Legislative and Judicial Updates

An obscure provision of the House tax bill (H.R. 1, Section 3601) threatens to end a financing tool that has been used by local governments for years to fund critical infrastructure such as airports, seaports, hospitals, educational facilities, affordable housing and tollways, to name a few. Private activity bonds, as they are called, are tax-exempt bonds that are typically issued by municipalities to finance private projects that serve a public purpose.

Some estimates put the loss to the municipal bond market at 20 percent of the $3.7 trillion market – that is the share of the market held by private activity bonds. Consequently, housing advocates, finance officers and local government officials are working hard to raise their concerns with members of Congress as the Senate and the House must now reconcile competing bills. The Senate bill does not contain a similar provision aimed at eliminating the tax exempt financing program.

So why would House members seek elimination of such a widely used financing tool? First and probably foremost, they have to find ways to pay for a reduction in corporate and individual tax rates. One estimate puts the savings at $38.9 billion over ten years beginning in 2018 (see Government Finance Officers Member Alert). In addition, members of Congress argue that the federal government shouldn’t subsidize financing of private development when some competitors don’t qualify for the bonds. Supporters argue that the private development serves a public purpose and the bonds are widely available to competitors in the market place.

Meanwhile, now that the Senate passed its version of the tax bill, calls to spare private activity bonds from the congressional ax will grow louder. A number of industry groups are actively lobbying the issue and circulating talking points to constituents. However, if these efforts are unsuccessful, billions in new projects may be shelved or delayed as proposers look for new sources of project financing.

The Minneapolis Star Tribune published an article recently that describes how this provision has caused concern for affordable housing advocates.

One of the current tax code provisions that would be eliminated under the House-proposed tax reform bill is the popular federal Historic Tax Credit program (HTC). The HTC dates back to the Reagan Administration and currently provides a federal tax credit in the amount of 20 percent of qualified rehabilitation expenditures for any certified historic structure. Certified historic structures are those that are either listed in the National Register of Historic Places, or located in a registered historic district and certified as being of historic significance to the district. The tax credit, which can be taken over a five-year period following completion of the rehabilitation of the structure, has spurred a lot of “main street” revitalizations and funded everything from asbestos abatement to insulation replacement.

The obvious purpose of the program is to encourage redevelopment of historic and abandoned buildings. According to the National Trust for Historic Preservation, since the inception of the HTC program in 1981, it has been used to renovate more than 40,000 structures and channeled $117 billion into private investment to rehabilitate these structures.

The apparent purpose of eliminating the HTC program would be to increase tax revenue needed to offset tax cuts provided in the tax reform bill. Ironically, an economic impact report by the National Park Service and Rutgers University concluded that for every dollar of tax credits given under the program, $1.20 in construction activity, business taxes, income taxes and property taxes was created. The HTC program generated 86,000 jobs in 2015 alone. Id.

Loss of the HTC program would eliminate what has grown to be an important incentive for promoting public-private investment in revitalizing downtowns, neighborhoods across the country. In a further irony, President Trump used the HTC program to develop the Old Post Office in Washington, D.C. into the Trump International Hotel, which earned the developer $40 million in tax credits.

Minnesota also offers a 20 percent credit that largely follows the federal HTC, but must be taken against Minnesota state taxes. The Minnesota program would appear to be affected if the federal HTC goes away because in order to claim the Minnesota credit, the taxpayer must be allowed the federal credit.

While the tax reform bill is a long way from becoming law, provisions in the 400-page document will impact many programs in ways that are still coming to light, including the federal HTC program.

 

Forgive developer Martin Harstad if he thought he was in Potterville and not Woodbury when the city told him he had to pay nearly $1.4 million in “road assessments” as a condition of approval for his “Bailey Park” residential development. Harstad sued Woodbury to challenge its authority to demand the road assessments and won in both the trial court, and now the Minnesota Court of Appeals in a published decision released September 18.

