FAQ: Tax Increment Financing

The recent Seward Commons debate highlighted an important discussion about how the city uses Tax Increment Financing, or TIF. It’s one of the few financial tools cities have and control fully. But it’s not broadly understood. So what is TIF and how does it work? What has Minneapolis used it for in the past?

What the heck IS TIF?

TIF is a financing tool that is sometimes used for real estate and economic development projects.

Tax increment financing (TIF) uses the increased property taxes that a new real estate development generates to finance costs of the development.”

State law puts strings on how it can be used, and the political process for approving TIF districts ensures another layer of oversight.

TIF can’t be used willy nilly. According to Minnesota State law, projects must pass a “but-for” test to receive TIF. Here’s how Minneapolis describes this limitation:

“One of the basic provisions of this policy is that any development receiving TIF assistance must satisfy the “but-for” test contained in the TIF Act. This test can only be satisfied if the City Council adopts findings that (1) the proposed development would not occur without TIF assistance, and (2) no other significant development is expected on the site, in the reasonably foreseeable future if TIF assistance is not provided.” (Source: the city’s TIF application, which includes more detail. Bonus info here in the city’s TIF policy.)

How do the Financials Work?

In a typical scenario, the TIF funding repays a loan from a bank, and that loan is one of several sources of funding needed to build the project. To memorialize the City’s intention to use tax increment to repay the loan, the City issues a ‘TIF Note’ to the bank.*

For the City, issuing a TIF Note is no risk. The Note is merely a piece of paper that says “Thank you bank for funding part of this project. In return for your funding, as we get increased property taxes from this project, we will pay most/some of it to you.” The City gives up no existing property tax revenues, because the taxes from before the development continue to be collected as before.

After construction is complete, the developer pays real estate taxes to the County just as they would if the project were not in a TIF district. As it did in the past, the County sends the taxes on the pre-improvement value to the City, School District, and other taxing jurisdictions.

The unique thing about TIF districts is that the County sends the taxes generated by the increased value (the increment) to the City. The City forwards these funds to the bank that made the loan to the project. After the TIF Note is paid off (or after 26 years, whichever comes first), the County stops sending increment checks to the City for the project, and the full real estate tax amount is distributed to the various taxing jurisdictions going forward. Thanks to the “but-for” test, that’s money that property owner wouldn’t have paid in without the project.

What is the process to receive TIF?

There is a political process to access TIF, as any new TIF District requires that the City Council specifically authorize the new district. There is a financial cost to request TIF, with a $3,000 application fee and a $15,000 payment at the end of the process. Getting TIF also requires meeting legal and financial criteria. Staff review any TIF before City Council consideration. In recent times, that has required a two-step process: projects first must win preliminary approval, and then return once the final TIF plan is developed.

Here are the questions considered as part of the preliminary approval:

  • Does the proposed project meet the “but-for” test?
  • What public purpose would be served?
  • Is the project consistent with City goals, priorities and applicable plans?
  • Does the project appear to be financially feasible?
  • Have significant efforts been made to obtain other financing/funding?
  • Can the project and/or site qualify for TIF assistance under the TIF Act?
  • Are there sufficient TIF-eligible costs in the project?
  • Is the proposed TIF financing mechanism (bonds, pay-as-you-go, etc.) appropriate?
  • Does the developer have adequate financial capacity and experience?

If preliminary approval is granted, staff does much deeper analysis and brings back a proposed TIF district.

How has Minneapolis used TIF in the past?

Going back about 25 years, the City has primarily used TIF for four things:

  1. Supporting the Neighborhood Revitalization Program (NRP) and Neighborhood and Community Relations (NCR) department
  2. Funding major downtown projects
  3. Demonstrating the market for development in transitioning neighborhoods
  4. Funding affordable housing

Using TIF for NRP/NCR was possible only because the state Legislature passed special legislation to allow it. That’s such a different use, it doesn’t add much to a conversation about using TIF for development. However, the majority of TIF spending in Minneapolis (in the past 25 years) was allocated to NRP/NCR. You can see just how big that is in this chart that shows the percentage of Minneapolis tax base in TIF districts. The big drop in 2010 was a result of several of the NRP/NCR-supporting TIF districts going away. The rest of these will be decertified in 2020, and there will be another significant drop in the City’s percentage of tax base within TIF districts.

