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The But-For Test

What is the "but-for" test?

The "but-for" test is actually a finding requirement. Before creating a TIF district or subdistrict, a local government must find that in its opinion the subsidized development would not have happened but for the use of TIF (hence, the term "but-for" test).

What is the purpose of the but-for test?

The but-for test is generally thought to have two purposes:

  1. To prevent excessive use of TIF–i.e., to prevent unnecessary use of TIF. If a development would have been done anyway, why should TIF be used to assist it?
  2. To protect the interests of overlapping governmental units (typically the county and school district). If authorities use TIF for developments that would be built anyway, TIF diverts tax revenue from the county and school to the development authority and city.

Source: Office of Legislative Auditor, Tax Increment Financing p. 42 (1986).

Which local government unit is required to make the but-for finding?

The statute requires the municipality (usually the city in which the TIF district is located) to make the but-for finding. Minn. Stat. § 469.175, subd. 3. However, for hazardous substance subdistricts, the development authority (e.g., a housing and redevelopment authority or economic development authority) makes the finding. Minn. Stat. § 469.175, subd. 7(b).

When must the but-for finding be made?

The municipality must make the but-for finding before it approves the TIF plan. Minn. Stat. § 469.175, subd. 3. This is apparently a one-time requirement that applies to the first approval of the TIF plan. The law is somewhat unclear on this point. The law does not explicitly require additional but-for findings for amendments to the TIF plan, even if the amendments make substantial changes (e.g., adding a new area to a district or changing the purposes for which increment may be spent).

What must the municipality find to satisfy the statute?

There are two basic components to the required but-for finding:

  1. The development would not happen solely through private investment in the "reasonably foreseeable future."
  2. The induced development will yield a net increase in market value for the site compared to the likely development that would occur without TIF.

The findings represent "the opinion" of the municipality.

What is required to find a net increase in market value for the site?

The statute requires the municipality to compare two values:

  1. The increase in market value of "the site" that would be reasonably be expected to occur without using TIF
  2. The increase in market value of the proposed TIF development, minus the present value of the TIF assistance.

The municipality may not make the finding if, in its opinion, the value of #2 is less than or equal to #1. For example, assume the city is considering using $16 million of TIF to assist development of a parcel as a hotel. Before any development, the parcel has a market value of $20 million. The city determines that the block would develop as an office building within a few years without using TIF, increasing the total value to $110 million without using TIF. The city projects that the hotel development will have a total market value of $125 million. In this instance, the city cannot make the but-for finding, since the TIF development yields a smaller market value increase. The calculations are displayed in the table below.

Development w/o TIF
Item #1 above
Development w/ TIF
Item #2 above
1. Base value of area $20,000,000 $20,000,000
2. Value after development 110,000,000 125,000,000
3. TIF assistance (present value) 0 16,000,000
4. Net increase in value (=2 – 1 – 3) $90,000,000 $89,000,000

What geographic area does the but-for finding relate to?

The 2003 Legislature clarified that the finding relates to parcels on which the development or redevelopment assisted with TIF will be located. Before this change, the statute was not clear on this issue. Cities took varying approaches to this issue, according to the Legislative Auditor's 1986 report, including the project area or smaller areas within the project area or the district that will be assisted with TIF.

What form requirements apply to the but-for finding?

The municipality must make the finding in writing and must set out of "the reasons and supporting facts" for the finding.  Minn. Stat. § 469.175, subd. 3. These statements must explicitly include the dollar amount of the municipality's alternative market value estimates. Minn. Stat. § 469.175, subd. 3(d).

Are any districts or projects exempt from the but-for finding?

Yes, the market value finding requirement does not apply to qualified housing districts. These districts are designed to provide low-income housing. The public benefit of these districts is considered to be providing types of housing that otherwise would not be available. In many instances, these developments will not generate the highest market value for a site. Thus, the but-for test could not be satisfied.

Are failures to satisfy the but-for test subject to judicial enforcement?

Violations of the but-for requirements can be divided into two categories:

  1. Failure to make a finding altogether. Violations of this type clearly would be subject to judicial or administrative enforcement.
  2. Making a finding that is false or contrary to fact. The statute is not clear as to whether judicial actions (or administrative enforcement) applies. Based on the text of the statute, two arguments can be made that there is no remedy for these violations: First, the finding is simply as to a matter of the municipality's "opinion."  Even if an opinion is not factually based, one may still consider it to be a view genuinely held by the governing body of the municipality. (It may have been unaware of the facts or simply refused to believe them.) Second, the law provides that once approved, the determination of the authority "shall be conclusive of the findings therein and of the public need for the financing." This provision appears intended to preclude a court or another administrative entity (State Auditor or Attorney General) from "second guessing" the basis for the finding. Thus, this provision buttresses the notion that the finding is simply a matter of good faith and discretion on the part of the municipality. The Court of Appeals in the Walser case, however, held that this provision did not preclude judicial review of the blight test findings. Walser Auto Sales, Inc. v. City of Richfield, 635 N.W.2d 391, 399 fn.4 (Minn. App. 2001). Similar consideration may apply to permit judicial review of the but-for findings.

    Moreover, the statute requires the municipality to document in writing the supporting facts for its finding. Why would this be required, if the municipality could not to be held legally accountable for a false finding? It is possible that the required documentation was simply a mechanism to guarantee some accountability to the electorate, rather than providing a basis for legal enforcement. On balance, it seems likely to be very difficult to obtain judicial or administrative relief for but-for findings that are counterfactual, except perhaps in very extreme circumstances.

What criticisms have been made of the but-for test?

The 1986 report of the Legislative Auditor made numerous criticisms of the but-for test. Some of these include:

  1. The most basic criticism is that the test tends to be treated not just as a necessary condition to the use TIF, but also a sufficient condition. The auditor's report points out that the test does not indicate whether public benefits of a development justify the public costs. According to most public finance experts, passing a cost-benefit test should be a litmus test for any proposed use of public money.
  2. The language of the test is vague and permits cities to interpret it in a number of ways.
  3. The test does not require the city to consider the displacement effects of the use of TIF–e.g., using TIF at one location for a retail or office development likely will affect development of other sites.
  4. The test may permit cities to use TIF to fund public improvements, even though using TIF generally to fund public improvements (other than in connection with stimulating specific developments) is often considered questionable.

Following the 1986 Report of the Legislature Auditor, the legislature made a number of changes to address some of these concerns. The most important of these was to add the requirement that the city find that the use of TIF will yield a net increase in market value of the site.

October 2015