How TIF Can Solve a Market Failure in Minneapolis

I wrote an earlier post that explains what TIF is and how it works. Click through and read it here.

In any community, we put things we want in plans. We want good jobs for the people who live here. We want homes people can afford to rent and buy. We want polluted land cleaned up. We want abandoned land to host homes and businesses. We want underutilized land to be better used. We want more landowners to pay taxes, to spread the costs of running our City among more people.

If those spaces stay polluted or abandoned, that’s a problem: we aren’t getting the homes we need in this housing shortage, or jobs for residents, or more tax income.

Sometimes, a community has a spot that is perfect for new homes and/or businesses, but nothing gets built. Why not? Because of a market failure: the people who would build these new homes and businesses can’t convince lenders to lend them the money to build it.

Being lenders, they are very cautious and use increasingly formulaic tools to predict which projects are guaranteed to make a certain rate of return. If a given project doesn’t have another successful comparable project nearby to point to, it doesn’t matter to the lenders that it’s on an LRT line or in a great neighborhood. They keep to their narrow formulas and refuse to lend. And the underused land stays underused.

These plans are a lot like my garden. I’m planning carrots and radishes on one side, tomatoes and basil in the sun over here around those raspberries. But just drawing my plan on paper isn’t going to make it grow. I need to plant seeds and water them.

In cities, changing the status quo sometimes requires a nudge. Cities need their own watering can.

Most tools come with lots of strings, inflexible regulations, and restrictions, and one flexible tool cities have is Tax Increment Financing (TIF). Like anything, it can be misused, but leaving this watering can in the tool shed creates its own problems, too. It’s a powerful tool when it’s deployed well.

How has Minneapolis used TIF in the past?

Looking over past TIF projects, I noticed a pattern. Check out this list:

 

District Number / District Name / Date Approved / Neighborhood

92 Heritage Landing 11/13/98 North Loop

94 2nd Street North Hotel/Apartment 10/01/99 North Loop

95 10th Ave. N. & Washington Ave. N. 08/13/99 North Loop

105 Magnum Loft Apartments 06/23/00 North Loop

99 Grain Belt Brew House 06/09/00 Northeast Mpls

102 East Hennepin & University 06/09/00 Northeast

118 900 Sixth Avenue Southeast 08/10/01 Northeast

125 Minneapolis Stone Arch Apts. 07/12/02 Northeast

132 Grain Belt 09/26/03 Northeast

112 Urban Village (Between Bryant‐Colfax at Greenway) 07/28/00 Uptown/Greenway

86 West Side Milling District 02/06/98 Mill District

93 Historic Milwaukee Depot Reuse 06/11/99 Mill District

121 Parcel C 12/14/01 Mill District

142 St. Anthony Mills Apartments 09/02/05 Mill District

96 East Village 10/29/99 Elliot Park

104 Grant Park 06/09/00 Elliot Park

Stonearchapts

Stone Arch Apartments, funded with TIF in 2002 (image credit www.stonearchapts1.com)

In my explainer post, I outlined four uses. The first is an unrepeatable outlier, and the second is for big and speculative downtown projects. (That’s a use that many argue was a problem — see also Block E — and it’s a use we’ve stopped.) The fourth use is widely supported: providing an affordable housing subsidy to buy down the cost of rents for people with limited incomes.

This list looks like the third use, where Minneapolis uses TIF to spur the building of market-rate homes in the hottest neighborhoods in the city, and most of these projects do not include affordable homes. Reviewing the dates, though, every one of these districts happened before the neighborhood took off. With a few catalytic projects, Minneapolis demonstrated that these neighborhoods were good investments. We pulled out our watering can, and it worked: the soil was fertile, there was plenty of sunshine, but we needed TIF to keep the seeds moist until the roots grew and the rain was enough.

Some neighborhoods needed three or four TIF-supported projects to correct the market failure  and get lenders to invest in projects without any subsidy. In other areas like Elliot Park and the Midtown Greenway west of Nicollet, one or two projects was all it took to prove the viability of the market and for people to build hundreds of new homes.

