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CHAPTER 13 - ECONOMIC DEVELOPMENT AND SPECIAL PROGRAMS A Minnesota Tax Increment Financing Glossary Administrative expenses are all expenditures of a development authority other than the direct cost of physical improvements, including architectural and engineering fees. They include expenses such as bond counsel and fiscal consultant fees and the development authority's operating costs (employee salaries, overhead, and so forth). M.S. 469.174, subd. 14. The tax increment financing act limits the amount of tax increments that may be expended for administrative expenses. For most districts, the limit is 10 percent of the lesser of the (1) expenditures authorized in the TIF plan or (2) expenditures made for the project. M.S. 469.176, subd. 3. These Hiles apply to the project, rather the district. Special rules apply to districts certified after august 1, 1979, and before July 1, 1982. For districts for which the request for certification was made after July 1, 2001, the limit applies based on the district, not the project, and is the lesser of: (1) 10 percent of expenditures of increment authorized by the TIF plan, or (2) 10 percent of the narrow definition of the increments from the district. These percentage limitations in administrative cost do not apply to county administrative cost under M.S. 469.176, subd. 4h. An assessment agreement binds the developer to a minimum market value for property tax purposes, regardless of the development's actual market value. M.S. 469.177, subd. 8. Assessment agreements are binding on a purchaser of the property; they "run with the land." Minnesota courts have, in several cases, held developers and other property owners to the terns of these agreements. Assessment agreements reduce the risk to the authority and city that the tax increments will not be sufficient to pay obligations of the project (e.g., bonds). Since the liability for property taxes has priority over the mortgage lenders' liens, property taxes generally will be paid even in a foreclosure situation. Although assessment agreements reduce the risk to the city, they do not eliminate it. Increments may still fall short of projections if the legislature changes class rates or the taxing districts' tax rates drop. In addition, temporary cash shortfalls may occur if a developer goes bankrupt and the mortgage lender does not step in immediately to make property tax payments. Blight or blighted areas are redevelopment jargon for areas that contain (or conditions that cause) high percentages of dilapidated buildings or otherwise deteriorating and substandard structures. The term was originally used largely to refer to slum housing and its effects on the quality of housing and commercial structures in adjoining areas. The law requires TIF redevelopment districts, TIF renewal and renovation districts, and HRA project areas to meet statutory tests for blight. The Minnesota tax increment law defines blight reference to the percentage of the district's area that is occupied by buildings, streets, utilities, or similar structures and the percentage of these that are "structurally substandard." see, e.g., M.S. 469.174, subd. 10. But -For Test is actually a finding requirement. Before creating a TIF district or subdistrict, a local government must find that in its opinion the subsidized development would not have happened but for the use of TIF (hence, the term "but -for" test). Capitalized interest is the issuance of additional TIF bonds to pay the interest on the project's debt until increments begin to be received. TIF involves an inherent mismatch in costs and revenues. Most costs are incurred at the beginning of development. However, increments are collected only when the development begins paying increased property taxes --two or more years later. This mismatch can be overcome by borrowing money to cover these interest payments. In T1F jargon, these interest payments are "capitalized." TAX INCREMENT FINANCING 13.01 . 32 REVISION DATE: NOVEMBER, 2010