The 2023 Tax Bill and Tax Increment Financing – What Minnesota Cities Need to Know

By Schane Rudlang

Put simply, the 2023 Minnesota legislative session was consequential. Beyond the headlines relative to funding available for housing and other projects, there were a number of important clarifications and changes pertaining to both tax increment financing (TIF) and the 4d tax classification for affordable apartments.

Small cities TIF

Cities with a population of 5,000 or less can create TIF districts if they are more than 5 miles from a city with a population of 10,000. The previous threshold was 10 miles.

Office of the State Auditor working group: Technical fixes to TIF law

The 2023 tax bill included changes recommended by a working group convened by the Office of the Minnesota State Auditor (OSA). The statutory changes aligned with and clarified how practitioners have historically implemented TIF law, and also made a few meaningful adjustments.

The definition of “administrative costs” was clarified to include a specific list of allowable expenditures necessary to create and manage a district. While TIF practitioners typically incorporated many of these costs prior to the new legislation, there is now certainty relative to what can (and cannot) be legally included. Insurance and maintenance of property purchased with TIF are specifically allowed, as are legal and fiscal consulting expenses. The law now definitively excludes property taxes and other costs related to a future project, such as demolition, soil correction, and public improvements. In addition, the 10% limitation on “admin” costs was clarified to exclude any increment returned to the county auditor as excess increment.

The tax bill also clarified what TIF revenue can be used to calculate the pooling percentage of a district. Specifically excluded are any amounts returned to the county auditor as excess increment, increment received after obligations have been paid in full, or increment received in violation of the TIF Act. This provision applies only to districts decertified after Dec. 31, 2023.

Additionally, the Six-Year Rule, which requires municipalities to decertify a TIF district when sufficient revenue exists to retire all obligations, was largely rewritten to prescribe the calculation methodology. It also requires that parcels not pledged to a pay-as-you-go (PAYGO) note, bonds, or interfund loan:

• Be decertified from the district by the end of the year; or
• Use the applicable in-district revenue from those parcels to prepay obligations; or
• Accumulate revenue if a city has elected to retain an additional 10% for affordable housing.

Cities are required to remove parcels via a modification to the TIF plan prior to the end of the calendar year in which the above conditions have been satisfied. The modification does not require a public hearing. If TIF was pledged to bonds financing projects outside of the district prior to Aug. 1, 2023, the requirement to remove parcels does not apply.

Finally, if the decertification happens after the county has calculated the TIF for the following year, it allows the county auditor to redistribute the TIF in the same manner as excess TIF. This means the city will only receive their proportionate share of the TIF, which can then be placed in the city’s general fund. Overall, these changes only impact large redevelopment districts with multiple parcels since small or single parcel districts typically pledge more than 75% of TIF to projects.

Affordable multifamily housing tax rate change “4d”

A revision that bears discussion relative to TIF is the change to the property tax rate for affordable multifamily housing projects, also known as Class 4d. The new law uses a single-tier class rate of 0.25% for the entire property value, whereas the tax rate was previously split into two tiers (the class rate for the first $100,000 in unit value was 0.75%, with the remaining unit value above $100,000 at 0.25%).

Prior to this change, a property classified as 100% 4d typically paid 50% of what a market rate project paid in taxes and will now pay closer to only 25%. The new rate shifts the tax burden in a community to the other property types and reduces the potential TIF generated by the project. With lower operating costs, developers should be able to increase their mortgage proceeds to help alleviate all or a portion of an identified financing gap.

Cities will need to assess whether it makes sense to create a TIF district for such projects or leverage other financing tools to fill any remaining gaps. Another option to assist with gap financing for metro-area cities is the new housing sales tax allocation approved by the Legislature this year. This tool could eliminate the need for creating TIF districts for some projects, but the amount available depends on the size of the municipality and will vary greatly.

As with any new legislation, it’s always prudent for cities to consult with legal counsel, and municipal and economic development advisors to thoroughly assess your options, limitations, and opportunities.

Schane Rudlang is a municipal advisor with Ehlers. Contact: srudlang@ehlers-inc.com. Stacie Kvilvang, senior municipal advisor with Ehlers, participated in the OSA working group referenced in this article. Contact: skvilvang@ehlers-inc.com. Ehlers is a member of the League’s Business Leadership Council (lmc.org/sponsors).