Why is this type of subsidy so important? Because in areas that haven’t seen much development for decades, investors are understandably cautious. Having a couple nearby examples of developments that succeeded goes a long way towards demonstrating that if you build it, people will move in.

Consider the Mill District. As difficult as it might be to imagine today, just two decades ago the Mill District consisted of dozens of acres of parking with some abandoned mill buildings and unused rail yards. The North Loop was similar, but with a few more vacant buildings and not quite as many parking lots. By today’s standards the TIF investments in these neighborhoods from 1998-2003 were very generous. However, in comparison to the private, unsubsidized development that followed, the TIF-supported projects in the Mill District and the North Loop are a small fraction of the recent development. By any measure, the investment in those early projects was effective and significantly boosted the City’s overall tax base.

Perhaps the most striking example here is the Midtown Greenway corridor. West of Nicollet, one single TIF-supported project was enough to spark redevelopment of several parcels that had been vacant or underutilized for decades.

Here is an example of what’s now happening without TIF:

Once these neighborhoods got started, projects could get built without help from the City. Land that was mostly abandoned or underutilized in the heart of the city is now supporting neighborhoods with jobs, businesses, and thousands of new homes. We didn’t have to build all-new infrastructure and sewers for those projects – the supporting infrastructure has been there for more than a century. As a result we’ve got loads of help paying to maintain old streets and sewers throughout Minneapolis, paying into the school district, and supporting all of our other shared needs.

In those areas, we put our watering can back in the shed, because the rain has started to fall.
But in other parts of town, we haven’t ever even taken the watering can out of the shed.

How should citizens feel about TIF?

TIF is powerful, when deployed strategically.

Our neighbors, our city’s staff, and our city’s leaders know our city well. We know that there are good projects in great neighborhoods that can’t get financing because there hasn’t been local development in decades. The locations may be well-served by transit and within walking-distance of many amenities. Still, these areas lack the “proof of market” that lenders (and therefore the people building homes and businesses) rely on. In the past, the City strategically used TIF to spur development in an area, and then stepped back to let developers and lenders continue without public assistance. Helping neighborhoods overcome market challenges — that’s what TIF is supposed to do.

Today, we know there are places people want to live and work, places undermined by historic redlining and present-day effects of past segregationist policies. Places like 44th and Victory, West Broadway, Seward, Corcoran, parts of Northeast, and many more. TIF can show that investment makes sense in every corner of Minneapolis. TIF can end the racial-covenant shaped, redlining-driven market disinvestment in swaths of our city. But the effect of current practice, where Minneapolis limits TIF to affordable homes mostly located in lower-income neighborhoods, reinforces income and race segregation in our city.

You can see that pattern in this map, with yellow subsidized apartments are in historically redlined areas, and blue market apartments are in TIF-kick-started neighborhoods.

Map courtesy of Scott Shaffer

How should property taxpayers feel about TIF?

Never using TIF raises taxpayers bills. Our 1,500 miles of streets and alleys, and 1,380 miles of sewer tunnels need the same amount of paving and sweeping and plowing and rebuilding whether we have 370,000 or 450,000 people sharing the cost.

The tax increment of zero is zero. Ending the use of TIF doesn’t help us fund maintenance of aging streets or sewers or stormwater drains. It just forces those of us who are here to shoulder all the costs. TIF demonstrated that there’s a market for homes in and around downtown neighborhoods that experienced disinvestment for decades. As a result, we’ve seen a 400% increase in people living downtown and paying property taxes.

State law doesn’t preclude using TIF for making almost-feasible projects feasible; in fact that’s the whole point of the tool. But since 2013 Minneapolis has adopted a practice of using the tool much less than in the past. On the surface, that recent practice of rarely using TIF might appear fiscally prudent, but it isn’t. The fastest-growing neighborhoods in Minneapolis were sparked by TIF investments. The new development in these neighborhoods since 2003 pays millions in real estate taxes every year, and that reduces the amount of the City’s budget that must be covered by folks who live elsewhere in Minneapolis.

When one new, large apartment building adds over $800,000 in property taxes, that’s an addition taxpayers want. If we do it enough, we can fund affordable homes, housing vouchers, or whatever we as a city need.

