Other Tax Incentives
Tax Increment Financing
In Minnesota, cities and development authorities may use tax increment financing to help finance costs of real estate development.
TIF uses the increased property taxes that a new real estate development generates to finance up-front costs of the development. In Minnesota, TIF is used as an incentive to:
- Encourage developers to construct buildings or other private improvements
- Pay for public improvements, such as streets, sidewalks, sewer and water, and similar public infrastructure improvements that are related to the development.
The city, county or development authority uses TIF to pay qualifying costs – land acquisition, site preparation, and public infrastructure, for instance – incurred for the project.
There are three basic financing techniques used to finance upfront costs:
- Bonds. The authority or municipality (city or county) may issue its bonds to pay these upfront costs and use increment to pay the bonds back. Often, extra bonds are issued to pay interest on the bonds (“capitalizing” interest) until increments begin to be received.
- Interfund loans. In some cases, the authority may advance money from its own funds (e.g., a development fund or sewer and water fund) and use the increments to reimburse the fund.
- Pay-as-you-go financing. The developer may pay the costs with its own funds. The increments, then, are used to reimburse the developer for these costs. This type of developer financing is often called “pay-as-you-go” or “pay-go” financing.
Minnesota authorizes development authorities to use TIF. These authorities are primarily housing and redevelopment authorities (HRAs), economic development authorities (EDAs), port authorities, and cities.
In addition, the “municipality” (usually the city) in which the district is located must approve the TIF plan and some key TIF decisions. TIF uses the property taxes imposed by all types of local governments. But the school district and county, the two other major entities imposing property taxes, are generally limited to providing comments to the development authority and city on proposed uses of TIF.
Development authorities make almost all of the TIF decisions, at least initially. Their powers to do so are determined by both the TIF Act and by the separate laws that authorize and grant powers to the authority. The authority approves the TIF plan. The municipality must also approve the plan. The plan sets out the important parameters for the use of TIF:
- The boundaries of the district and the project area – where tax increments will be collected and spent
- The type of district
- The purpose for the TIF district
- A budget specifying what increments will be spent on
- Financing plans (use of bonds versus pay as you go financing and so forth).
The authority carries out this plan and makes the day-to-day decisions about spending increments under the plan. The authority negotiates development agreements with developers. It may contract for construction of public improvements or other costs. It typically hires the consultants, lawyers, and other advisors that shape many of the plans and decisions.
Minnesota allows several different types of TIF districts. The legal restrictions on how long increments may be collected, the sites that qualify, and the purposes for which increments may be used vary with the type of district.