"The city shouldn't be giving millions of dollars to developers!"
That's the common statement I hear from people who are opposing a potential real estate development. Two things are likely true in that case:
1. The developer likely is requesting Tax Increment Financing (TIF)
2. Those people don't understand TIF!
Tax Increment Financing is an awesome tool to stimulate housing development at little to no cost to the city.
Example: The Birke Apartments in Minnetonka MN
In 2020 the developer Doran Companies wanted to raze a 1980s office complex to build a 175-unit apartment building. To help make the deal pencil out, they requested TIF from the city. Minnetonka awarded them $4.8M in TIF to be paid out over several years.
Let's estimate that the developer will receive a TIF $600K payment each year for 8 years. The kicker is that Minnetonka will pay these TIF payments using the property taxes from the shiny new $48M apartment complex. This tax revenue would have never been realized from the old $3M office building. Also, the developer agreed to keep 35 units affordable @ 60% AMI for 30 years.
Tax revenue breakdown:
2020 Tax Assessment (Office building)
Assessed value: $3.5M
Property taxes: $55K
2023 Tax Assessment (Apartment Complex)
Assessed value: $47.7M
Property taxes: $679K
Property tax revenue minus (est.) $600K TIF payment: $79K
The developer is paid $600K in annual TIF payments out of property tax revenue, with $79K left over each year. So for ~8 years, the city’s tax revenue will look similar to pre-development.
Once the $4.8M in TIF has been fully paid out, the TIF payments stop and the city has a massive new revenue stream forever. Plus they now have 175 units of additional housing, including 35 units with 30-year affordability restrictions!
Market News
Doran Plans New Development Next Door to The Birke Apartments
Doran Companies has closed on the purchase of The Offices at Marsh Run at 11816 Wayzata Blvd. in Minnetonka, Minnesota, and the construction financing to redevelop the decades-old more than 31,000-square-foot office property.
The Doran-designed 197 apartments will replace the existing three-building, two-story office complex. Doran has already begun site prep work, including abatement and demolition, with large-scale construction beginning in January 2024.
Source: RE Journals Doran Companies to demolish office complex and build multifamily property in Minnetonka https://rejournals.com/doran-companies-to-demolish-office-complex-and-build-multifamily-property-in-minnetonka/
Tips & Tricks
Terms:
Tax Increment Financing (TIF) – Tax Increment Financing is a value-capture revenue tool that uses taxes on future gains in real estate values to pay for new infrastructure improvements. TIFs are authorized by state law in nearly all 50 states and begin with the designation of a geographic area as a TIF district. Plans for specific improvements within the TIF district are developed. The TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues. The intent is to enhance the value of existing properties and encourage new development in the district.