HomeMy WebLinkAboutCity Council Packet 01-25-1993 SpecialCITY COUNCIL STUDY SESSION
MONDAY, JANUARY 25, 1993
5:00 P.M.
5:00 P.M. - 5:15 P.M. Dinner
5:15 P.M. I. PLYMOUTH PORT AUTHORITY
History
Powers
Actions to Re-establish
5:30 P.M. H. AVAILABLE TAX INCREMENT FINANCING
STRATEGIES
Fund Senior Citizen Housing Project
Encourage Development in Existing TIF Districts
To Benefit Development Throughout the City (Parcel by
Parcel)
To Direct Development of Downtown Plymouth
6:00 P.M. III. FINANCIAL IMPACTS
6:30 P.M. IV. DIRECTION
CITY OF PLYMOUTH
3400 PLYMOUTH BOULEVARD, PLYMOUTH, MN 55447
DATE: January 22, 1993
TO: Mayor & City Council
FROM: Frank Boyles, Acting City Managef\ 9
SUBJECT: JANUARY 25 CITY COUNCIL STUDY SESSION
Attached is a memorandum from Community Development Director Chuck Dillerud
which provides the City Council with information about the Plymouth Port Authority
and outlines four potential strategies the City Council may wish to consider with
respect to tax increment financing.
I recommend that the City Council discuss the Port Authority issue,direct the staff on
whether or not the Port Authority should be reestablished, the size of the authority, and
who the Council would like to have serve on the Port Authority. The Council could
decide to initiate a seven -person port authority and leave two positions vacant until
these Councilmanic positions are filled.
The Council should review four alternative tax increment uses and direct which, if any,
it would like the staff to further evaluate. The next step would be to more thoroughly
review the project cost and timing against cash needs established by these various
strategies and report back to the Council on financial parameters which will guide these
projects in the future.
The study session should conclude by 6:30 p.m. in order that the Plymouth Forum can
be conducted prior to the City Council meeting.
FB:keb
CITY COUNCIL STUDY SESSION
MONDAY, JANUARY 25, 1993
5:00 P.M.
5:00 P.M. - 5:15 P.M. Dinner
5:15 P.M. I. PLYMOUTH PORT AUTHORITY
History
Powers
Actions to Re-establish
5:30 P.M. H. AVAILABLE TAX INCREMENT FINANCING
STRATEGIES
A. Fund Senior Citizen Housing Project
B. Encourage Development in Existing TIF Districts
C. To Benefit Development Throughout the City (Parcel by
Parcel)
D. To Direct Development of Downtown Plymouth
6:00 P.M. III. DIRECTION
MEMO
CITY OF PLYMOUTH
3400 PLYMOUTH BOULEVARD, PLYMOUTH, MINNESOTA 55447
DATE: January 20, 1993
T0: Frank B le Ac ing City Manager
FROM: Chuck ill Community Development Director
SUBJECT: DISCUSS TOPICS FOR THE JANUARY 25, 1993 CITY COUNCIL STUDY
SESSION
The Council has reserved the evening of January 25 to study several topics
that have been touched on over the past several months regarding
development/redevelopment and related financing. While I have addressed these
topics individually from time to time, it may be beneficial for the purposes
of the forthcoming discussion to briefly address each of the topics and to
provide possible advantages or disadvantages of the strategies as applied to
Plymouth. I have discussed each of these strategies or concepts with both the
City Attorney's office (principally Dan Nelson) and with representatives of
Springstead, the City's financial consultants. Generally it has been found by
our consultants that each of these proposed strategies or actions may be
accomplished within the purview of existing statutes, under certain
conditions.
I. Plymouth Port Authority
The Minnesota legislature, in 1984, adopted special legislation creating
the Plymouth Port Authority. The City Council, on June 18, 1984,
officially established the Port Authority and named Mayor David
Davenport, Councilmember David Crain, and O.J. Heinitz as the initial
three commissioners with terms expiring in 1986, 1988, and 1989.
The organizational meeting of the Port Authority was held on November 29,
1984. At that time the Port Authority Commission adopted bylaws, elected
officers, and generally took care of housekeeping matters.
From my reading of the memorandums and organizational materials from that
period it appears that one of the primary purposes for requesting the
legislature to authorize a Port Authority and then later doing so was the
resulting eligibility for the City to participate in a foreign trade zone
venture that was then underway statewide. Evidently the only
organizations authorized to participate in a foreign trade zone were Port
Authorities. Since no foreign trade zone was ever established I am left
to assume that the opportunity was lost for some reason.
I-
I have been advised by the City Attorney's office the Port Authorities in
Minnesota retain certain powers and capabilities not available to cities
through the other economic development provisions of State Statute. It
is clear to me that the ability of a community to assemble "marginal"
property for redevelopment purposes is broader under the Port Authority
law than it is under related statutes available to cities in general. It
is also my understanding that Port Authorities have a broader ability to
assist in construction of buildings than would cities under other
economic development statutes.