Blocking TIF investments has the biggest tax penalty for people paying property taxes in the most expensive parts of the city. That’s also where the taxes are highest. Keeping the number of taxpayers down, keeping taxes in other parts of the city down, that simply shifts the tax burden onto the wealthiest neighborhoods. That’s not good for those folks.

Ward Tax Base

Tax base by city council ward (map credit Scott Shaffer)

So what should we do?

No gardener would use a watering can on saturated soil, or even wet soil. It’s too much lugging, too much time, pointless, and expensive (in labor and water). No gardener would plan for a garden and then hope it would grow without putting in some work, either.

Minneapolis needs to revisit our TIF policy – and practice – to provide clear guidance as to when and where we use it. Let’s define our standards for community support and minimum community benefits for using TIF. Let’s declare what conditions show continued lender disinvestment that justifies TIF to overcome that history. Let’s clarify when affordability is an absolute requirement. Current priorities to build for-sale housing and address environmental pollution could be supported by TIF, with or without affordable housing, depending on the site.

In the comments, share your recommendations. What conditions are necessary? What benefits do we require? What uses are prohibited? How do these recommendations link to our comprehensive plan?

Avoiding TIF means we all lose. We lose if we want nice things in our neighborhoods. We lose if we’re renting or homeowning taxpayers (especially in high-value neighborhoods). We lose if we want affordable housing. 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.

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19 Responses to How TIF Can Solve a Market Failure in Minneapolis

  1. Sean Hayford Oleary
    Sean Hayford Oleary May 2, 2019 at 10:44 am #

    I really appreciate this defense of TIF. Minneapolis has done an excellent job right-sizing regulations to support unsubsidized market development. And it works great, in certain desirable neighborhoods, but there are broad parts of the city that still aren’t seeing much new investment.

    My only concern about the framing is the idea that market will or must catch up as a result of the initial TIF investment. I think there are areas of the city that will not transform in the same way that the North Loop did. And that’s OK! Even good in some aspects — because it likely means market rents are lower (hence the development not being able to fully support itself).

    But even without the potential for transformation to fully self-supporting development, use of TIF can still increase the tax base and provide more housing, place for business, etc.

    One other comment, from a regional perspective: TIF is often used to subsidize a project whose inefficiency is created, unnecessarily, by the local government. I am not concerned about this in Minneapolis. But in many other metro cities, you’ll see things like minimum 2 parking spaces per unit, or large setbacks required on expensive land that nothing can be built on. Naturally, it is much harder to create a development that supports itself with this manufactured inefficiency. A combination of good land use rules and subsidy gets the biggest bang for (public and private) buck.

    • Adam Miller
      Adam Miller May 2, 2019 at 11:27 am #

      We probably shouldn’t expect each project to be transformational, but that doesn’t mean we can’t try. There are places (e.g., lots of places east of Hiawatha) that sure look like they could with the right catalyst.

    • Janne Flisrand May 2, 2019 at 11:30 am #

      I like your nuance that it’s OK if the market doesn’t catch up. Thank you.

      The Seward proposal that was voted on a couple weeks ago is a good example — that “market rate” TIF proposal is proposing median rents (as opposed to high-end rents). That’s a neighborhood that needs and can support non-subsidized apartments, but they can’t get built because lenders won’t lend. That doesn’t mean the neighborhood will (or that we want it to) support high-end apartments. And it’s a good use of TIF.

      • Sheldon Mains May 14, 2019 at 9:57 pm #

        First, thanks for two GREAT articles. Regarding Seward Commons project.To get the market rate part of the Seward Commons project into the TIF program, we needed to pair it with a building with about 36 affordable units. And even with that we had major push-back and opposition from a Council Member who represents one of the highest income (and the wealthiest) wards. The final vote was 8 to 4 in favor of the staff doing the final analysis and coming back to the Council with a full proposal.

  2. Bob Roscoe May 2, 2019 at 11:12 am #

    Somehow examining TIF’s use in decades-ago Minneapolis needs a “but not for” rationale. More important, another set of initials might better describe much of that development: “NLR”, meaning No Longer Red-lined.