For now, it’s a wonderful life for Harstad, other developers and for property owners who have been troubled for years over whether Minnesota cities have the power to condition development approvals on the payment of (frequently hefty) fees for future road improvements to accommodate new growth and development. Here, the court of appeals struck down what amounted to an impact fee assessed by Woodbury, but sidestepped the longstanding question of whether impact fees are legal in Minnesota.

As is the case for other developers, Harstad was already paying significant amounts for transportation infrastructure that would be needed within the Bailey Park development. Woodbury attempted to rationalize its road assessment policy by declaring that new development must not only “pay its own way,” but also pay “all associated costs” for “public infrastructure.” This meant, according to the city, that if a proposed development is perceived as contributing to the need for unspecified, offsite road improvements at unspecified locations outside the development, at unspecified points in the future, then road assessments under the city’s formula must be imposed and collected now as a condition of approval for the development.

The court of appeals said that Woodbury can only exercise powers conferred by the state legislature and that Woodbury overstepped its powers here. The court said of the statute on which the city pinned its hopes for upholding the assessment (Minn. Stat. Sec. 462.358, subd. 2a): “In fact, subd. 2a does not authorize collection of any type of assessment. Rather subd. 2a authorizes city planning.”

While Woodbury called its fees “major road assessments,” these types of charges have a variety of names, including “transportation improvement district fees,” “trip charges” and “transportation fees.” The name may vary, but the purpose is the same: cities are seeking to capture revenues for anticipated future upgrades to area roads to accommodate growth from new development. Regardless of a particular city’s label, the commonly-recognized name for this revenue-raising practice is “impact fee.”

Impact fees were defined by the Minnesota Supreme Court in Country Joe, Inc. v. City of Eagan, 560 N.W.2d 681, 685 (Minn. 1997), as fees: (a) in the form of a predetermined money payment; (b) assessed as a condition to the issuance of a permit or plat approval; (c) justified as within local government powers to regulate new growth and development and to provide for adequate infrastructure; (d) levied to fund large-scale, off-site public facilities and services necessary to serve new development; and (e) in an amount proportionate to the need for the public facilities generated by new development. Country Joe did not clearly decide, however, whether impact fees were illegal in Minnesota.

The court in Harstad did not address whether Woodbury’s road assessment was an impact fee, or whether impact fees are legally authorized in Minnesota. [This blogger made the case that such fees are not legally authorized in Minnesota in a March 2009 article in Hennepin Lawyer entitled Road Improvements: When Are Special Assessments Legitimate?

The court of appeals in Harstad also did not address whether Woodbury’s road assessment was an illegal tax. Country Joe held that the City of Eagan’s “Road unit connection charge” was an illegal tax under state law that limits municipal taxing powers. The court of appeals in Harstad did not address the illegal tax issue because it was raised only by amicus parties and not by either of the parties to the litigation. The City of Woodbury has until October 18 to decide whether to petition the Minnesota Supreme Court for review.

Property owners and lawmakers joined forces last month in an attempt to reverse the erosion of property rights in Wisconsin which resulted from two landmark decisions, one issued by the U.S. Supreme Court and the other issued by the Wisconsin Supreme Court. In Murr v. Wisconsin, the highest court in the land sided with local officials in a 5-3 decision holding that the Wisconsin Court of Appeals was correct in upholding a requirement that two nonconforming lots be treated as one for zoning purposes (see Jake Steen’s post on Murr v. Wisconsin).

In the second significant decision, a sand mining case known as AllEnergy v. Trempealeau County, the Wisconsin Supreme Court upheld denial of a conditional use permit to mine sand. In upholding the lower court’s decision, the Supreme Court relied on a record of objections raised by residents though the applicant had supplied expert reports and testimony refuting the concerns and addressing the conditions for approval in the zoning ordinance.