While the City of Plymouth may have many of the same powers and
capabilities for economic development purposes under other State Statutes
I believe it would be prudent for the City to reestablish its Port
Authority and focus its development and redevelopment efforts through the
Port Authority for the following reasons:
1. Economic development and redevelopment is sufficiently complex to
suggest the need for a body of "specialists" to focus strictly on
that activity. While these specialists may also be elected officials
and in all probability would be), when sitting as Port Commissioners
their primary focus would be economic development and redevelopment.
2. The Port Authority, by statutory definition, holds certain powers and
abilities regarding land assembly and redevelopment not necessarily
available to a community through the other economic development
statutes. Without question, there is a reason why the legislature
has established Port Authorities only by special legislation. Port
Authorities are not generally available to any community in the state
such as other economic development powers. As long as Plymouth
already has that statutory authority it would seem wise to play every
card" we have in our efforts toward economic development and
redevelopment.
3. Truly broad based economic development efforts similar to that which
I have described to the Council in an earlier memo regarding the
national transportation concept require the ability to exercise
economic development initiatives both within and outside of the
physical limits of the City. Only a Port Authority has that ability
in this state.
All that would be required of the City Council to reestablish the Port
Authority would be the adoption of a simple resolution appointing Port
Authority Commissioners. The statute provides that the Port Authority
may be made up of either 3 or 7 commissioners which may or may not be
also members of the City Council. Wherein our original Port Authority
was set up as a 3 commissioner organization there is no reason why it
could not be enlarged to 7 commissioners concurrent with the appointment
of those commissioners. I believe that at least initially the City
Council should appoint the entire Port Commission from among its
membership.
2 -
II. Tax Increment Financin
A. Tax Increment Financinq--Fund Senior Citizen Housinq Project
I have attached a lengthy memorandum prepared by the City Attorney's
office regarding this subject. In summary it says that the City
Council could, under certain circumstances, either invest Tax
Increment funds directly in the HRA's Senior Housing project; or,
invest TIF fund balances in bonds that would be issued by the HRA to
finance the construction of the Senior Housing project. As is the
case with many of the topics that will follow, either application of
TIF funds to the senior project will represent a radical departure
from TIF philosophy that Plymouth has adhered to for the past 10
years.
The concept of the direct application of TIF funds to the Senior
project is quite simple. It amounts to the TIF fund "buying down"
some portion of the construction costs for the Senior Housing Project
now estimated in the 5 million to 6 million dollar range). The net
effect would be to reduce the effective capital cost of the project
which would lend additional economic feasibility. This would both
aid in saleability of the bonds for the remaining debt on the
project, and, potentially, contribute to reducing the rent necessary
to service debt.
The second approach to utilizing TIF funds to assist with the Senior
Housing Project is unique in nature. Noting the rather sizeable TIF
fund balances that have been regularly carried year-to-year the City,
through its TIF fund, may wish to directly invest in HRA issued
Senior Housing Essential Function Bonds --at least for a period of
time sufficient for the senior project to establish a "track record"
that will enhance its ability to be favorably financed on the open
market.
Even if we assume that all of the currently programmed TIF projects
will ever happen, it is plain that, at the present time, there will
still remain over 10 million dollars worth of TIF work that will not
have been completed by the Year 1999 --according to the current
Capital Improvement Program. With some adjustment to the Capital
Improvement Program with respect to the years certain projects
undertaken, it would not seem difficult to assure ourselves that
sufficient TIF fund balance would annually exist to support the
investment in all or most of the senior housing bonds that will be
necessary to support the project now contemplated by the HRA. The
rate that the City would receive on those bonds would equal or exceed
the rates that would be available to the City for investment of those
TIF funds anywhere else. The City Attorney advises us that the bonds
would be required to have the G.O. guarantee of the City itself (City
cosigning for the HRA, if you will) for the bonds to be of sufficient
grade to be purchased by the City as an investment for the TIF fund.
The advantages to either of the foregoing concepts would appear to be
obvious. In either case the cost of the Senior Housing Project is
certain to be reduced. In the first case the cost would be directly
3 -
reduced as a result of a TIF grant. In the case of the acquisition
of Senior Housing Bonds by the TIF account there will be 6 figure
savings in bond discount fees to the HRA as well as a significant
savings in the interest rate that will have to be paid by the HRA (as
much as 2 percentage points) without any corresponding reduction in
the interest rate received by the TIF fund investments. In that
respect it would seem to be the ultimate "win/win" situation.
There are however disadvantages to both senior housing/TIF strategies.