  3. Brit Anbacht
    Brit Anbacht May 2, 2019 at 12:39 pm #

    I think a good strategic use of TIF post-2040 plan would be to set TIF zones along the corridors of 6 stories with encouragement for mixed use development. If we want to have a particular transit oriented development style, let’s fund it.

    • Trent May 2, 2019 at 8:03 pm #

      Only if they agree to adhere to the 6 story corridor profile and don’t push the “or higher” approach. We shouldn’t’ be using TIF to overbuild neighborhoods beyond the comp plan approach.

  4. Alex Schieferdecker
    Alex Schieferdecker May 2, 2019 at 1:12 pm #

    I think this is a compelling case.

    Good TIF gets the “what” and the “where” correct. It subsidizes a use that is needed, in a place where that use is especially needed. It also helps if the use has proven demand (like housing in a tight housing market), but the the issue that is preventing development is something non-economic, like discrimination.

    Using TIF to correct segregation by subsidizing affordable housing in wealthy areas with good schools, and subsidizing market housing in poor areas with contaminated or stigmatized land seem to me to be generally worthy uses of TIF.

  5. Karen May 2, 2019 at 5:12 pm #

    The herd nature of development seems to be a problem the public can address.

    Not often discussed but financing costs can, even in this low interest rate environment, can nearly double the cost of building things so its a very big issue.

    Is TIF an efficient way to reduce financing costs also?

    Is TIF better than say, if we had a public bank and simply lent money the to worthy projects at low interest rates and took that interest to fund further projects.

    In our modern world we seem to have problems with concentrations of wealth. It would be nice if community financing, TIF, whatever, would work to equalizing our neighborhoods more and with supply, keep rents take of our income, GDP as low as possible.

    • Daniel Choma
      Daniel Choma May 6, 2019 at 11:48 pm #

      I dig the idea of a public bank.

  6. Mickey May 3, 2019 at 8:20 am #

    TIF can also be used as a bludgeon by companies like Hy-Vee that probably should be paying for the cost of building their stores on their own. As it is, the Robbinsdale store is turning out to be a failure and even its biggest champions in the battle to tear down the Historic Terrace Theatre (historic tax credits are more desirable than TIF in my opinion) have been shopping at the New Hope store instead.

    • Janne Flisrand May 3, 2019 at 10:13 am #

      TIF can absolutely be used badly, and this sounds like a prime example. Minneapolis has certainly also had its own bad TIF deals.

      And, it doesn’t make sense to leave all the tools in the shed if you’re trying to grow something – historic tax credits, TIF, direct subsidy, and a host of other tools all have their role to play. None of them is a good idea in all situations, and sometimes, it’s best to just let things grow on their own.

  7. Bill Siegel May 3, 2019 at 3:30 pm #

    These have been great, thank you so much. Could you do a similar thing for St. Paul TIF projects? My good friend is a progressively minded Executive Director at a local Chamber of Commerce. He and I have been arguing for years about TIF and how and when it gets used and if it’s legitimate or not. I am proud to say that we have both conceded certain points and generally agree now that if used appropriately it can be of great benefit.

    • Daniel Choma
      Daniel Choma May 6, 2019 at 11:25 pm #

      I think a lot of people’s frustration with TIF in Saint Paul (at least in my neighborhood) comes with projects like the Allianz Stadium.

      Allianz stadium’s benefit/non-benefit is still yet to be determined, as we have yet to see if the tax free stadium will create a glut of new housing development around the stadium to make up for the tax free stadium.

      All that said: I think people are very reasonably scared that the city and city planners alike aren’t planning for the people of the neighborhood, they are planning for the economy of the city. If we are talking about the global economic health of the city, then it’s easy to think in broad terms and forget that artificially adding a great deal of housing stock into an already dense neighborhood without any economic checks such as:
      * A Minimum wage that is a living wage
      * Rent Control (in any way)
      * Licensing on Landlords
      can drive up the cost of the housing within a neighborhood even if it drives down the cost of housing within a city.

      So realistically, the new stadium supported by tiff funding might keep housing cheaper in in Saint Paul globally while driving up the cost of housing in the neighborhoods surrounding the stadium as landlords can just charge whatever the average is for the neighborhood which will go up if a bunch of luxury housing goes in overnight.

