Suburbs embrace tax subsidies as Minneapolis' interest fades

Suburban communities across the metro area are rebuilding themselves with the aid of a controversial development subsidy that once played a major role in reshaping Minneapolis.

While Minnesota's largest city has largely weaned itself off the tool, the taxpayer subsidy is now underwriting growing visions of suburban renewal as the first generation of postwar suburbia reaches middle age.

It's the backbone of Edina's plan to rebuild a massive 1960s office park; of Wayzata's new downtown housing and retail complex; of glitzy outdoor malls in St. Louis Park and Eagan; and mixed-use districts around several Northstar commuter rail stations.

The 15 costliest subsidy districts approved in the last five years — based on potential budgets — were all in the suburbs or outstate Minnesota, according to the state auditor's office.

"The more savvy cities know that they have to constantly upgrade infrastructure, deal with blighting influences, work on major redevelopment projects," said Jim Casserly, an attorney who advises cities. "They have to do that or they go into decline."

Called tax-increment financing, the tool diverts anticipated local government tax revenue from a project to pay for some development costs. Developers say that they couldn't afford to ­complete such ambitious projects without the financial assistance, but the incentive also shorts cities, schools and counties of the new tax revenue.

Stacie Kvilvang, a senior director at the consulting firm Ehlers, said suburbs are seeking "wholesale change" with large mixed-use projects that typically include retail, housing and offices. Use of the tool dates back decades, but she said that visions have grown grander in the last 10 to 15 years.

Only some costs are eligible for assistance, such as parking ramps, demolishing buildings, utility work or improving roads. The budget estimates are based on each city's highest development aspirations and the needed public support, which do not always materialize. Taxes from the new projects are often used for decades to pay off the initial public support — about half of which is often for interest — effectively growing the city without generating additional money for police, fire and schools.

But once the initial subsidy is paid off, the theory goes, the properties will generate ongoing tax revenue that would never have existed if the cities hadn't helped get the projects off the ground.

Once a dominant user of the tool, Minneapolis now uses it largely on a small scale for affordable-housing projects. The subsidies gobbled up 15 percent of the city's tax base as recently as 2004, but that number has been cut approximately in half and continues to fall as older districts expire, like this year with the former Neiman Marcus downtown and the Laurel Village project.

Casserly said suburban use has expanded from targeted business incentive projects to large-scale redevelopments.

The public aid often occurs in phases as needed. The city of Champlin bought land and demolished some apartments to lure housing and commercial development to 60 acres beside the Mississippi River, billed as "one of the largest infill, mixed-use redevelopment locations in the entire metro area." New Hope demolished an abandoned Kmart in an area they had planned a mix of uses and space for people to "to linger and to have fun," but ultimately approved a Hyvee grocery store for the site. Anoka acquired property, demolished buildings and contributed $1.9 million toward a parking ramp at its Northstar station, with hopes of ultimately attracting nearly 700 housing units and commercial space.

Edina officials estimated that parking ramps could eat up as much as $52 million of their potential $109 million in public support for The Link, a 42-acre office campus complete with hotel. Bloomington is committing $34 million from an existing district to pay primarily for new parking facilities at the Mall of America expansion.

The subsidy program is attractive to cities because it allows them to capture taxes that would otherwise go to the county and school districts, said Rep. Ann Lenczewski of Bloomington, lead DFLer on the Minnesota House Taxes Committee. "It's super tempting because they get all this extra money," Lenczewski said. "So they're leveraging this huge tax base that isn't even theirs."

Not all of them work out as planned. In Eagan, the school district blocked an attempt to extend the duration of the district that helped create the Twin Cities Premium Outlets and several nearby housing projects. Delayed by the unexpected downturn during the recession, city leaders sought the extension to cover a $13 million gap repaying their $62 million investment in land, a parking ramp and development costs.
Chuck Marohn, president of the Brainerd-based Strong Towns, said suburbs often make the mistake of chasing large, "home run" projects.
"Nobody ever really sits down and really says, 'What is a high-return investment?' " Marohn said. "Because when you do that, it winds up to not be the stuff with parking lots, and the stuff that's real huge and the stuff that requires massive amounts of public infusion. It tends to be small, little things."

The proposal for Edina's "The Link" make it among the largest new districts certified in the last 15 years. Pentagon Park in Edina was the Twin Cities' first suburban office park, a series of low-rise modern buildings ringed by surface parking lots near the intersection of Hwy. 100 and Interstate 494.

For decades, a succession of owners failed to invest in the property. Roofs and windows leaked, heating and ventilation systems didn't work, weeds sprouted from cracked asphalt parking lots. Vacancy rates in Pentagon Park's buildings rose as high as 90 percent.

Link developer Scott Tankenoff and his investors are in line for eventual reimbursement of about $54 million in principal costs, not including interest, if the project is completed. ­Tankenoff and city officials say the incentives were critical to getting the $500 million multiphase project underway.

"Everybody sees the location. Everybody thinks it's wonderful," Tankenoff said. "But it's a really challenged site with a lot of problems."
Steve Timmer, a retired corporate lawyer and Edina resident, has emerged as a leading critic of the city's tax subsidy deals. "It seems like a financial deal that's better than you need to give," he said.

Edina city officials acknowledge that the market could have sustained lower-rent office space on that site. "We'd much rather scrap it and start over, and deliver that Class A amenity for the 21st century," said Bill Neuendorf, the city's economic development manager.
A similar philosophy is at work in Wayzata, where a '60s-era shopping center has been replaced by a dense new district that includes retail, senior living apartments and a planned hotel. "Could you have torn down the old mall and built a couple of strip malls? Sure," City Manager Heidi Nelson said. "But I think the community had a vision for something broader."

These large tax-subsidy districts once helped transform Minneapolis, from the redevelopment of the central riverfront to the construction of Block E on Hennepin Avenue. Much of that changed after the 2001 election of Mayor R.T. Rybak, who was more skeptical of the subsidy.

The last major project was a $30 million subsidy — not including interest — to redevelop the former Sears building into the Midtown Exchange on Lake Street in 2004. But newer districts are geared toward modest affordable housing projects, where low rents make private financing difficult.

"We are trying to grow the city. That doesn't just mean growing in terms of population," said Council Member Lisa Goodman, a leader on the issue. "It means growing in terms of tax base so the existing population doesn't have increasing property taxes."
Notably, however, the city also received legislative approval to redirect taxes from several apartment projects — including LPM tower and Nic on 5th — to eventually fund a streetcar line. Though technically not tax-increment financing, the amount of taxes ultimately redirected could reach $100 million.

St. Paul has recently been more aggressive in using the subsidy for housing, often to add affordable units. The 15 districts approved by the city in the last five years — 11 of them for housing — are collectively estimated to redirect $109 million in new taxes toward project costs and interest, vs. $24.5 million for those in Minneapolis.
The city's use of the tool has become a campaign issue for Jane Prince, an attorney now running unopposed for an east side council seat vacated by Kathy Lantry. She specifically cites the city's aid for an affordable senior housing project on Bates Avenue, a site she felt would have ultimately attracted development without a subsidy.
"When we do a project that brings more residents to St. Paul, if it's a housing project and it's a tax increment project, we're creating an increased need for city services," Prince said. "But we're actually taking the money away to pay for them."

Mayor Chris Coleman said the recent uptick in the city's tax-increment financing use reflects renewed interest by developers. "We've taken a very aggressive approach to try and build more housing so that as we revitalize the city, it continues to be a place where everybody can live," Coleman said.

Eric Roper • 612-673-1732 John Reinan • 612-673-7402