requirements, if more than 20 percent of the cost will be paid with tax increments. Minn. Stat. §§ 469.178, subd. 2; 475.58, subd. 1(3).

General obligation authority bonds are TIF bonds that are backed by the full faith and credit of the development authority (e.g., the HRA or EDA), but not the city. Minn. Stat. § 469.178, subd. 3. If the increment or other revenues prove insufficient, the HRA must use any available authority revenues. However, because the authority has only limited taxing authority, a general tax levy cannot be imposed to make up the shortfall.

Development authorities may establish a guaranty fund to pay environmental liability costs. Minn. Stat. § 469.1765. A guaranty fund can be financed with either increments or other revenues. It can be used to indemnify or provide insurance against environmental liability for someone using or financing property in a TIF district.

A hazardous substance subdistrict is a type of TIF district that is used to finance the clean-up cost of properties containing pollution. Minn. Stat. § 469.175, subd. 7. A hazardous substance subdistrict is created within another, regular TIF district. The original tax capacity of the subdistrict is reduced by the cost of clean-up (but not below zero), providing immediate increment from the existing property value. Minn. Stat. § 469.174, subd. 7(b). A hazardous substance site may only collect increments for the lesser of 25 years from the receipt of the first increment or the time necessary to recover the cost of cleaning up the pollution. Minn. Stat. § 469.176, subd. 1e. The duration of the part of the overlying district containing the subdistrict is also extended for the duration of the subdistrict. The additional increments received as a result of reducing the original tax capacity by the clean-up costs may only be used to pay clean-up and related costs. Minn. Stat. § 469.176, subd. 4e. This restriction apparently (it is not crystal clear in the statute) applies to the other increments collected during the extension period (i.e., increments that don't result from the "write-down" but that are collected after the end of overlying district's regular duration limit).

Housing districts are TIF districts created and used primarily to provide housing for low and moderate-income families. Minn. Stat. § 469.174, subd. 11. To qualify as a housing district, 80 percent or more of the area of the assisted development must be used for low and moderate-income housing. In addition, specified income guidelines apply to individuals occupying the housing. Minn. Stat. § 469.1761. The geographic area of a housing district need not meet the "blight criteria" required for redevelopment districts. Other types of TIF districts, such as redevelopment districts, may provide assistance to housing developments. These districts are not subject to the income or other restrictions that apply to housing districts.

Housing and Redevelopment Authorities (HRAs) are development agencies authorized to exercise TIF powers for redevelopment and housing projects. Minn. Stat. §§ 469.001 - 469.047; 469.174, subd. 2. Any city or county may establish an HRA. Minn. Stat. §§ 469.003, subd. 1; 469.004. The county authorization, however, does not extend to Ramsey County or to counties with housing authorities established under special laws.

Interest rate write-down programs may use tax increments to subsidize the interest payments on private loans to finance low-income rental housing developments and "related and subordinate facilities[.]" Minn. Stat. §§ 469.174, subd. 8; 469.176, subd. 4; 469.033, subd. 1; 469.002, subd. 12; 469.012, subd 7, 8, and 9. Tax increments from a district may not be collected to provide interest reduction programs for more than 15 years. This limit starts with the first interest reduction payment. Interest reduction programs may not be used for owner-occupied, single-family dwellings. Minn. Stat. § 469.176, subd. 4f.

Interfund loans are loans or advances made by the development authority or municipality to pay TIF costs that will be repaid with tax increments. Minn. Stat. § 469.179, subd. 7. These loans must be authorized by a resolution of the authority or municipality, passed before the loan is made. The terms of the loan must be in writing and include the principal amount, term, and interest rate.

A land write-down occurs when the development authority transfers property to a developer at less than authority's acquisition cost. For example, an HRA may acquire a parcel for $1 million and spend an additional $100,000 demolishing a building on the property. If the HRA sells the property to a developer for $500,000, the price of the land is "written down" from the HRA's $1.1 million cost to $500,000. The authority may give the land to the developer–i.e., "write it" down to zero.

A municipality is the general purpose governmental unit required to approve new TIF districts, issuance of bonds, and other major TIF decisions made initially by the development authority. Minn. Stat. §§ 469.174, subd. 6; 469.175, subd 3. In most cases, the municipality is the city in which the project is located. For projects located outside of a city or for certain multi-county projects, the municipality is the county.