They include at least the following:
1. The allocation (or reallocation) of direct TIF funds to the Senior
Housing Project will represent a substantial change of direction for
the Plymouth TIF plan. The type and magnitude of TIF plan amendment
required to accommodate this change of strategy will depend entirely
on whether such an amendment will result in an increase in the amount
of total TIF funds to be spent or simply the reallocation of TIF
funds already contained within the TIF plan. Expansion of the TIF
plan (in terms of dollars to be expended) would prove to be
politically more difficult than simply reallocating funds within the
existing TIF plan and retention of the current maximum plan
expenditure level.
2. The use of TIF fund balances to acquire Senior Housing Essential
Function Bonds on a short/midterm basis could potentially expose the
tax payers of Plymouth to ad valorem "rescue" of a senior housing
project that was not successful. While the odds on this happening
are very minimal since the HRA is approaching the senior housing
project on a very fiscally conservative strategy, some risk always
exists. If the HRA is to sell its senior housing bonds on the open
market without the benefit of a G.O. guarantee from the City Council
Plymouth taxpayers would not be exposed financial difficulties of the
project in the future --the private bond holders would be. That is
why, of course, bonds sold on that basis will command at least 2
points of additional interest, which, ironically, will lead to a need
for a higher rent schedule and "narrow" the project feasibility.
3. Under the TIF bond purchase strategy there is the assumption that at
some point in the not too distant future (perhaps 6 to 7 years) the
TIF fund will need the funds that are invested in the Senior Housing
Bonds, and it will be necessary for the HRA to seek substitute
financing, or the TIF fund to find a buyer for the bonds to free up
the money for TIF projects at that time. The risk certainly exists
that the bond market at the time the TIF fund requires liquidating
its position in the bonds will be "soft" and the bonds will not be
saleable except at a deep discount, and/or alternative financing will
not be available to the HRA for the senior project loan balance at
near as favorable rates as available today. Perhaps a reserve fund
of some sort could be created to cover this eventuality.
B. Tax Increment Financinq--Encouraqe Development in Existinq TIF Districts
I have previously reviewed with the City Council and staff the status of
our current Tax Increment Finance Districts. We currently have several
4 -
Tax Increment Finance Districts made up of one or an aggregation of
parcels within the Industrial/Commercial areas of Plymouth. While there
are individual lots or small aggregation of lots scattered throughout the
industrial areas, three major concentrations of industrial property
remaining within Tax Increment Finance Districts:
1. The Bass Creek Business Park, and the adjacent Astleford property at
169 and Bass Lake Road.
2. The Plymouth Business Center industrial property at 34th Avenue North
and Annapolis Lane.
3. The Parkers Lake Corporate Center at 21st Avenue North and Niagara
Lane.
In all three cases substantial amounts of industrial property remains
fully serviced, but undeveloped. It has been established that there are
no assumptions with regard to development of this vacant property
included in the revenue forecast for tax increments in the latest Capital
Improvement Program. This means that the entire current Tax Increment
Finance plan (as is reflected in the Capital Improvement Program plus the
10 million 1999 item) can be financed from development that has already
taken place in other Tax Increment Districts. This means that any
increments that would be generated from development on any of the vacant
land I have referred to above in exiting TIF Districts would be over and
above that necessary to accomplish the current TIF plan.
It should also be understood that Tax Increment Financing Districts have
a finite life. They do not run on forever, and this is only logical
because the other taxing districts (besides the City) are "locked out" of
any incremental increases in potential tax revenues during the entire
time period the Tax Increment Financing District is in effect.
Essentially, the type of Tax Increment Financing Districts that we have
in Plymouth are available for 8 tax increment years. That is, 8 years in
which tax increments are actually paid. Since most of these districts
were created in the mid -1980's, most will be expiring within the next 2-4
years. As we all know the pace of industrial/commercial/office
development has not accelerated in the same manner as has residential.
Because of this there is a very real chance that a large portion of our
existing Tax Increment Districts will not see development, and therefore
will not realize any tax increments prior to the expiration of the
district. Once a district has expired it can not be renewed or extended.
With these facts in mind I have suggested that it may be prudent for the
City of Plymouth to revisit its policy of the past 10 years with respect
to the application of tax increment through the direct assistance to
private development. Where the City of Plymouth are has been involved in
complex land write-down strategies in two instances (Waterford Park Plaza
and Rockford Road Plaza) we have never in the past, as a matter of
policy, committed a portion of our tax increments to assistance with the
private development that is going to create the increments. I am
suggesting that since we are not counting on the increments from any new
development to support the existing TIF plan of improvements, it may now
be prudent for us to endeavor to provide an incentive for new development
5 -
by pledging a portion of the increment that would be created by such
development to assist in writing down the capital cost of that
development at the "front end"
While I am not necessarily advocating land write-down, the statutes will
allow us to assist the project developer with site development such as
grading, utilities installation, landscaping and parking lot
improvements. We could commit a percentage of the precalculated
increment that the project will generate to the payment of these easy to
track front end improvements, thereby reducing the capital cost of the
project to the developer and the ultimate project tenant.