Funding major downtown developments fell out of favor soon after the ‘Block E’ controversy. Prior to ‘Block E,’ several major downtown developments were supported with TIF, with varying levels of success and/or controversy. When people refer to the ‘bad old days’ of TIF or the ‘excesses of the past’, these projects are the ones that sparked ‘buyer’s remorse.’

Development in transitioning neighborhoods, on the other hand, has been the quiet engine behind the success of some of the Minneapolis neighborhoods where development is strongest. I’ll cover this more in an upcoming post, but suffice it to say that Minneapolis would not be the city it is today without a wave of catalytic, TIF-funded developments between 1998-2003.

Mpls Tax Base In Tif

Mpls tax base in TIF (image credit Scott Shaffer)

Funding affordable housing has been the primary use of TIF in the past decade. Using TIF has been restricted in reaction to the ‘bad old days’ of downtown mega-projects, and this has been the last remaining TIF use in Minneapolis. And even this use has dwindled significantly. In 2012, Minneapolis approved four TIF Districts for affordable housing projects. In the years 2013-2018, Minneapolis approved 6 TIF Districts for affordable housing, averaging only one per year. The need for affordable housing didn’t evaporate in 2013, but the flow of TIF funds for affordable housing slowed to a trickle. Most recently, the newly elected City Council members have signaled a willingness to consider TIF for affordable housing as a significant tool once again, and there are now nine active TIF applications for affordable housing.

What should Minneapolis consider going forward?

TIF is being considered as one of the key tools to get the benefits from a citywide Inclusionary Zoning policy without bringing much-needed housing production to a standstill. The Inclusionary Zoning policy just adopted by the Council will give developers a choice: build 10% of their units at a level of affordability of 60% of Area Median Income on their own, or get city financing to build 20% of the new units at an even more affordable 50% of AMI. TIF could a seamless rent subsidy for people of limited means to live in newly-built buildings where there are few alternatives.

Sometimes, cities can create revenue problems by putting too much of their tax base into TIF districts. Cities should aim to have less than 15% of the tax base in TIF, in general. That’s not an issue in Minneapolis today, especially not given upcoming district decertification – the percentage of our tax base dedicated to TIF districts is already less than 10%, and it will soon be even lower.

It’s time for Minneapolis to have a thoughtful discussion about how we want to invest TIF funds to achieve the goals adopted as part of Minneapolis 2040, to address our affordable housing shortage, to eliminate racial disparities, and to build climate change resilience.

 

*Sometimes the City finances TIF itself using General Obligation Bonds. This adds risk to the city if a project falls through or if improvements don’t have as much value to as projected. Minneapolis has essentially stopped using GO Bonds for TIF.

Streets.mn is a non-profit and is volunteer run. We rely on your support to keep the servers running. If you value what you read, please consider becoming a member.

, , , , ,

16 Responses to FAQ: Tax Increment Financing

  1. Sean Hayford Oleary
    Sean Hayford Oleary April 25, 2019 at 10:37 am #

    Thanks for writing this, Janne.

    A few things I’d add:

    • As you hinted at the end, Minneapolis is not a major user of TIF — despite a few high profile examples downtown. However, it is 100% standard practice in many cities in the metro. Richfield approved an apartment project in 2018 that was exceptional because it was the first significant multi-family project in over 30 years not to use TIF. Bloomington and St. Louis Park (and of course many others!) are also major users of TIF.

    • The but-for test is important, but imperfect. How seriously that will be evaluated depends on the political support for the subsidy. If I recall correctly, I believe one of Goodman’s critiques of Seward Commons was the amount of parking it included (which could be seen to artificially inflate the need for subsidy).

    • Graphics like this TIF graph I think can be a helpful way to convey the concept of TIF for people who aren’t familiar. As your article mentions, the critical point of TIF done well is that there is a long-term gain for the city, there is no net loss, and the short-term gain helps make the project happen.