Original tax capacity is the tax capacity of the TIF district when the TIF district is established. (Hazardous substance subdistricts are an exception to this rule. For these subdistricts, the original tax capacity value is reduced by estimated cleanup costs.) This value is occasionally referred to as the frozen value. The original tax capacity is subject to adjustment if tax exempt property in the district becomes taxable, taxable properties become tax exempt, the legislature modifies the class rates of properties in the district, or parcels are added to or deleted from the district.

Original local tax rate is the sum of the tax rates imposed by all the taxing districts (e.g., city, county, and school district) in the year the TIF district is created. This rate is multiplied by the captured tax capacity to determine the amount of tax increment. These rules apply only to post-1988 districts. For pre-1988 districts, increment is determined using the current year local tax rates.

Pay-as-you-go financing relies on the private developer or property owner to initially finance the costs of the TIF improvements. A development agreement between the authority and the developer, then, provides the developer will be repaid as tax increments are collected. This method of financing allows the city or authority to avoid borrowing money (e.g., by issuing bonds) to pay for the costs up-front or to "capitalize interest." The developer bears these costs until increments are collected. The developer may only be reimbursed for costs that can be financed with TIF. Pay-as-you-go financing has become more popular after the federal tax law made it more difficult to use tax exempt bonds to finance many TIF costs.

Pooling of increments is permitted under the TIF Act for post-1982 TIF districts. Minn. Stat. § 469.175, subd. 1 and 4; 1982 Minn. Laws 888-92, chap. 523, art. 38 §§ 3, 5, and 10. Pooling allows increments collected from a TIF district to be expended on activities geographically located outside the district or functionally unrelated to the development in the district, if the activities are within the same project area. The activities may or may not be located in another TIF district. There are a variety of different mechanical means of pooling increments, including use of large project areas, "master projects," and other mechanisms.

Port authorities are special purpose governmental entities authorized to exercise a variety of development powers, including TIF powers. Minn. Stat. §§ 469.048 - 469.089; 469.174, subd. 2. Only a limited number of cities have port authority powers, although EDA powers are similar.

Pre-1979 districts are TIF districts for which certification was requested before August 1, 1979. These districts are generally not subject to the act, except the act required de-certification by August 1, 2009 and prohibits enlargement of the district after August 1, 1984. Minn. Stat. § 469.179.

Pre-1982 districts are TIF districts for which certification was requested before July 1, 1982. These districts do not qualify under the 1982 amendments to the act, including the authority to spend increments on activities outside the district area and to spend more than 5 percent of increments on administrative expenses. Minn. Stat. § 469.175, subd. 1 and 4; 1982 Minn. Laws 888-92, ch. 523, art. 38 §§ 3, 5, and 10.

Pre-1988 districts are TIF districts for which certification was requested before May 1, 1988. These districts are not subject to most of the restrictions that were enacted by the 1988 Legislature. These include the calculation of increment revenues based on the certified original local tax rate, the restrictions on soils condition districts, the requirement to pay the county's administrative costs, and a variety of other restrictions.

Pre-1990 districts are TIF districts for which certification was requested before May 1, 1990. These districts are not subject to most of the 1990 changes in the TIF law. 1990 Minn. Laws 2603, ch. 604, art. 7, § 31. The 1990 changes included (1) the percentage limitations on pooling and (2) the five-year rule. The enforcement provisions of the 1990 act apply to all TIF districts. To qualify as a pre-1990 district, the development authority had to do one of the following by June 1, 1991: (1) enter into a development agreement for a site in the district, (2) issue bonds, or (3) acquire property in the district.

Preexisting district is a TIF district for which the request for certification was made before August 1, 2001. Minn. Stat. § 469.1792, subd. 2. The law limits use of special deficit reduction provisions to preexisting districts. These deficit reduction provisions are intended to provide development authorities options for increasing increments in response to the effects of the 2001 property tax reform. The 2001 reform significantly reduced increments statewide and making it difficult for some districts to meet their contractual and bond obligations.

Preexisting obligations are TIF bonds, contracts, pay-as-you-go contracts, and interfund loans that were approved or issued before August 1, 2001 (or refunded bonds issued before August 1, 2001). Stat. § 469.1792, subd. 2. (Contracts to issue bonds must have been approved before July 1, 2001.) The special deficit reduction provisions are generally limited to paying preexisting obligations.

Prior planned improvements are improvements for which building permits were issued 18 months before certification of the TIF districts. The property value of these improvements may not be captured–i.e., the value is added to the original tax capacity. Minn. Stat. § 469.177, subd. 4.

Project area is the geographic area in which tax increment revenues may be spent. These revenues must be collected from TIF districts located in the project area. Project areas are designated by the development authority under the applicable development law, such as the HRA, port authority, economic development authority, or municipal development act.

