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CHAPTER 13 - ECONOMIC DEVELOPMENT AND SPECIAL. PROGRAMS For districts which were certified on or after January 1, 2005, and before April 20, 2009, the four-year "knockdown" rule is increased to six years. Five -Year Rule in TIF The five-year rule essentially requires development activity for a TIF district to be finished within a five-year period that begins with certification of the district's original tax capacity. M.S. 469.1763, subd. 3. After this five-year period has expired, increments may only be spent to pay off obligations that were incurred to fund worlc done during the five-year period. When these obligations are paid (or enough money has been collected to pay them), the district must be decertified. M.S. 469.1763, subd, 4; 469.177, subd. 12(4). The Five -Year Rule Does Not Apply to AH TIF Districts. It only applies to districts where the request for certification was made after April 30, 1990, the effective date of the statute imposing the rule. The five-year period begins with certification of the original tax capacity of the district by the county auditor. This will generally occur within a short time after the authority submits a request to the auditor. The period ends five years and one day after this date. After the Five -Year Period In general, the five-year rule requires that the activities on which increments will be spent must be completed within the five years - i.e., land must have been acquired, contractors must have been paid to clear the land, public improvements installed, and so forth. However, the costs may have been financed (e.g., bonds issued) and increments may be used after the five-year period to pay off the financing. After the five-year period has run, increments may be spent only on four items: 1. To pay bonds that were issued during the five-year period, if the bond proceeds were spent to fund the activity within five years. This five-year period can be extended, if the proceeds are spent within "a reasonable temporary period under the federal tax exempt bond arbitrage rules," I.R.C. § 148(c)(1). Generally this allows up to a six-month extension from the date of the bond sale. 2. To pay binding contracts with a third party (i.e., someone other than the developer or owner of the property). Again, the activity financed under the contract must have been performed within the five-year period, 3. To reimburse the developer or owner of the property for costs incurred, if the developer or owner incurred the costs within the five-year period. This covers "pay-as-you-go" type financing arrangements. 4. To decertify the district by defeasing the bonds ("defeasing" means setting aside money in a dedicated account to pay future bond obligations or pre -pay contracts). In many instances, TIF districts produce more increment than is needed to pay for the development or redevelopment as originally conceived. Development authorities have tended to use these "surplus" increments for other purposes, rather than to decertify the TIF districts before their maximum duration limits. Both of the legislative auditor's program evaluations of TIF have pointed this out as a policy TAX INCREMENT FINANCING 13.01 -24 REVISION DATE: NOVEMBER, 2010