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City of RRIbISHVHnIE Tax Increment Financing (TIF) Minuemts, USA Overview (January, 2006) What is TIF? Tax Increment Financing, or TIF, is a financing tool that is designed to advance public development. TIF was first introduced in 1946, but was not widely used until the 1970's, when many federally assisted housing and urban development programs were phased out. Later, in 1979, the MN Legislature created the Tax Increment Financing Act. The TIF Act, while amended numerous times, remains the basis of all TIF use today. Tax increment is the difference between the property taxes paid on a parcel of land before development, and the increased property taxes created by the new development. The additional, or incremental, property taxes are used to pay for the extraordinary costs of the new development. Public Purpose and `But For' Test In order for TIF to be used, a jurisdiction must establish a public purpose and meet what is called the `but for' test. The public purposes for which TIF can be used include, but are not limited to; creating jobs, redeveloping blighted areas, constructing affordable housing, or cleaning up contaminated soils. The primary objective of TIF is to encourage certain types of development or redevelopment that would not normally occur without the use of TIF. It must be established that `But for' the use of TIF, the project would not occur. Why is TIF Needed? TIF is needed when the marketplace is unwilling to provide the desired development or redevelopment. As an example, let's assume the City has a particular area with two lots adjacent to each other. The first lot contains a viable business that pays $5,500 in annual property taxes. The second lot contains some contaminated soils and remains vacant of any business because the general marketplace has determined that the soil cleanup costs would make it cost -prohibitive to develop. To explain why lot #2 is cost -prohibitive to develop, a hypothetical example is shown below. In this example, the presence of contaminated soils results in a net loss to the developer — hence they would not normally develop the lot `but for' the presence of public assistance. If the City is willing to pay for the soil cleanup costs, the development would be more likely to occur. www.cityofroseville. com Page' of `Clean'Lot Contaminated Lot Cost to purchase the lot $ 100,000 $ 100,000 Soil cleanup costs - 50,000 Development/construction costs 1,000,000 1,000,000 Total costs $ 1,100,000 $ 1,150,000 Estimated resale value of the lot 1,125,000 1,125,000 Net profit loss) $25,000 ($25,000) In this example, the presence of contaminated soils results in a net loss to the developer — hence they would not normally develop the lot `but for' the presence of public assistance. If the City is willing to pay for the soil cleanup costs, the development would be more likely to occur. www.cityofroseville. com Page' of