Qualified disaster area is an area that was subject to disaster or emergency (declared by the federal, state, or local government in the last 18 months), which caused substantial damage to at least one-half of the buildings in the area. Minn. Stat. § 469.174, subd. 10b. These areas can be designated a redevelopment district with an original tax capacity equal to the value of the land. Minn. Stat. § 469.177, subd. 1(g).

A redevelopment TIF district is a type of TIF district used to finance the redevelopment of areas occupied by substandard buildings and other structures or railroad properties. To qualify as a redevelopment district, 70 percent of the district's area must be occupied by buildings and structures and 50 percent of these must be structurally substandard. Alternatively, the area may also qualify as vacant or underused railroad property, tank facilities, or as a qualified disaster area. Minn. Stat. § 469.174, subd. 10. The duration of a redevelopment district is limited to 25 year from the receipt of the first increment. Minn. Stat. § 469.176, subd. 1(e).

A small city under the TIF law may use economic development districts for small commercial developments, such as retail and office space. (Other cities may only use economic development districts for a more limited set of uses, such as manufacturing, warehousing, and research and development. For more detail on economic development district rules on use of increment, go to Economic Development TIF districts.) To be a small city, the city's population must be 5,000 or less, it may not be located within ten miles of a city with a population of 10,000 or more. Minn. Stat. § 469.174, subd. 27. This is intended to disqualify suburbs of larger cities. Qualification is determined based on the year of the certification of the TIF district. Minn. Stat. § 469.176, subd. 4c(e). In 2002, about 500 cities qualified as small cities. (Go to a list of qualifying small cities as of 2002.)

A soils condition TIF district is a type of TIF district that is used to finance correction of hazardous waste or pollution clean-up. Minn. Stat. § 469.174, subd. 19. Clean-up costs must exceed $2 per square foot or the market value of the property. Increments from soils condition districts may only be expended to acquire property, clean up contamination, and pay for administrative expenses. Minn. Stat. § 469.176, subd. 4b..

The state aid offset was repealed, effective for taxes in 2002. The offer provided for a reduction in the local government aid or homestead and agricultural aid that was paid to the municipality that approved the TIF district. The amount of the reduction was based on the amount that state school aid would have gone down if the TIF district's captured value were used in state school aid formula. The offset amount varied by the type and age of the TIF district.

Tax increment financing act (or the act) refers to the 1979 Act, and subsequent amendments, that govern the establishment of tax increment financing and collection of tax increments. Minn. Stat. §§ 469.174 - 469.179. The development authority acts (HRA, port authority, municipal development act, and so forth) also govern the purposes for which tax increments may be expended.

The tax increment financing plan states the objective of a TIF district, the activities to be undertaken, the type of district to be created, the estimated costs, and other details of the proposal. Minn. Stat. § 469.175, subd. 1. The TIF plan must be approved by the municipality after a public hearing. Minn. Stat. § 469.175, subd. 3. The plan defines and limits the activities that may be undertaken with the increments collected from the district. The plan may be amended at any time. However, a public hearing must be held before significant changes such as modifications in the size of the district or increases in bonded debt are approved. Minn. Stat. § 469.175, subd. 4(a). The geographic area of a TIF district cannot be increased five or more years after the district was created. Minn. Stat. § 469.175, subd. 4(b).

Tax increment revenue bonds are payable only out revenues generated by the TIF district itself–i.e., the tax increments and other revenues such as the proceeds of land sales and other developer payments. Minn. Stat. § 469.178, subd. 4.

Tax increments or tax increment revenues include (1) the property taxes paid by the captured value of the TIF district; (2) interest or other investment earnings on tax increments; (3) proceeds from sales of property purchased with tax increments; (4) lease payments from property acquired with tax increments; and (5) repayments of tax increments by the developer or property owner (often called developer payments). Minn. Stat. § 469.174, subd. 25. The property tax component of tax increment (item (1) above) is determined by multiplying captured tax capacity by the tax capacity rate or for a post-1988 district, by the original local tax rate. Minn. Stat. § 469.177, subd. 3.

The three-year rule required the development authority to do one of the following within three years after creating a TIF district: (1) acquire property in the district; (2) issue bonds; or (3) construct public improvements. Minn. Stat. § 469.176, subd. 1a (2001). The three-year rule was repealed, effective June 2, 2005.

Tourism counties are counties in which economic development districts may be used for tourism projects. Qualifying counties must (1) have income at or below 85 percent of the state median and (2) be located in development regions 1, 2, 3, 4, or 5.

October 2010