RAPID CITY - Developer Chad Lewis has never used tax increment

financing but believes it has gotten a bum rap lately.

"Everybody seems to think it's a big giveaway," he said. "It's not. TIFs allow development of land that otherwise wouldn't be developed."

Rapid City has approved 65 tax increment districts since 1983, but 22 of those districts were dissolved or not created when the projects failed to move forward. Of the other 43 TIF districts, 14 have been paid off and 29 are still active.

Lewis, the president of the Black Hills Homebuilders Association, said one reason Rapid City uses more TIFs compared to other cities in the state is because of the higher costs of development in the rocky terrain of the Black Hills.

In a TIF district, property-tax valuations remain frozen at a base value for a number of years. During that time, improvements are made that increase the property's value. The property owner pays taxes based on the higher value, but taxing entities, such as the city, receive taxes based on the original value.

The difference between the two - the increment - goes to pay off the cost of the loan or bond used to make improvements. After those costs are paid off, local governments receive all of the property-tax revenue.

In the long run, the developments built using TIF help increase the tax base and the overall property value of the city and county, Lewis said, which means more tax money that can be spent providing services to residents.

Contrary to public opinion, Lewis said it is difficult to get a TIF approved. He said the city makes applicants jump through a huge number of hoops; plus, the city requires applicants to open up their financials completely to the city - something Lewis doesn't necessarily want to do.

Mayor Alan Hanks made the city's use of TIFs a campaign issue earlier this year. Although he has concerns, he is not opposed to TIFs. Mainly, Hanks has concerns about the trend in recent years of allowing more of the costs historically paid by the developer to be paid by TIF.

Developers are normally responsible for all on-site improvements of their property. Utilities and streets are required to be built to a certain size, but sometimes the city wants larger infrastructure to accommodate anticipated future growth. In those cases, the city pays the extra cost to overbuild.

Anything else on site should generally be the responsibility of the developer, according to Hanks.

"I believe TIFs are a great tool to get infrastructure in, but we need to be extremely careful about including developers' costs in there because then you are transferring the cost of development from the developer to the taxpayers," Hanks said.

Alderman Ron Weifenbach, a new city council member elected in June, also advocates a conservative approach to TIFs and believes the city should spend more time analyzing their impact and explaining the need to the public before a TIF is approved.

Weifenbach said the public's tendency to be leery of TIFs is understandable. People tend to be afraid of things they don't understand, he said. However, he believes that people simply want assurances the council is safeguarding their assets.

"They're saying be careful. Don't just go out and do these TIFs without any analysis. It is the taxpayers' money, and we all work for the taxpayers on the city council," he said.

Sioux Falls is a city that takes a conservative view of TIFs.

Urban Planner Erica Beck said Sioux Falls has eight TIFs, five of which are active. Generally, the city focuses its use of TIFs on redevelopment of its downtown in places that are blighted or unattractive to developers.

"Our first TIF covered the entire downtown area and was a very large geographic district. We've kind of held it to the core of the community, specifically downtown or right outside downtown," Beck said.

Sioux Falls is blessed with an abundance of flat ground that generally isn't as expensive to develop as downtown with its existing buildings and infrastructure, she said. The city has used TIFs as an incentive to spur redevelopment in the urban core.

"We're not able to move as fast as we'd like on the outskirts of town, but I think we've done pretty good so far in being progressive while also being somewhat safe," she said.

Former state legislator Don Frankenfeld of Rapid City, the prime sponsor and writer of South Dakota's TIF legislation in 1978, said he favors Sioux Falls' conservative approach.

Frankenfeld said TIFs have a useful but limited purpose. Others may disagree, but TIFs do pledge a public tax base for a private purpose for some period of time, he said.

"Giving away our tax base is not something that should be done casually or lightly. It should be done when we're sure the area in question would not be developed but for the TIF and we're confident the ultimate revenue generated after the TIF expires is sufficient is to justify it," he said.

Frankenfeld would like Rapid City to pay more attention to the law regarding "blight," more detailed feasibility studies of TIF proposals and for the council to exercise some self discipline.

To be considered for a TIF, 25 percent of an area must be blighted. But the definition is so broad that an empty pasture can be deemed blighted simply because of lack of development.

"I have to say, that's my fault to some degree. We obviously didn't define blight," Frankenfeld said. "We had a vision of what it meant. It's like Potter Stewart and pornography. I can't define it, but I know it when I see it."

Blight to those who wrote the Connecticut law that originated TIF financing meant abandoned factories in crime-ridden parts of town that developers wanted no part of. Frankenfeld said that's the idea he had of blight 30 years ago, but he didn't translate it into the bill well enough.

Hanks agreed that blight should have been better defined in state law, and he worked to change state statute regarding blight while in the Legislature.

"We need to be conservative on how we use them," Hanks said. "We need to educate the public about why there's a need for a TIF. And really, we have to do a better job explaining exactly why we're using TIF on specific projects."

The city is currently reviewing its tax increment financing policy and guidelines.

Hanks supports reviewing TIF rules due to a concern that if the city didn't tighten its rules itself, the state Legislature might eliminate the TIF law entirely.

"If we don't make those rules very clear, my concern is we're headed down a path where TIFS might go away, and we'd lose a very good tool for economic development," he said.

Guide outlines TIF purposes

Rapid City's tax increment financing guide outlines four purposes for TIF:

* Encouraging redevelopment of deteriorated or otherwise blighted property

* Stimulating economic development

* Stimulating private investment in areas that otherwise would remain undeveloped or under-developed and provide long term source of additional tax revenue for all taxing entities

* Stimulating construction of affordable housing for low to moderate income residents.

Projects applying for TIF must meet three required criteria:

* Compliance with the city's comprehensive plan and all other appropriate plans and regulations

* No loss of pre-existing tax revenues to the city and other taxing jurisdictions

* A minimum 25 percent of the district must be blighted.

A blighted area is defined as an area in which the structures, buildings or improvements are conducive to ill health, disease transmission, infant mortality, juvenile delinquency or crime, and is detrimental to public health, safety, morals or welfare.

Blight is also an area that substantially impairs or arrests sound growth, retards the provision of adequate housing or constitutes an economic or social liability and is a menace to public health, safety, morals or welfare as a result of substandard, unsafe or deteriorating development.

And blight is also defined as an open area that substantially impairs or arrests the sound growth of the community because of the need for infill development, cost-effective use of existing utilities and services, obsolete platting, diversity of ownership, deterioration of structures or site improvements, or otherwise is determined to be blighted.

A project also must meet two of six additional criteria: demonstrate that the project is not economically feasible without a TIF; eliminate an actual or potential hazard; provide no direct or indirect assistance to retail or service businesses competing with existing businesses in the Rapid City trade area; create new or expanded job opportunities; result in redevelopment in the downtown district; or result in building affordable housing.

The city also has 10 discretionary criteria that are used to help evaluate projects.

All of the city's TIF guidelines can be viewed through the Growth Management Department's Web page on the city's Web site, www.rc gov.org.

If you go

What: Public hearing before Rapid City TIF Committee

When: 7 p.m. Monday, Oct. 29

Where: City/School

Administration Center

Contact Scott Aust at 394-8415 or scott.aust@rapidcityjournal.com.