Court of Appeals ruling impacts tax-increment financing

A 10th Circuit Court of Appeals ruling indicates that considerations beyond statutory requirements could impact the validity of established and proposed urban renewal plans authorizing TIF and impact the ability of certain redevelopment projects to use the tool.

Anne Bensard
Associate, Ballard Spahr

Tax-increment financing, commonly referred to as TIF, provides a powerful tool for financing redevelopment within municipalities, notwithstanding legislative changes that have restricted its use in recent years. However, a recent decision from the 10th Circuit Court of Appeals indicates that considerations beyond statutory requirements could impact the validity of established and proposed urban renewal plans authorizing TIF and impact the ability of certain redevelopment projects to use that tool. TIF generally comprises the use of incremental property tax revenues and/or incremental sales tax revenues (also referred to as property tax TIF and sales tax TIF) as a repayment source for publicly issued debt or for the direct payment or reimbursement of eligible costs.

Property tax TIF and sales tax TIF generally consist of that portion of property or sales taxes collected within an “urban renewal area” in excess of the taxes collected during a specified time period prior to the effective date of the approval of the applicable urban renewal plan (i.e., the base year), subject to certain adjustments. Colorado’s Urban Renewal Law (Section 31-25-101 et seq., C.R.S.) provides that property tax TIF and sales tax TIF are payable to the applicable urban renewal authority for a period of 25 years after approval of the applicable urban renewal plan. It also authorizes urban renewal authorities to use property tax TIF and sales tax TIF to finance urban renewal projects consisting of, among other things, the acquisition of all or a portion of a blighted area (including by eminent domain); demolition and removal of buildings and improvements; and the construction or reconstruction of streets, utilities, parks and other improvements necessary for implementing the urban renewal plan.

The availability of property tax TIF and sales tax TIF as a source of financing is dependent upon the validity of the urban renewal plan authorizing the use of such revenues. Therein lies the significance of the decision in M.A.K. Investment Group, LLC v. City of Glendale, 889 F.3d 1173 (10th Cir. 2018), a recent decision in an ongoing dispute between M.A.K. and the city of Glendale (the governing body of the Glendale Urban Renewal Authority).

Under the Urban Renewal Law, urban renewal authorities are authorized to undertake urban renewal projects for property (designated “urban renewal areas”), which a municipality has determined, based on evidence presented at a public hearing, is a slum or blighted area. Such a blight determination triggers the start of a seven-year period during which the urban renewal authority may initiate proceedings to acquire the property by eminent domain for the purpose of transferring to a private party. Under the Urban Renewal Law, property owners have 30 days to challenge a blight determination. However, there is no requirement in the Urban Renewal Law that a municipality provide notice to a property owner that its property was determined to be blighted. This was the issue in M.A.K.

The following pertinent facts are set forth in M.A.K. In 2013, the city embarked on the Riverwalk Urban Renewal Plan, which would redevelop certain property, including M.A.K.’s property (comprised of several parcels, including a Persian rug store), into a retail and entertainment district. The city notified M.A.K. in April 2013 that it was commencing a blight study and would hold a hearing in May 2013 to approve the plan. M.A.K. did not attend the hearing after receiving assurances from a city representative that M.A.K. “did not need to worry about the notice.” At the hearing, the city determined that M.A.K.’s property was blighted. M.A.K., however, did not learn about this determination until November 2013 when it engaged a real estate attorney to assist in M.A.K.’s redevelopment of its property. Because more than 30 days had passed since the city’s determination, M.A.K. lost its ability to challenge such determination.

The court found it determinative that M.A.K. did not attend the meeting, was not notified of the blight determination by the city, and did not otherwise receive notice of the blight determination until months after the determination was made. As a result, the court held that because M.A.K. did not otherwise have notice of the blight determination, the city’s failure to send M.A.K. direct notice (even though this notice is not expressly required by the Urban Renewal Law) of its blight finding after the May 2013 meeting violated M.A.K.’s rights to due process. While the court’s decision did not invalidate the plan (the case was remanded to the district court for further proceedings), its validity is uncertain.

This decision may present obstacles for those relying on TIF revenue for redevelopment projects, but they are not necessarily insurmountable. There are a number of factors that may distinguish existing urban renewal plans from the plan at issue in M.A.K. or present other bases for concluding that the additional notice requirements required by the court in M.A.K. are not applicable or have been otherwise satisfied, such as:

• Whether the urban renewal plan authorizes eminent domain and whether the expected redevelopment involves the use or potential use of eminent domain;

• When the urban renewal plan was initially approved and whether more than seven years have passed since the blight determination; and

• The number of affected property owners and whether property owners were actively involved in the approval of an urban renewal plan. (Note that other considerations may apply that are outside the scope of this article.)

While activities, including the use of TIF, under certain urban renewal plans may proceed without triggering the issues raised in M.A.K., urban renewal participants should consult their legal counsel to specifically discuss the potential impact of M.A.K. on their particular circumstances.

Featured in CREJ’s Aug. 15-Sept. 4, 2018, issue

Edited by the Colorado Real Estate Journal staff.