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The approximate location of the 20 tax increment financing (TIF) districts created in Mitchell since 1995. Thirteen are still active. (Daily Republic graphic)

Do developers need all of this help?

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On a bare stretch of land in western Mitchell, Chuck Mauszycki Sr. saw opportunity. “It was just an empty piece of land that really wasn’t very usable,” Mauszycki said. “We needed to move some dirt around.”

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In the early 2000s, the land directly west of the state Highway 37 bypass was, as Mauszycki saw it, prime for commercial development with seemingly more and more traffic on the four-lane road each year. “I thought that it was an excellent place for a lot of things,” he said.

But there was a problem. The land lacked even the most basic utilities necessary for any development to occur — streets, sewer and water.

“It was such a large piece of land that needed so much,” he said. “I realized that it was going to be hard to get it going.”

To pay for the infrastructure necessary for any development to begin, Mauszycki convinced local officials to grant him a development tool known as a tax increment financing district, or a TIF district. In a TIF district, financing is issued for infrastructure improvements, like roads or sewers, to aid development within the district, and property tax dollars are diverted from local taxing entities to pay off the financing. Rather than paying all the development costs himself, Mauszycki was given access to more than $3 million in financing, with up to 20 years to pay it off using the new and higher property taxes he hoped the TIF would generate.

He was among the first to use the tool in Mitchell, but the practice has since become commonplace. There have been 20 TIFs created in and around the city. Some say those TIFs have aided business recruitments and expansions that might not otherwise have happened. Others say the projects either would have happened anyway, or shouldn’t happen at all, and the TIF financing amounts to government handouts to developers.

Lately, a new concern has surfaced about how often TIFs are used in Mitchell. Because there are 13 active TIFs in and around the city, more than $800,000 in Davison County property taxes has been diverted to TIF payments so far this year. Mitchell’s city government, meanwhile, has about $10 million of outstanding TIF debt that counts against its overall debt limit and could prevent some city projects from receiving financing.

TIFs defined

In a TIF, new property tax revenues from development — or higher tax revenues, in some cases, because of improvements made in the district — are captured for an agreed upon period of time to pay off the initial financing. Those new or higher tax revenues are known as tax increments.

The base property taxes that were being collected prior to the creation of the TIF district continue to be split among local taxing entities during the life of the TIF. In Mitchell, those include the city of Mitchell, Davison County, the Mitchell School District and the James River Water Development District.

“The taxes that are being collected as it sits right now continue to be collected in a normal way,” said Bryan Hisel, executive director of the Mitchell Area Chamber of Commerce and Mitchell Area Development Corp. “That’s the beauty of tax increments.”

Critics, though, point out that the new and higher property taxes are diverted from local taxing entities during the life of the TIF, for up to 20 years, to pay off the financing. Schools are the one exception. The Mitchell School District’s share of the new and higher taxes in a TIF district is used to pay off the financing, but the state reimburses the district for those captured property taxes. The state does not reimburse cities, counties or water districts.

During last June’s Mitchell Board of Education election, then-candidate Rod Hall openly criticized the use of TIF districts. Hall claimed too much tax revenue is diverted during the life of TIFs.

Hall, 85, is a former state legislator who spent 14 years as a teacher and school administrator, and later worked as an educational consultant in South Dakota and Iowa. He also served one term on the Mitchell school board from 2002 to 2005.

Another of his criticisms is that as a TIF develops — with residential housing, for example — the demand for services from residents in the TIF district increases, but the tax money needed to support those services doesn’t become fully available to local governments until the TIF financing is paid off.

That, Hall said at the time, places an undue burden on taxpayers outside of the TIF district to support those inside the district.

The amount of property taxes captured by TIFs locally has increased in recent years. According to the Davison County Auditor’s Office, TIFs in Mitchell and Davison County captured $676,488.72 in 2012, nearly a 28 percent increase from 2011, when TIFs collected $529,289.17.

In 2013, TIFs have already captured $801,120.04 locally, already an 18 percent increase from 2012.

When development is slow

The city created Mauszycki’s Westwood TIF district in 2005 with the intention of financing $3.3 million worth of infrastructure improvements to aid development on the land.

As with all TIFs, Mauszycki had five years in which to spend the money.

