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of which are used to finance an activity, are sold to a third party and proceeds are • reasonably expected to be spent within the five-year period (with certain limited exceptions); (3) binding contracts are entered with a third party for performance of an activity, and increment is spent under the contract; or (4) costs are incurred by a "party" and revenues are spent to reimburse a party. The term "third party" excludes the party receiving TIF assistance and the "municipality or the development authority or other person substantially under the control of the municipality." Therefore, clause (4) permits the typical "pay as you go" reimbursement where the initial costs are incurred by the developer within the 5-year period. See Section III.B. Note: the 5-year rule applies only to districts requested for certification after April 30, 1990. M. TYPE OF FINANCING A. Bonds. Bonds secured by tax increments are issued when there is a need for initial capital to finance public or private improvements. Typically, the bonds are general obligation bonds backed by the full faith and credit of the municipality. As long as at least 20% of the debt service on the bonds is reasonably expected to be paid with tax increments, the bonds may be issued without election. If bonds are issued, the authority will typically require that the developer sign an "assessment • agreement," which establishes a minimum market value of the improvements upon completion. Other types of security may also be required, such as a guaranty of debt service in the event of a tax increment deficiency, a letter of credit during the construction period, or other forms. B. Pay As You Go. An alternative to bond financing is a "pay as you go" arrangement with the developer. The developer pays for various TIF-eligible costs initially, and the authority promises to reimburse the developer from tax increment over time as it is generated. The developer(rather than an unrelated bondholder) bears the risk that the increments will be insufficient to repay the costs incurred. This arrangement may be structured as a revenue note or bond issued to the developer, with an interest component to compensate the developer for costs of financing the improvements up front. IV. LOCAL GOVERNMENT AID PENALTY A. Generally. The penalty, set out in Minnesota Statutes, Section 273.1399, applies only to districts requested for certification after April 30, 1990. The penalty is tied to the state school aid formula. When an authority creates a TIF District, the state calculates how much less the school aids would have been had the captured property value been available to the school district. That amount is then deducted from the municipality's local government aid (LGA) and if necessary from the homestead and agricultural credit aid (HACA). • S.;B64549 .:RN-2 -6-