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CHAPTER 13 - ECONOMIC DEVELOPMENT AND SPECIAL PROGRAMS base), the increased rates do not yield more increment. Furthermore, in the twin cities metropolitan area and in the taconite tax relief area, increment may be reduced by the fiscal disparities contribution for the district's properties, if the city elects that option. Note that the excess taxes in this discussion, which may be referred to as "excess TIF" or "base excess," are different from "excess increments" (or "surplus TIF") which are discussed later in this Section .13.01. Increments May Be Attributable to Other Factors as well as New Construction Increments may be attributed to: • Construction of improvements • Overall inflation in property values unrelated to development • Market effects that are attributable to the TIF development, if the properties are in the TIF district. (proximity to a new development, in many cases, will increase the value of surrounding properties.) • Market effects that are unrelated to the TIF development, if the properties are in the TIF districts. (market values in areas around TIF districts may increase and these increases may be caused by factors, such as shifts in locational values or tastes, other than the TIF development. For example, some researchers have observed the tendency of cities to put TIF districts in areas that are already experiencing rising property values.) Other Limitations to Using TIF as a Financing Method Development costs must be paid "up -front" or at the very beginning of the development, but the increased property taxes (increments) are not paid until later and, then, only in modest amounts (relative to the development costs) spread over many years. This creates an imbalance or mismatch between costs and revenues, TIF traditionally overcomes this mismatch by issuing bonds. These bonds pay for: 1, Development cost (e.g., site acquisition); 2. Interest on the bonds until increments are received. The need to pay these interest costs on borrowing, pending receipt of increments is commonly referred to as capitalizing interest. The need to capitalize interest means that increment flows must be larger to pay off this component of the cost. Before 1986, bonds were routinely used as part of TIF financing. These bonds were usually tax exempt, providing a lower interest rate to the city and the developers. The 1986 tax reform made it more difficult to issue tax-exempt bonds for this purpose. This took away much of the incentive for the local TAX INCREMENT FINANCING 13.01 .20 REVISION DATE: NOVEMBER, 2010