But development in the area was slow, and after five years only about $1.1 million of the $3.3 million was spent, Mauszycki said. With little new development and no reason for Mauszycki to continue spending, he never received the remaining money from the city.

To bring developers into the area, Mauszycki said, the price of the land was cut by as much as 10 percent in some cases.

There was some development in the area, as several businesses, including Floor to Ceiling, Big Dog Concrete and Verifications Inc., benefited from the infrastructure. Verifications, a human-resources services company, has since shut down its operation in Mitchell. Avera later agreed to lease half of the former Verifications Inc. building for a new payment center the health care company has opened in Mitchell.

“I honestly don’t think that anything would have happened without the TIF,” Mauszycki said. “I don’t see how it financially could.”

Commercial development happens at a slow and deliberate pace, Mauszycki said, especially in Mitchell.

“We grow maybe at a decent rate for our population, but we don’t grow at a rate of a Sioux Falls,” he said.

Davison County records show the Westwood TIF has captured nearly $300,000 in taxes since it began collecting in 2007.

In June, the Davison County Commission approved the creation of a TIF to fund $3.6 million worth of infrastructure for the Pheasant Ridge apartments, located on land owned by Mauszycki west of the state Highway 37 bypass, along Cemetery Road.

The Pheasant Ridge TIF overlaps a large portion of the Westwood TIF. In the case of overlapping districts, the earlier district is paid off first.

The Westwood TIF is scheduled to be paid off in 2024, but due to the new TIF district and development in the area, it is possible it could be paid off sooner, according to Don Petersen, an attorney at the Mitchell law firm Morgan Theeler who frequently works with developers on TIF districts.

Without the Westwood TIF, Mauszycki said, that area would likely still be vacant.

“Tomorrow looks a lot better because of what we got to do,” he said.

Risk vs. reward

Other local developers have had similarly rocky experiences when development in a TIF district happened more slowly than expected.

In 2004, a TIF district was created to finance $1.05 million worth of infrastructure — streets, storm sewers, curb and gutter, and water and sewer lines — for a housing development near Wild Oak Golf Course. At the time, developers said the new and higher property tax revenues would pay off the financing within 10 years.

But in late February, the developers, including Wayne Puetz, of Puetz Corp., approached the Davison County Commission to discuss the possibility of an extension, which would allow the developers more time to pay off the financing.

According to Puetz, approximately 35 of the 100 lots in the housing development have been sold, at prices that range from $30,000 to $60,000.

But development has progressed slower than anticipated, Puetz said in an email reply to The Daily Republic, and it could be another two years — 12 years total — before the TIF generates the full $1.05 million.

“It has been a little slower than hoped, primarily due to the worst recession since the Great Depression,” he wrote.

Puetz said the request for an extension has been postponed, but could be renewed once developers have a clearer idea of how much property tax was collected by the TIF this year.

The Wild Oak TIF is scheduled to expire at the end of 2014.

The cost of the infrastructure for the housing development was actually $1.4 million, with developers picking up the cost not covered by the TIF, Puetz noted.

Without the TIF, the housing development never would have been built, he said. If developers had paid for the infrastructure themselves, Puetz said, at least 65 percent of the lots would have to be sold before they could even break even on the project.

“In short, the risk was not worth the reward,” Puetz said.

Despite the slow pace of development, Puetz said the new and higher property taxes will eventually be of great benefit to the county.

In 2003, prior to the development, the property taxes on the land were approximately $2,500, Puetz estimated. Now, he said, the property taxes exceed $175,000, and will likely exceed $200,000 by the time the TIF expires.

“You tell me, is this good for the people of the city of Mitchell and Davison County?” he said.

Assigning the risk

To get ahead, developers have to take risks, said Toby Morris, of Pierre, senior vice president of Dougherty & Co., an investment banking firm.

“You know what you call a developer that doesn’t push the envelope?” he said. “Broke.”

TIF districts are typically financed in one of two ways. A private developer can secure a loan from a lender and use the new and higher tax revenues to pay off the loan, or a public entity can finance the TIF district on its own and use the taxes to pay off its debt.

Whoever secured the initial financing — the developer or the public entity — is at risk if the TIF district fails, Morris said.

“My recommendation is always have the developer borrow the money,” he said. “Put all the risk on them.”

