Tax Increment Financing

What is tax increment financing?

Tax increment financing, often called TIF, is a financial tool cities may use to assist development, which otherwise would not occur but for the use of tax increment assistance. The purpose of TIF is to create jobs, provide affordable housing, redevelop declining areas or clean up environmentally contaminated sites.

TIF may also be used to finance public infrastructure--such as streets, sewer, water or parking facilities--that is related to the development. In some cases, the developer would be required to pay for this infrastructure though special assessments or other charges. In other cases, all taxpayers would pay though general city taxes.

How does TIF work?

When a city creates a TIF district, the assessed property values in that district are "frozen" at their current level. As development occurs and property values rise, the city captures the increased local property taxes (city, county, school, and special taxing jurisdictions) to pay for any public improvements or to help finance development and redevelopment projects. State property taxes and referendum taxes are not captured within TIF.


Do Victoria residents pay taxes that are used by a TIF project?

No. Taxes paid by a development continue to be directed in the same manner. Residents do not pay taxes that are used by a TIF project. Only new dollars created by the project can be used to assist the project. In some cases, existing taxpayers may be relieved of financial burdens if additional public improvements are financed with the increment created by a project.

What is a TIF district?

A TIF district is a designated area in the city in which the city is trying to attract development to increase the tax base, create jobs or provide affordable housing.

Will a TIF district create development?

No, but it can help. A business must be able to make money at a specific location. A TIF district can help by decreasing development costs.

What can TIF funds be used for?

TIF funds can only be used for land acquisition and physical improvements, such as infrastructure, buying land or demolishing buildings. TIF funds cannot be used for loans to businesses for working capital, machinery or equipment.

What is a TIF plan?

A TIF plan is a planning document, which describes why the area is eligible to be a TIF district and describes the proposed projects and activities. The TIF plan also includes the estimated tax increments to be generated and the proposed use of the tax increments. Specific terms for assistance to a private developer are not included in the TIF plan; these terms are part of a separate development assistance contract known as a TIF agreement.

What is the "but-for" test?

Before creating a TIF district, the city council must consider the "but-for" test; this test asserts that the project would not go forward as proposed “but for” the requested assistance. The city council must find that the market value of the TIF development will be higher, after subtracting the value of the TIF assistance, than what would occur on the site if TIF were not used.

How is TIF used to pay upfront development costs?

There is a mismatch between when most TIF costs must be paid versus when tax increment dollars are received. The former occurs at the beginning of the development and the latter occurs after the development is built. Three basic financing techniques are used to finance the upfront costs.

Bonds

The city may issue its bonds to pay these upfront costs and use the tax increment to repay the bonds. Often, extra bonds are issued to pay interest on the bonds (“capitalizing” interest) until receipt of increments begins.

Interfund Loans

The city may advance money from its own funds, such as a development fund or sewer or water fund, and use the tax increments to reimburse the fund.

Pay-as-you-go Financing

The developer may pay the costs with its own funds; the tax increments are used to reimburse the developer for these costs. The reimbursement occurs as property taxes are paid by the property and tax increment is available to make payment to the developer. Under pay-as-you-go financing, the developer assumes the risk that future tax increments will be sufficient to repay the costs.

How long can a TIF district exist?

The duration of a district depends on the type of district. An economic development district can last for nine years; a redevelopment district can exist for up to 26 years. The most common types of TIF districts in Minnesota are the following.

Redevelopment; Renewal; Renovation  

Generally, for a city to create any of these districts, the area must be 'blighted' within the meaning of the state statutes. The area must be at least partially developed and a percentage of the buildings must be structurally substandard.

Housing

The housing project must be intended for occupancy in part by persons or families having low to moderate income.

Economic Development

TIF can be used when 85% or more of the new buildings in the district will be used for manufacturing, storage, distribution (excluding retail sales), certain research and development, telemarketing and tourism.