    • Janne Flisrand April 25, 2019 at 10:46 am #

      That’s a great graph, thanks for sharing, Sean.

  2. Bob Roscoe April 25, 2019 at 10:46 am #

    The “but-for” test is largely ignored by Saint Paul City Hall’s development minders. Both the recently built Allianz Field and the proposed Ford Plant site are TIF users. Allianz site could have been built without TIF and the Ford site is location-location-location rich. Saint Paul is generally acts TIF dependent while downtown Minneapolis is more judicious.

    • Janne Flisrand April 25, 2019 at 11:02 am #

      Bob, what tests do you think Saint Paul City Hall should use when deciding whether a specific project warrants TIF? There are the but-for questions (as Mpls applies them listed in the post), and I’d argue communities ought to get other benefits beyond just the but-for test. But-for on a parking ramp would never (in my opinion) warrant a TIF Note. But-for on a BIPOC-oriented business incubator certainly might.

  3. Patrick Flanagan April 25, 2019 at 12:47 pm #

    Great article, Janne. It answers a lot of questions I’ve had about TIF, and your idea about using TIF as a vehicle for rent subsidies deserves consideration.

  4. Casey April 25, 2019 at 1:09 pm #

    “TIF can’t be used willy nilly.”

    HAHAHAHAHAHAHAHAHAHAcoughHYVEEROBBINSDALEcoughHAHAHAHAHAHAHA

    • Sean Hayford Oleary
      Sean Hayford Oleary April 25, 2019 at 1:57 pm #

      Yeah, $2 million of TIF subsidy to get a pretty low-value long-term use (big box grocery chain on the edge of a nice downtown) is brutal. But the TIF mechanism isn’t really the problem… it’s wanting to lavishly subsidize anything shiny and new, regardless of long-term implications.

      • Frank Phelan April 28, 2019 at 7:36 pm #

        One mile fro that Hy-Vee is a Cub Foods. The Cub Foods pays it’s employees union negotiated wages and benefits. By subsidizing Hy-Vee, the tax payers of Robbinsdale are putting downward pressure on their own wages.

        At minimum, Robbindale should have made Hy-Vee agree to not interfere with any organizing campaign, which they would have completely balked at.

    • Andrew Evans April 25, 2019 at 2:58 pm #

      That was a major improvement over what was there and has a huge benefit to those of us in North, as well as around Robbinsdale. Unless people liked looking at a parking lot, strip mall, and the shell of a old theater.

      • Slappt May 7, 2019 at 5:37 am #

        It was over 4 million dollars that Hy-Vee got in Robbinsdale.

        People in Robbinsdale have noticed that the New Hope store has been selling products for significantly better prices ~and~ people aren’t getting mugged in the New Hope parking lot. Plus, a huge big box store on the edge of a walkable downtown? Egads.

        “Major improvement”? Methinks not. Especially when said theater had investors trying to buy it and with historians and architects who understood the true value of the building.

  5. Bruce Brunner April 25, 2019 at 2:47 pm #

    I’ve heard MPLS is in the 3-5 percent range in use of TIF which is WAY below the 15 percent threshold

    • Janne Flisrand April 25, 2019 at 3:40 pm #

      Check out the graph in the post, based on actual data. It’s not quite that low, but it is WAY below the 15% threshold.

  6. Tom Anderson April 27, 2019 at 11:28 am #

    Excellent article, Janne. Personally, I vary from agnostic to cautiously optimistic on broader use of TIF, but I think you could write a whole other article on your second to last paragraph (“Sometimes, cities can create revenue problems by putting too much of their tax base into TIF districts.”) I realize that Minneapolis is currently well below the 15% rule-of-thumb limit for tax base in TIF Districts, but I think a much deeper analysis is required of how tax and subsidy systems interact, especially at the county and state level.

    For example: I used to live in Baltimore, which is mostly huge swathes of impoverished neighborhoods with low value real estate, with some fringes of newer high value luxury developments in downtown and around the harbor. Many if not most of those new developments are in TIF districts, so the city and school district receive minimal tax revenue. Yet the formula used for calculating state aid to school district relied on evaluating a district’s total tax base, not its revenues. So over time as more TIF districts were created, state aid decreased and eventually blew a hole in the Baltimore Public Schools budget that could not be filled by local tax revenue locked up in TIFs. This created a major crisis that IIRC necessitated a state legislative fix that still didn’t make the school district whole.