In a developer-financed TIF district, the developer is still liable to pay for whatever portion of the debt is still owed even if the TIF district doesn’t generate enough new or higher taxes. “That’s the risk the private sector takes,” he said. The public entity’s only obligation in a developer-financed TIF is to collect and distribute the tax increment. “The TIF is just a reimbursement,” Morris said.

If a developer is unable to pay the debt incurred as a result of the TIF, the public entity is not liable to pay that debt, according to Morris.

“That’s between the lender and the developer,” Morris said.

As TIF districts have grown in popularity, public entities became more inquisitive and looked closer at their agreements with developers.

In many cases, Morris said, it’s hard for public entities to know whether a TIF district is actually necessary for development to happen.

“Economic development is emotional,” he said. “You just have to look at the data on everything that is presented to you by a developer.”

Whether certain projects in Mitchell would have gone forward without the aid of a TIF is difficult to say, said Mayor Ken Tracy.

“To assist a developer in ensuring a project goes forward I don’t think is something negative as far as the city is concerned,” Tracy said.

Debt limit concerns

Approximately $10.23 million of Mitchell’s projected debt at the end of 2013 is expected to be due to 13 active TIF districts, all created in the city since 2005, according to a one-page report on the city’s debt presented at the annual budget hearings in August.

The city’s remaining debt limit — the amount of additional debt the city is legally allowed to incur based on the 5 percent debt limit imposed by state law — was $9.54 million at the end of 2012, but is projected to fall to $6.53 million by the end of the year.

The city’s total debt within the 5 percent debt limit, including interest, is projected to be approximately $28.14 million by the end of the year. If accurate, that means TIF districts will account for approximately 36 percent of the city’s total debt within the 5 percent debt limit at the end of the year.

“I think the TIFs that have been awarded by the city have benefited the city as a whole,” Tracy said. “I think there are probably some of these projects that would not have taken place without TIFs.”

Still, Tracy said the city will be limited in the amount of additional debt it takes on in the near future.

“It’s going to take a little bit of time for us to get to a level where we’re going to be able to do TIFs,” he said.

The city’s shrinking debt limit can be attributed in part to the amount of TIFrelated debt, but also to the $13.9 million in bonds the city sold in December and January to pay for the second sheet of ice at the Mitchell Activities Center, the expansion and renovation of the Corn Palace, the renovation of the Mitchell Public Library and the construction of a new city hall.

The city’s projected debt limit has hurt its ability to take on additional projects in the near future, Tracy said.

“You’re always going to have to pick and choose how you’re going to use the money,” he said. “We can’t have everything we want all at once.”

A useful tool

In 1995, Hisel, executive director of the Mitchell Area Chamber of Commerce and Mitchell Area Development Corp., was involved in the creation of the city’s first TIF, used to finance $843,000 worth of infrastructure improvements to aid the development of the Graphic Packaging plant in western Mitchell.

The Graphic Packaging facility now has an assessed value of approximately $5.9 million, according to the Davison County Equalization Office, and employs 225 people. The TIF that was used to aid the development has expired.

“Now those tax dollars go directly to the county, city and the school district,” Hisel said.

Hisel noted the amount of property taxes paid to public entities is not reduced when a TIF is created. There seems to be a misunderstanding that developers and businesses unfairly benefit from TIFs, he added.

“There is no tax break for them,” he said. “They pay their property taxes just like everyone else.”

Hisel also pointed out that the infrastructure built with those taxes is publicly owned, even if it was built to aid private development.

“This isn’t building their buildings. This isn’t paying their employees,” he said. “All they get is the infrastructure.”

In some cases, though, TIF funding does help buy land. A TIF district created in 2007 to help Vantage Point Solutions with infrastructure for its new building, for example, included $300,000 for land.

Public entities should not be concerned with the property taxes captured during the life of a TIF district, Hisel said. Instead, they should look forward to the additional taxes that will likely be collected once the TIF district ends.

“I think we’re building a property tax base for the future,” Hisel said. “We shouldn’t be looking short-term; we should be looking long-term.”

Mitchell has grown, in part, because the city has strategically used TIF districts to encourage development and expand infrastructure, Hisel believes.

“It’s just a good tool to get things done,” he said.

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