There would need to be a "program" established so that is assures equal
treatment of all owners of land within existing Tax Increment Districts
with respect to projects that are proposed. We would also have to decide
upon the appropriate percentage of the TIF increment that we would commit
to the private side of the development in advance. In doing this we
should recognize the fact that in some cases very few years remain in
which to collect the TIF, and that a project started in 1993 will not
generate much of a TIF until 1994 or 1995. With this in mind it would
not appear that a commitment of less than 50% of the increment would be
of any real value in terms of encouraging development.
I know the City Council has heard from several industrial developers that
are holding land for development in Plymouth where all of the
improvements have been made and paid for. Many of those developers hold
land that is within one of the TIF Districts that currently exist. I
know also that the Council has been encouraged to proceed with a more
developer oriented TIF program, such as I have suggested above. If it is
the Council's decision to modify our prior policy and proceed with a
program regarding existing TIF Districts as I have outlined above we
could be in a position to begin very soon --within weeks. The key will be
to determine the percentage of TIF increment that we are prepared to
commit to the private side of the endeavor.
C. TIF to Benefit Development throuqhout the Citv (Parcel by Parcel
I have assumed this topic heading to mean the application of TIF to
properties where no Tax Increment District now exists, i.e., the creation
of a new Tax Increment Financing Districts and the modification of our
TIF overall plan.
As I am sure the Council has heard through the various legislative
lobbying organizations and elsewhere, the creation of new Tax Increment
Financing Districts has been severely impacted by actions of the last
Legislature. In effect, what the Legislature has done, is "penalize"
cities that create new Tax Increment Financing Districts by reducing the
amount of State aids received by that city by a percentage of the tax
increment that will be "captured" by the new Tax Increment District.
While there is a complex formula to determine how much penalty to State
aids a city will realize as a result of capturing new tax increments, it
is my understanding that it could amount to as much 30% of the captured
increment. It is my understanding that some communities have,
nevertheless, proceeded with creation of new Tax Increment Financing
6 -
Districts, and covered the loss in State aids through creative charge
back methods to the project. It is also my understanding that the
Legislature will endeavor to plug those "loopholes" at this session.
In addition to the foregoing, the concept of creating new Tax Increment
Financing Districts to assist development in Plymouth on a private
project -by -project basis will likely be of concern to the other taxing
bodies (principally the school districts and the County). These other
taxing entities have become increasingly critical of municipalities
freezing out" increasingly scarce new tax base through the Tax Increment
Financing strategy.
Even considering the foregoing, the option does remain open for the City
to modify its policies and practice with regard to the creation of new
Tax Increment Financing Districts on a parcel -by -parcel basis to more
directly assist individual project development. Many cities continue to
offer this development incentive. For instance, I am told that Apple
Valley currently commits 75% of the forecasted new increment to the
private side of a new project, reserving but 25, for public. This,
however, is done on a "pay as you go" basis, where the dollars are only
available to the private side once the increment has actually been
collected.
D. TIF for Direct Development of Downtown Plymouth
Recently we advised the City Council of a project by the City of Eden
Prairie where Tax Increment funds have been used to acquire a 27 acre
portion of "Downtown Eden Prairie" in raw land status. It is the
intention of the City of Eden Prairie to solicit development of the
parcel and resell the parcel to a single developer who presents a
development proposal that is found to be in the best interests of the
City of Eden Prairie, as it applies to its "Downtown" concept. I have
not heard whether any land write down will result, but this certainly is
a possibility to accomplish the public goal of an integrated downtown.
I have previously suggested to the Council that this may be an approach
Plymouth would wish to take for all or a portion of the area that we
normally consider to be "Downtown Plymouth" (Highway 55 to Vicksburg
Lane, to Rockford Road, to Plymouth Boulevard, and back to Highway 55).
It would appear that the platting and planning of this general area was
premature in relationship to the market, and perhaps faulty in terms of
its lack of a central theme and the division into several two acre
parcels. It strikes me that the City of Plymouth has perhaps even a
better foundation to support use of TIF funding and Port Authority powers
to secure the purchase and assembly of all or a portion of this area
critical to the future of the City; secure a more focused and complete
land planning program for the entire site as an integrated development;
and, market the site to a single or small number of developers on the
basis that the land and site planning will be closely adhered to. The
degree to which the City would impose the prepared plans for the site may
influence the amount of land write down that may be required to remarket
the site to the development community. Any design for this site may
impose certain constraints as to the marketability of the site which must
be compensated for in a write down situation. Many communities consider
7 -
this to be a highly appropriate application of public funds --to ensure
the appropriate development of a highly public portion of the City.
