Tax Increment District -- How It Works

At last week's meeting, the Madison City Commission approved a Tax Increment District (TID -- also known as a Tax Increment Finance District) to support the development of 12 housing units -- 5 houses, 2 duplexes, and 1 triplex -- on land owned by local developer Randy Schaefer.

The Madville Times has offered its opinion on the design of the development (culs-de-sac are so 1970), and further opinion is forthcoming. But first, let's take a moment to describe just how this tax increment finance district works (Quit your groaning in the back row, there! And take out your notebooks...).

Right now, the land in TID #1 is mostly undeveloped (see 2007.11.19 City Commission agenda packet, p. 64 for grainy map, p. 65 for proposed development). The district does appear include the current Schaefer Plaza, a strip mall with Schaefer's insurance office and some other businesses, plus the Second Street Diner. There is one house on the property as well.

Here's the plan: the city takes out a loan for $203,485. The city uses the money to acquire and demolish the one house in the designated area (that lot provides access to Grant Avenue); build water, sewer, and street with curb and gutter; and cover fees for the contractors, engineers, and lawyer, as well as capitalized interest. Then Schaefer sells lots so other folks can build and own their own little piece of Madison heaven.

Here's the TID twist: Randy Schaefer doesn't have to pay off the loan. As the land is developed, its value will go up. Schaefer projects that, once all the planned structures are up, the TID will generate $29,150 in property tax (Exhibit C, agenda packet, p. 66). The numbers are a little unclear, but let's assume that the current house and bare land in the district are producing $1000 in property tax. That $1000 will still go to the city, county, and school district. The "increment" in revenue generated by the development, that additional $28,150, goes toward paying off the loan the city took out to get the development started. After the loan is fully paid off, the total tax value then starts going to the regular taxing entities.

Now Schaefer could still get stuck with the bill. The TID has a maximum of 15 years to pay off the debt (see SDCL 11-9-25). If Schaefer's development doesn't take off -- if there are delays or people say, "A cul-de-sac? Why would I live in a cul-de-sac?" and don't buy -- and the TID does not produce a sufficient increment in the property tax revenue to pay off the loan in 15 years, Schaefer has to cover the difference.

We should note that this residential development exists at the edge of the legally acceptable uses of TIDs. SDCL 11-9-42 declares, "Tax increments not to be used for residential development. No tax increments shall be used for the construction of residential structures." TIDs are generally used for business development (like the TID Flandreau created to attract the new Alco store). Schaefer's housing development still qualifies for TID status since the actual TID funds are being used for the utility infrastructure, not the dwellings themselves.

There are the nuts and bolts of this TID project. Stay tuned for commentary... after I get some supper!