What is tax-increment financing?
Tax-increment financing, or TIF, allows a city to use the additional property taxes generated by a new development or a redevelopment project to pay for certain development expenses.
With TIF, a city secures the additional property taxes, or increment, generated by the redevelopment. The increment is then returned to the developer for a period of time to finance the development costs.
In the case of the East Brainerd Mall redevelopment project, Oppidan Inc. has requested about $2.5 million in TIF over 15 years, though the final mall evaluation is not known and the Legislature can change how property taxes are calculated.
The East Brainerd Mall, pending a public hearing and council approval of a TIF request by Oppidan Inc., will be renovated into a strip mall.
Oppidan Inc., a merchant development company based in Minnetonka, has entered into a purchase agreement to buy the mall and -- pending a public hearing sometime in May and final city council approval of Oppidan's TIF request -- will proceed with plans for a $12,125,000 redevelopment project.
"It is the location potential that draws a developer to that site," said Paul Tucci, of Oppidan.
With the exception of J.C. Penney, Oppidan's plans call for the mall to be demolished. A Cub Foods will be built where Montgomery Ward used to stand, and the space between Cub Foods and J.C. Penney will be converted to retail space with outdoor entrances -- a sort of strip mall.
There will also be two buildings constructed for retail space on the south edge of the parking lot, and Oppidan has been working with the Brainerd School District to build space for the Early Childhood Family Education Center behind the mall, with an access point in the front of the building.
The base tax payable for the East Brainerd Mall today is about $80,000.
If the mall is redeveloped by Oppidan at a projected cost of $12,125,000 the future property value after redevelopment is estimated to be $12,600,000.
Oppidan's plans will be taken to the county assessor, who will assign a square-foot property value based on those plans.
Based on a tax rate of 2.4 percent for the first $150,000 of the future property value and a tax rate of 3.4 percent on the remaining $12,450,000 the tax capacity would increase to an estimated $426,900.
The "increment" in tax-increment financing is derived by subtracting the current tax payable -- about $80,000 -- from the estimated future estimated tax of $426,900 to get $346,900 for increment.
Over the 15-year life of the TIF, the current $80,000 base tax would always be paid to the city, county and school district, regardless of how much increment the redevelopment creates.
Taxes are currently divided 41 percent to the school district, 32 percent to the city and 26 percent to the county.
One percent goes toward other taxing jurisdictions, like the Brainerd Housing Redevelopment Authority and Region 5.
If approved the TIF agreement would be "pay-as-you-go," meaning the developer will absorb all costs during the construction period, and the TIF agreement would go into effect in 2003.
In total, depending on how much TIF is generated, Oppidan could see about $5.7 million in local subsidy through the 15-year TIF and local contribution. It is the biggest TIF request the city of Brainerd has received, but it is not unprecedented.
"This is fairly large redevelopment property and costs of this type of a project inevitably are going to be bigger," said Steve Bubul, an attorney with Kennedy and Graven, Minneapolis, the city's bond counsel. "But it's fairly similar to what you'd see in other cities for a project of this size."
Under TIF law, Brainerd taxpayers have to provide a local contribution of 5 percent of the net increment generated -- or $19,800 per year for 15 years, the length of the TIF district.
City officials have discussed a way the local contribution cost could be offset. The Brainerd City Council gave conceptual approval to the TIF application contingent on two things: the length that Oppidan could collect TIF would be 15 years, instead of the 20 Oppidan requested. The maximum on redevelopment is 25 years.
Oppidan had to buy 2.37 acres of land the city owns in front of J.C. Penney. The land was appraised a little over a year ago at $300,000. Invested at 6 percent interest, the interest income from the 2.37 acres -- which could be higher than the previous appraisal -- could be used to help offset Brainerd's local contribution.
TIF has not been without its detractors. Bob Olson, Brainerd City Council and Economic Development Authority member, said he doesn't support TIF when it is used for fast-food restaurants, drug stores or newspapers. Instead, he said, he would like to see it used in the way it was originally intended, to help clean blighted areas and provide services for industry.
There are several types of TIF districts: redevelopment, renovation and renewal, economic development, soil condition and housing. The East Brainerd Mall project would be a redevelopment district.
There are several qualifications that need to be met to qualify for one of the TIF districts. Since 1990, economic development districts have been restricted to manufacturing and related activities, meaning businesses such as Menards and Wal-Mart looking to develop on bare land are not eligible to receive TIF assistance, the office of the legislative auditor reported.
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