It is implied in the foregoing that there would be essentially two uses
of TIF funds in a Downtown Plymouth application;
1. A relatively short term use to cash flow the assembly, acquisition
and resale of all or a portion of the Downtown Plymouth area.
2. Permanent use of a smaller portion to accomplish the land/site
planning in a greater level of detail than now is available; and, to
write down the selling price of the land back to the private sector
to reflect any constraints that are imposed by the land/site planning
that has been mandated.
With regard to the initial TIF application, the primary concern would be
to, again, be sure that the TIF cash flow in future years would be
sufficiently monitored to assure that the necessary amount of funds is
available to support the acquisition and assembly of the Downtown
Plymouth land. For the entire acreage remaining I can foresee the need
for several million dollars of short term cash flow in support from the
TIF fund. Incidentally, once the funds are expended for the acquisition
of land within a city development district (such as Downtown Plymouth is
in) any repayment of those funds results in resources that are no longer
constrained as to their uses within existing development districts.
The second application of TIF funds for Downtown Plymouth would require
modification of the TIF plan, either to substitute a new use for one of
the uses of TIF funds that is already programmed but not as yet expended;
or, to add a use and a planned financial expenditure over and above
elements of the TIF plan now in existence.
Aside from the disadvantages of use of TIF funds in this manner thcat are
implicit in the foregoing paragraph, a major impediment may be the
philosophical concerns of the public sector for "short circuiting" the
market place in the manner suggested. There are certain to be those that
will question the advisability of the public either getting involved in
the use of this power to assemble land for development and/or providing
mandated land/site planning and offering incentive of land write down for
accomplishment of that plan.
pl/cd/tif.1-20)
ROBERT L. CROSBY
LEONARD M. ADDINGTON
ROBERT R. BARTH
N. WALTER GRAFF
ALLEN D. BARNARD
RICHARD A. PETERSON
ROBERT J. CHRISTIANSON,JR
FRANK J. HALZ
FRANK VOGL
IARINUS W. VAN PUTTEN, JTR
DAVID B. MORSE
JOHN A. BURTON, JR.
JAMES C. DIRACLES
ROBERT L. MELLER,JR•
SCOTT D. ELLER
BEST & FLANAGAN
ATTORNEYS AT LA-tV
CHARLES C.BERQUIST
GEORGE O. LUDCKE
E.JosEPH LAFAVE
GREGORY D. SOULE
CATHY E. GORLIN
PATRICK B. HENNESSY
TIMOTHY A. SULLIVAN
TAMMY L. PUST
BRIAN F. RICE
TRACY J. SAN STEENBURGH
DAVID J. ZUBRE
STEVEN R.KRUGER
JAMES P. MICHELS
PAUL E. KAMINSKI
3500 IDS CENTER DANIEL R.W. NELSON
80 SOUTH 8TH
ZINNEAPOLIS M1
TELEPHONE (612)
TELECOPIER (012)
Direct Dial:
December 21, 1992
Mr. Chuck Dillerud
Executive Director
Plymouth Housing and
Redevelopment Authority
3400 Plymouth Boulevard
Plymouth, MN 55447
Ms. Kathy Aho
Springsted, Incorporated
85 East 7th Place, Suite 100
St. Paul, MN 55101
OF COUNSEL
JOHN R. CARROLL
JAMES D. OLSON
ROBERT M. SKARE
ARCHIBALD SPENCER
CHARLES S. BELLOWS
WARD B. LEWIS
JAMES I. BEST
1902-1988
ROBERT J. FLANAGAN
1898-1974
R E C-, VE0
DEC 22 1992
CITY OF PLYMOUTH
COMMUNITY DEVELOPMENT DEPT.
Re: Plymouth Housing and Redevelopment Authority
Senior Apartments Project, Use of Accumulated Tax
Increment Revenues
Dear Chuck and Kathy:
At our last meeting, we discussed the possibility of
utilizing the accumulated tax increment revenues (the "Tax
Increments") from the existing tax increment financing districts
established by the City of Plymouth (the "City") to assist the
proposed 100 -unit Senior Apartments Project (the "Development") to
be constructed, owned and operated by the Plymouth Housing and
Redevelopment Authority (the "Authority"). This assistance is
available in either of two forms: First, directly through the
expenditure of Tax Increments to pay the costs of the Development;
or second, indirectly by making an investment in the Authority's
bonds from the accumulated Tax Increments. These two alternatives
are further discussed below.
