At Tuesday’s City Council meeting, the topic of the night was tax increment financing—“which is just a thrilling subject for everyone,” joked Stacie Kvilvang, a financial advisor with Ehlers Inc.
Kvilvang’s humor was well deserved. TIF isn’t always easy to understand, and it’s dry even by standards.
Yet TIF is a key redevelopment tool that can both launch projects and cost residents in foregone taxes. It’s also a subject that’s going to occupy a bigger share of Hopkins’ attention as council members go about working on the city’s TIF management plan in February.
Kvilvang took some time Tuesday to offer residents a crash course in TIF basics. Here are five things you should know about tax increment financing.
1. TIF mechanics: TIF takes advantage of increased values that result from redevelopment by “capturing” the extra tax revenue coming in and using most of it within a specific area.
- At the beginning of a project, a property’s value is artificially frozen at its “original tax capacity” or base value. That money continues to go to local governments.
- Most of the revenue from any value over that can then be used to pay for certain project costs.
2. TIF is used to encourage development or redevelopment that wouldn’t otherwise occur: The key phrase with TIF is “but for”—as in, “This project wouldn’t happen but for TIF.” A proposed project must fulfill certain legal requirements to move forward. In general a TIF project must:
- Create or retain jobs,
- Redevelop blighted areas,
- Remediate polluted sites or
- Construct affordable housing
3. TIF money can only be used in certain ways: Laws spell out what TIF money can go toward. Land acquisition, demolition, parking, utilities, administration and financing are fair game. Parks, trails and city buildings are not.
4. Cities can mitigate their risks: Kvilvang said developers aren’t looking to get rich off TIF; they’re just trying to reach a profit point comparable to what they’d see if they were building on an undeveloped site. Still, cities can reduce their chances of getting stuck with a bad TIF deal:
- Payment schedules: Originally, local governments footed the bill for TIF payments. They borrowed the money. If additional revenue were less than expected, they’d be out the money. Now, most TIF payments are “pay-as-you-go.” Developers borrow for the project, and local governments only distribute TIF payments as the tax revenue comes in.
- Look-back provisions: TIF agreements can include “look-back provisions” in which the developer must open up its books and detail that the TIF assistance was actually needed. If the project wound up better than expected, the amount could be reduced. (And if it ends up worse than expected? Well, that’s the risk a developer takes because the city won’t end up paying more because of a look-back provision.)
5. Hopkins has five TIF districts:
- Entertainment: Created for the area near Mann’s Hopkins Cinema 6.
- Oaks of Mainstreet: Created for the townhouse complex near the intersection of Shady Oak Road and Mainstreet.
- Supervalue: Despite the name, this project actually includes the Excelsior Crossings project—which is now the Cargill office complex at Highway 169 and Excelsior Boulevard.
- Marketplace & Main: Created for a mixed-use project at Seventh Avenue and Mainstreet scheduled .
- Hopkins Barrier Free Housing: Created for Sonoma Apartments at 44 Fifth Ave. S.
Kvilvang also explained the basics of city borrowing. to find out five things you should know about city borrowing.