    With the obvious caveats that Minneapolis is not Baltimore, I am curious to know more about how local government aid from the state to the city or the school district could be affected by having a greater proportion of the tax base in TIF districts, even if that just means something like going from 7% to 12%. Is Minnesota’s statewide education funding mechanism similarly vulnerable to becoming warped by an increase in value on paper that is not matched by actual revenue to the city/school district? Are there Met Council or Hennepin County grants or funding streams for Minneapolis that could be similarly affected? And even if there were no other second order impacts on state or regional funding formulas, wouldn’t a new multifamily development that brings, say, 50 new school age children into the district but creates no new tax revenue for 26 years be a net negative for MPS from a narrow fiscal perspective?

    None of the above is intended as a definitive argument against TIF. I support it’s use for clear public purposes like increasing affordable housing supply, and I’m open to the idea of using it more broadly than we have in recent years. I just would like to have a more holistic view of the costs and benefits than the simple “but for” test.

  7. Thomas Leighton April 27, 2019 at 3:58 pm #

    You did a nice job with this, Janne! It’s very clear and helpful.
    I’m a planning and development consultant, and I often encourage cities to make use of TIF because it has two characteristics that make it a unique public finance tool.
    1. It doesn’t compete with other priorities for City funding. So using TIF funding doesn’t impact the City’s budget such that you need to spend less on something else.
    2. It’s super flexible—not tied to just one type of development or City goal. As long as you’re using it on a project that wouldn’t be built without financial support, it can be used for any kind of development project that furthers City goals and plans. In some cases that’s affordable housing. But it can also be stuff like: a) mixed income housing in disadvantaged neighborhoods, b) market rate workforce housing (sometimes called the missing middle), c) pioneering large-scale initiatives (example: the Prospect North innovation district) that can give the Twin Cities regional recognition, and help us compete with other mid-sized metropolitan areas across the country, d) ground floor retail space in a mixed use building, where market rents won’t pay the full cost of retail space construction. (That might in some cases allow legacy neighborhood businesses to occupy a new retail space—so it can be a gentrification mitigation strategy.) Additionally, 25% of TIF proceeds can go toward off-site improvements such as intersection redesigns, public spaces, or streetscaping, so that’s (e).
    Tom

    • Janne Flisrand April 28, 2019 at 3:34 pm #

      Thanks for the additional nuance, Tom.

      The c) use you list, pioneering large-scale initiatives, seems like the place where cities most struggle to smartly use TIF. In Minneapolis, that’s the Block E and Conservatory era. That’s left me generally skeptical of using TIF for these types of projects without a compelling policy purpose and evaluation for these proposals.

      What evaluation guidelines do you suggest for identifying projects that are well-suited to the context, worth public investment, reasonably likely to succeed, guidelines for evaluating whether to use TIF for those large-scale initiatives?

  8. Mark A. Baker May 2, 2019 at 8:05 pm #

    Janne:
    The “but-for” test is a sham. As currently used, it is an extremely low bar. All it’s really saying is: “At this moment in time, this developer will not do the project unless he/she extorts x dollars in public subsidy”. There’s not even the simplest analysis done in most cities. The developer is just assumed to be totally honest. What about running some ratios? Is the developer being unduly enriched??
    Also, no discussion about how the city is going to fund the deferred maintainance and depreciation of public goods being “consumed” as a result of the project. Where is that money coming from during the 26 years of no property tax to LGU?
    You also seem to be locked into the luxury housing vs “affordable” or low income housing. There are a number of strategies to encourage creation of the housing that actual working families need, the forgotten missing middle.

Note on Comments

streets.mn welcomes opinions from many perspectives. Please refrain from attacking or disparaging others in your comments. streets.mn sees debate as a learning opportunity. Please share your perspective in a respectful manner. View our full comment policy to learn more.

Thanks for commenting on streets.mn!