Minnesota Statutes, Sections 469.174 to 469.179 (the "Tax
Increment Act") contain the provisions of Minnesota law pertaining
CINDY J. LARSON
STREET JOHN P. BOYLE
ROSS C. FORMELL
55402-2113 CARYN SCHERB GLOVER
SARAH S.GODFREY
339 - 7121 MARY E. SHEAREN
CATHERINE J. COURTNEY
339-5897 KEITH J.NELSEN
TRACY F. KOCHENDORFER
JEAYNICE M-REDING
SARAH CRIPPEN MADISON
ROBERT D. MAHER
612-349-5649WILLIAM'JOHNSON
December 21, 1992
Mr. Chuck Dillerud
Executive Director
Plymouth Housing and
Redevelopment Authority
3400 Plymouth Boulevard
Plymouth, MN 55447
Ms. Kathy Aho
Springsted, Incorporated
85 East 7th Place, Suite 100
St. Paul, MN 55101
OF COUNSEL
JOHN R. CARROLL
JAMES D. OLSON
ROBERT M. SKARE
ARCHIBALD SPENCER
CHARLES S. BELLOWS
WARD B. LEWIS
JAMES I. BEST
1902-1988
ROBERT J. FLANAGAN
1898-1974
R E C-, VE0
DEC 22 1992
CITY OF PLYMOUTH
COMMUNITY DEVELOPMENT DEPT.
Re: Plymouth Housing and Redevelopment Authority
Senior Apartments Project, Use of Accumulated Tax
Increment Revenues
Dear Chuck and Kathy:
At our last meeting, we discussed the possibility of
utilizing the accumulated tax increment revenues (the "Tax
Increments") from the existing tax increment financing districts
established by the City of Plymouth (the "City") to assist the
proposed 100 -unit Senior Apartments Project (the "Development") to
be constructed, owned and operated by the Plymouth Housing and
Redevelopment Authority (the "Authority"). This assistance is
available in either of two forms: First, directly through the
expenditure of Tax Increments to pay the costs of the Development;
or second, indirectly by making an investment in the Authority's
bonds from the accumulated Tax Increments. These two alternatives
are further discussed below.
Minnesota Statutes, Sections 469.174 to 469.179 (the "Tax
Increment Act") contain the provisions of Minnesota law pertaining
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 2
to tax increment financing and the use of tax increment revenues.
Section 469.176 contains the following limitations:
Subd. 4. Limitation on Use of Tax Increment; General
Rule. All revenues derived from tax increment shall
be used in accordance with the tax increment
financing plan. The revenues shall be used solely
for the following purposes: (1) to pay the principal
and interest on bonds issued to finance a project;
2) . by a housing and redevelopment authority or
economic development authority to finance or
otherwise pay public redevelopment costs pursuant to
Sections 469.001 to 469.047,
The term "public redevelopment cost" is defined in Minnesota
Statutes, Section 469.033, Subd. 1, as follows:
469.033. Public Redevelopment Cost; Proceeds;
Financing.
Subd. 1. Financing Plans Authorized. The entire
cost of a project as defined in Section 469.002, Subd.
12, including administrative expense of the authority
allocable to the project and debt charges and all
other costs authorized to be incurred by the authority
in Sections 469.001 to 469.047, shall be known as the
public redevelopment cost. . . .
The Development will constitute a "housing development
project" within the meaning of Minnesota Statutes, Section
469.002, Subd. 15. A housing development project is also a
project" within the meaning of Minnesota Statutes, Section
469.002, Subd. 12, which defines the term "project" to mean a
housing project, a housing development project, a redevelopment
project, or any combination of those projects. The term "project"
also may be applied to all real and personal property, assets,
cash, or other funds held or used in connection with the
development or operation of the project.
Because the Development will constitute a housing development
project, it is a "project" within the meaning of Minnesota
Statutes, Section 469, Subd. 12. As such, all costs incurred by
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 3
the Authority in acquiring, constructing, equipping and
administration of the Project are public redevelopment costs,
which can properly be paid from the City's Tax Increments pursuant
to Minnesota Statutes, Section 469.176, Subd. 4. Alternatively,
the City's Tax Increment could be used to pay the principal of and
interest on bonds issued by the Authority to finance the
Development since the Authority's bonds would finance a "project"
for purposes of the Tax Increment Act.