      For me, that’s a net loss as the neighborhoods surrounding the stadium both a) have to deal with a stadium now and all the drunk soccer fans around it and b) still don’t have any protection against landlords raising the rent to match the price of the market rate apartments going in around the stupid stadium and everyone is about the get evicted.

      So without substantial protections in place for working people, it’s hard for me to celebrate TIF as it seems like gasoline for developers. And that is great for development, but I think it can really leave a lot of folks behind whose wages haven’t increased in years.

      • Daniel Choma
        Daniel Choma May 6, 2019 at 11:27 pm #

        But yea, go soccer, I guess?

      • Daniel Choma
        Daniel Choma May 6, 2019 at 11:33 pm #

        And before I get urbanist Bro’d here, I’m not saying Don’t build housing. And I’m not saying NIMBY, even though I think that acronym essentially means nothing and it’s just something urbanists say to act tough on twitter.

        But people have legitimate reasons for hating TIFF funding and some of those legitimate reasons are based on real lived experiences with TIFF funding where TIFF funding leads to displacement of themselves or those they love, often in defense of either luxury apartments or a stadium.

        So I get that people need to really discuss the ins and outs of good city planning, but city planners need to be aware that a large portion of the city experiences their city planning as largely a negative thing.

        All I can say is that it makes me very very very very wary to place so much faith in the market forces that make the theory of TIFF funding work when unchecked market forces are arguably the same thing that has led to housing shortages and homelessness in the first place.

        I’m sure I’m not woke enough or not smart enough or not Sven enough. But man, people have right to be scared of TIFF funding because of how many times it’s been used in bad ways.

        • Daniel Choma
          Daniel Choma May 6, 2019 at 11:43 pm #

          Instead of using tax rebates to spur big development for larger and larger and larger and larger property ownership corporations, maybe we should invest directly into the people.

          Maybe we should absord the suburbs who have no real legal reason to exist into city limits so that the tax base of a city is realistic and not surrounded by a rich people donut of tax tax burden avoidance.

          Maybe we should tax churches. Not a popular idea. But maybe we should tax churches.

          Maybe we should invest in municipal banks.

          Maybe we should invest in cooperatively owned public property.

          Maybe we could (crazy idea here) tax rich people.

          Maybe we should rethink zoning code so we aren’t stuck in this big build loop where we HAVE To cater to gigantic real estate developers because they are the only ones with the capital to invest.

          There are loooots of other waays to build tax base without giving a free hand out to gigantic developers. I know we probably need to give a few big handouts to developers (because lets be honest they’ve got us kind of cornered here and hold the cards because they hold the capital) for some necessary housing, but I’m tired of having this conversation about TIFF as if TIFF is the only way to increase the tax revenues of a city.

          Is it really that hard to just tax rich people or do we constantly have to bribe rich people to make developments happen that burden poor and middle class people in hopes that it will raise enough left over revenue that we won’t have a bankrupt city?

          • Daniel Choma
            Dan Choma May 7, 2019 at 12:16 am #

            Ultimately, TIF is like most tools for development: without clear equity driven guidelines: it can become a puck that developers can use to blackmail the city to give them special treatment.

            I fully endorse using TIF in support of covering the development costs of needed amneties in neighborhoods that need amneties or subsidizing lower income housing in a development that would never have had it initially. (like the Ford site in St Paul).

            But it’s a tax rebate. There’s only so much you can do to increase parity in wealth distribution by giving a tax rebate to wealthy developers. And a wealthy developers are always gonna get the nice end of that deal, even if the less nice end is a few units of affordable housing which will soon be unaffordable as wages lag behind increases in housing costs.

        • sheldon mains May 14, 2019 at 10:04 pm #

          In the Seward Commons project, all parts of the development have had strong support from the Seward Neighborhood: Phase 1–40 units of Section 8 housing for people with “severe and persistent mental illness;” Phase 2–60 units of Section 8 seniors housing: Phase III–127 units of non-income limited housing that is affordable for people at or slightly below the median income and 37 units of affordable housing–15 of which will be 3 and 4 bedroom. This in a census tract that already is “impacted” by a large amount of affordable housing (per City of Minneapolis)

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