At the outset of a day-long symposium on property rights in Madison, lawmakers announced an initiative known as the “Homeowners’ Bill of Rights” designed to roll back government regulations that threaten property rights and home ownership in Wisconsin. Two of the initiatives seek to reverse the impact of the Murr and AllEnergy decisions.

Legislation proposed by Senator Tom Tiffany and Representative Adam Jarchow would grandfather existing lots so property owners would not lose rights to build simply because the rules change over time. Another initiative would propose legislation modeled after Minnesota’s conditional use permit case law which requires that a municipality issue a conditional use permit if the applicant satisfies the conditions and standards in the zoning ordinance.

In recent years, a Republican controlled legislature in Wisconsin has passed laws that give property owners a leg up in negotiations with government zoning officials, particularly where officials seek to downzone property or deny construction along the state’s vast shorelines. Under new laws, the right to build vests when an application is submitted instead of when a building permit is issued. This prevents loss of development rights if an owner takes time to put together building plans or financing – and is particularly important for development phased over time.

Other changes no longer require deference to state agency interpretations of certain land use laws and provide for direct notice to property owners of zoning changes. At least one recent change may be modified in the next legislative session – a change designed to protect reconstruction of boat houses on Wisconsin lakes has resulted in the construction of a few three-story boat houses which the bill’s author said was not the intent.

 

Bill Griffith was a featured panelist at the University of Wisconsin Law School’s first annual “Property Rights and Land Use in Wisconsin” symposium.

To what extent can the government restrict the ability of property owners with lakefront and riverfront property from developing their land before those restrictions go “too far”? A recent U.S. Supreme Court ruling may change the threshold. In a decision that may have substantial impacts on property rights throughout the state and the region, the U.S. Supreme Court recently ruled 5-3 in a decision that sided with governmental regulators and environmentalists.

In Murr v. Wisconsin, four siblings challenged a state law that prohibited the development of two adjacent lots on the St. Croix River, the border between Minnesota and Wisconsin. The lots were acquired separately by the siblings’ parents in the 1960’s and conveyed to the siblings in 1994 and 1995. The siblings sought to sell one parcel to fund the improvement of the other parcel but were precluded from doing so under a state law requiring the “merger” of two adjacent commonly owned parcels if the parcels consisted of less than one acre of developable land.

The St. Croix River is a designated Wild and Scenic River under the Wild and Scenic Rivers Act of 1972 (the “Act”). The Act required the state to develop a management and development program for land along the river in order to preserve the nature of the river corridor. The merger provision at issue in the case is similar to widely-used provisions that affect many of the waterfront properties in Minnesota and Wisconsin. By requiring adjacent substandard lots to merge into one, the siblings argued that the merger constituted a regulatory taking under the Fifth Amendment of the U.S. Constitution, which prohibits the taking of private property for public use without just compensation.

The court considered the “ultimate determination” as to whether a regulatory determination has occurred: “What is the proper unit of property against which to assess the effect of the challenged governmental action?” Because a regulatory taking is determined by comparing the value taken from the property with the value that remains in the property, defining the “property” is the most critical consideration.

The court’s opinion described a new three-factor test for making the ultimate determination of the property to be considered: 1) the treatment of the land under state and local law; 2) the physical characteristics of the land; and 3) the prospective value of the regulated land. The third factor, the court stated, should give special attention to the effect of burdened land on the value of other holdings.

In applying these factors, the court ultimately held that the two parcels should be treated as a single property for the regulatory takings analysis. The court’s decision was based on: the fact that the merger provision had long applied to the property; the physical conditions of the property; and the fact that the lots were more valuable as a single parcel.

This ruling may have significant implications for properties on the combined 30,000 plus lakes and rivers in Minnesota and Wisconsin. As both states and most communities have merger provisions for shoreland lots, this case will likely form the basis for broader efforts to limit the development along protected bodies of water. Environmental groups will likely see the establishment of a new rule as an opportunity to push for broader land use protections in shoreland areas, with the rule giving expanded cover to local governments to expand regulation.