However, in both of these cases, the use of the existing Tax
Increments for this kind of housing development project is not a
use contemplated in the budgets for the City's existing tax
increment financing plans (the "TIF Plans"). Although I only have
summaries of the TIF Plans previously adopted by the City, it is
clear that any new use of those existing Tax Increments would have
to be authorized by a modification of those TIF Plans. Under
Minnesota Statutes, Section 469.175, Subd. 4(a), such a
modification to an existing plan could be adopted, but if that
modification increases the total tax increment expenditures (e.g.,
the additional expenditures for the new Senior Apartments
Development are not offset by the elimination of an equal amount
of previously approved tax increment expenditures), the
modification would have to be approved upon the notice and after
the discussion, public hearing, and findings required for approval
of the original plan. Although it is possible for the City and
the Authority to go back through this notice and approval process
for such a modification, the City would have to consider the
political ramifications of exposing itself to criticism from the
county and the respective school districts for altering the tax
increment expenditures at this date, and for the size of the
accumulations of Tax Increments which are now to be used for this
Development. Additionally, certain modifications to preexisting
TIF Plans would subject those TIF Plans to changes in the Tax
Increment Act since the districts were originally created. If it
is the City's intention to follow this alternative, we will
provide you with a more complete analysis of the effect on
existing Tax Increment Financing Districts of such a modification.
The second alternative for the use of the City's Tax
Increments would be structured as a purchase by the City of the
Authority's governmental housing revenue bonds issued to provide
financing for the Development. In essence, the Authority's bonds
would merely be an alternative investment vehicle for the City to
invest its accumulated Tax Increment funds. The essential
question in this analysis is whether the Authority's bonds would
constitute a legal investment for the City's funds. Minnesota
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 4
Statutes, Section 471.56 gives the general rule that funds of a
municipality, from any source, may be deposited or invested in the
manner and subject to the conditions provided in Section 475.66
for the deposit and investment of debt service funds. Minnesota
Statutes, Section 475.66 provides in subdivision 3 as follows:
Subd. 3. Subject to the provisions of any
resolutions or other instruments securing obligations
payable from a debt service fund, any balance in the
fund may be invested.
c) In any security which is (1) a general
obligation of the State of Minnesota or any of its
municipalities or a general obligation of another
state or local government with taxing powers which is
rated A or better by a national bond rating service,
For purposes of Minnesota Statutes, Sections 475.51 to 475.75, the
term "municipality" does not include a housing and redevelopment
authority. However, the 1992 Legislature provided in Minnesota
Statutes, Section 469.034, Subd. 2, for the backing of a housing
and redevelopment authority's housing development project bonds by
a municipality as follows:
Subd. 2. General Obligation Revenue Bonds. (a) An
authority may pledge the general obligation of the
general jurisdiction governmental unit as additional
security for bonds payable from income or revenues of
the project for the authority. The authority must
find that the pledged revenues will equal or exceed
110% of the principal and interest due on the bonds
for each year. The proceeds of the bonds must be
used for a qualified housing and development project
or projects. The obligations must be issued and sold
in the manner and following the procedures provided
by Chapter 475, except the obligations are not
subject to approval by the electors. The authority
is the municipality for purposes of Chapter 475.
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 5
Thus, if the City of Plymouth agrees to back the Authority's bonds
with the City's general obligation, the Authority's bonds would
become a security which is "a general obligation" of a Minnesota
municipality which is rated A or better by a national rating
service. This would make the Authority's bonds a permitted
investment vehicle for the City's accumulated Tax Increments.
Minnesota Statutes, Section 469.034, Subd. 2, goes on to
require that the principal amount of the Authority's bond issue
must be approved by the governing body of the City after public
hearings are held by both the Authority and the City at least 15
but not more than 120 days before the sale of the Authority's
bonds. Paragraph (c) provides that the maximum amount of general
obligation bonds which may be issued and outstanding in the City
equals the greater of (1) one-half of one percent of the taxable
market value of the City of Plymouth or (2) $3,000,000. Paragraph
e) gives the following definition of the term "qualified housing
development project":
e) "Qualified housing development project" means a
housing development project providing housing either
for the elderly or for individuals of families with
incomes not greater than 80 percent of median family
income as estimated by the United Stated Department
of Housing and Urban Development for the standard
metropolitan statistical area or the nonmetropolitan
county in which the project is located. A qualified
housing development project may admit nonelderly
individuals and families within higher incomes if,
1) three years have passed since initial occupancy.
2) the authority finds that the project is
experiencing unanticipated vacancies resulting
in insufficient revenues, because of changes in
population or other unforeseen circumstances
that occurred after the initial finding of
adequate revenues; and
3) the authority finds a tax levy or payment from
general assets of the general jurisdiction
governmental unit would be necessary to pay debt
service on the bonds if high income individuals
or families are not admitted. [Emphasis added.]
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 6
Because the Development proposed by the Authority in the City of
Plymouth will be exclusively an elderly housing facility, no
income limits will be imposed on the Development as a result of
requesting the general obligation backing from the City. In
addition, if in the future the Development experiences
difficulties in generating adequate revenues, the Authority would
be permitted to admit nonelderly individuals and families with
higher incomes if the three conditions specified above have
occurred. Given the foregoing analysis, if the City of Plymouth
is willing to support the Authority's bonds with the City's
general obligation backing, then these bonds would be a permitted
investment vehicle for the City's accumulated Tax Increments.
