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Expert advises TIF caution

Counties and cities using tax increment financing must demand accountability from developers, economic development specialist Toby Morris told government leaders Tuesday at the Davison County Courthouse in Mitchell.

"If a city or county is going to pass a TIF, they should want accountability on the developer's side. It's a public-private partnership," he said. "If a city or county is going to issue a TIF, then developers need to fulfill their obligations in a timely fashion."

He attended at the request of Equalization Director Kathy Goetsch.

Morris, a senior vice president with the Sioux Falls branch of Dougherty & Co., a Minneapolis-based investment banking firm, gave government leaders a primer on tax increment financing as part of the county commissioners' regularly scheduled meeting.

TIFs use tax money to finance improvements within defined district boundaries. For example, a TIF might be used to build streets or curb and gutter, or even to help acquire land in a proposed development. Money flowing to those improvements doesn't go back to the local taxing entities until all of the TIF projects are paid off or the TIF expires.

TIFs have been used extensively in Mitchell -- so much so that recently, the city asked the county to create some TIFs within city limits to protect the city's dwindling debt capacity.

Among those present at Tuesday's meeting were Mitchell Mayor Ken Tracy, City Planner Neil Putnam, county planning commissioners Bruce Haines and Brenda Bode, and Planning and Development District III Planner Brian McGinnis.

Counties and municipalities should be in the driver's seat when TIFs are being developed, Morris said.

They need to be wary of being managed by veteran developers and they must be ready to ask the right questions of those developers who are less experienced.

By law, TIFs cannot be longer than 20 years, but realistically, said Morris, they rarely go beyond 18 years and some may be as brief as six or seven years.

The involved government is doing a TIF because it wants a manufacturing or housing project completed within a specified time, he said, and those development timelines should be spelled out as part of any TIF development agreement.

It is up to the governments involved to make sure infrastructure improvements are made in a timely fashion. If timelines are missed, he said, "someone should be held accountable."

If developers do not adhere to the TIF agreement, the city or county can legally withhold TIF tax revenues.

"The government is in the driver's seat," he said. "You decide on the terms."

He said governments need to be wary of excessive fees and overly complex agreement provisions that don't pass the common sense "smell" test.

"This isn't something someone should use to come in and get rich," he said.

Agreements should also clearly spell out what would happen to TIF tax money if a project is sold before the TIF period is ended, perhaps by specifying that a TIF should be dissolved if a property is sold.

Also, since TIFs are expensive to set up in terms of time and money, Morris recommended setting minimum TIF amounts of $500,000 to $1 million to make the effort worthwhile.

"Whether a TIF is $200,000 or $1 million, you'll still have the same headaches," he said.

He said government should be aware of costly administrative fees and should not be afraid of charging to cover their costs.

Morris said his introduction to TIFs as a development tool began in the 1990s when he worked with the Janklow administration's Governors Office of Economic Development and continued to work with TIFs under the administration of former Gov. Mike Rounds. He has been involved with the planning of about 50 TIFs during his career.

Morris said that in a developer-backed TIF:

--The amount of a TIF is set by the city or county.

--The length, or term, of a TIF is set by the city/county.

--The developer must project future development to determine a realistic TIF amount and cash flow.

--If a TIF does not have an adequate tax flow, that is the responsibility of the developer borrower.

--A TIF expires when the full amount of the TIF has been paid, or when the end of the term is reached -- whichever comes first.

--The city/county is not liable for the developer's debt.

All TIF requirements and demands must be spelled out in advance, said Morris, who recalled one case in which a developer started a project and then unsuccessfully approached the county for TIF relief -- arguing that the project would be good for the community.

"It's easy to be pushed around a bit in the name of economic development," he said.