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


Stone Arch Apartments, funded with TIF in 2002 (image credit

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.

About Janne Flisrand

Janne Flisrand spends her time thinking about how people interact with the space around them. Why do they (or don't they) walk or bike or shop somewhere? How do spaces feel? Why do people sit here and not there? Why bus instead of bike, bike instead of drive? What sorts of spaces build community, and what sorts kill it? Can spaces build civic trust and engagement?