Two additional analyses must be satisfied before the use of
the City's accumulated Tax Increments is justified. First, as
described in my earlier letter dated November 19, 1992, to Dale
Hahn, a copy of which is attached to this letter, we must conclude
that the accumulated Tax Increments do not constitute "excess tax
increment" for purposes of Minnesota Statutes, Section 469.176,
Subd. 2. Having already reached that conclusion due to the costs
authorized in the City's existing TIF Plans, we also must conclude
that the City's accumulated Tax Increments do not violate the
Five -Year Rule" contained in Minnesota Statutes, Section
469.1763. This section was added to Minnesota law in 1990 to
prohibit cities and housing and redevelopment authorities from
avoiding certain tax increment limitations by pooling their
districts. Subdivision 4 of this Section requires that, beginning
in the sixth year following certification of the district, 75
percent of the revenues derived from tax increments paid by
properties in the district that remain after the expenditures
permitted in Subdivison 3 must be used only to pay outstanding
bonds, contracts to third parties or certain credit enhanced
bonds. Otherwise the tax increment revenues must be returned to
the various taxing jurisdictions and the district must be
decertified. Subdivision 3 provides that revenues derived from
tax increments are considered to have been expended on an activity
within the district only if one of the following occurs: (1)
before or within five years after certification of the district,
revenues are actually paid to a third party; (2) bonds used to
finance an allowable activity are issued and sold to a third party
before or within five years after certification and the revenues
are spent to repay the bonds; (3) binding contracts with a third
party are entered into within five years and the revenues are
spent under these contracts, or (4) costs with respect to the
activity are paid before or within five years after certification
of the district and the revenues are spent to reimburse a party
for payment of the costs, including interest on unreimbursed
costs.
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 7
The limitations of Minnesota Statutes, Section 469.1763,
Subds. 3 and 4 are applicable only to districts for which
certification was requested after May 1, 1988. Based on my
understanding of the City of Plymouth Tax Increment Districts,
only the TIF Plan for Economic Development District No. 7-1 was
certified after the effective date of Minnesota Statutes, Section
469.1763. With respect to the Tax Increments allocable to all of
the other City Tax Increment Districts, the Five -Year Rule will
not apply and the City can proceed as it has before with respect
to those Tax Increments. With respect to District No. 7-1, we
will have to comply with the foregoing requirements, but we are
still within the initial five year period after certification of
that District so we would be able to enter into the necessary
contracts or incur the necessary costs if we have not already done
so in order to avoid any claim that the City has not expended its
Tax Increments on a permissible activity within District No. 7-1.
Based upon the foregoing analysis, if the City is willing to
pledge its general obligation behind the Authority's bonds to
finance the Development, the City would be able to invest its
accumulated Tax Increments in the Authority's bonds as a permitted
investment for City funds. Without such a pledge by the City,
however, the Authority's bonds would not on their own be a legal
investment for the City's Tax Increments. It is ironic, however,
to conclude that the City, as investor (the holder of the
accumulated Tax Increments), would be required to rely upon the
general obligation backing of the City, as general obligation
guarantor, of the Authority's bonds. Such a general obligation
guaranty would only be called upon if necessary to pay principal
and interest on the Authority's bond issue, while the City as
holder of these bonds would have little incentive to ever make
such a call on its general obligation backing. Such a situation
should make the argument for granting the City's general
obligation pledge much easier than if the Authority's bonds were
held by an outside third party.
Finally, in connection with the placement of the Authority's
bonds with the City, it has been proposed that the Bonds be
renegotiated, refinanced, or sold at a future date to a new third
party bondholder after the Project shows an operating history
sufficient to support debt service and ongoing operating
expenses. One potential problem with the City as bondholder is
that the City cannot rely upon the Authority to return to the City
any principal of its investment earlier than such a refinancing,
and the principal amount of the City's investment would be locked
up for an initial period of presumably four to seven years. If
Mr. Chuck Dillerud
Ms. Kathy Aho
December 21, 1992
Page 8
the City's capital expenditure needs for its TIF Plans show that
this amount will not be required during this four to seven year
period, and if the City is willing to run the risk that it may
have a difficult time refinancing these Bonds unless the City
keeps its general obligation backing behind them, this structure
could seriously restrict the liquidity of the City's investment of
its accumulated Tax Increments.
Please feel free to contact me after you have had a chance to
review this letter. I am sure that a number of issues raised in
this letter will have to be discussed among the various City
representatives and outside consultants and I look forward to
working with you in the near future toward the final structuring
of this issue.
Very truly yps, r;
Daniel R. W. Nelson
DRN:rsr:0857v
Enclosure