Legislative and Judicial Updates

Last week the City of Bloomington adopted an expansive “inclusionary zoning” ordinance for the purpose of compelling developers of single and multifamily housing to include a portion of their new housing as affordable based on prescribed income standards.  “Inclusionary zoning” refers to a policy that compels developers to include some land use component desired by a given city as part of a development project being proposed in that city.  It is justified in the affordable housing context to address the need in Minnesota and nationally to supply more affordable housing to a greater number of people, either through subsidy or otherwise.

Under Bloomington’s ordinance, any developer proposing 20 units or more of single or multifamily housing must commit at least 9 percent of such units to be affordable based on specified income and affordability parameters (the city backed away from imposing the requirement on existing housing based on objections from multi-family from owners of such properties.  The ordinance does outline a set of “credits” that are potentially available to the developers of new housing to offset, at least partially, the financial burden of the new ordinance requirements, such as increased density or other performance criteria.  The city reserves to itself the question of whether any such credits would be awarded for a given project, leaving the developer on the hook until that determination is confirmed.  A developer seeking to avoid entanglement in the city’s evaluation process can buy its way out through a substantial payment to the City.  Bloomington’s ordinance adds to those ordinances previously enacted by the cities of Minneapolis and Edina.  Undoubtedly other cities will follow the lead of these cities.

In the author’s opinion, while laudable for their legitimate objective of addressing an important social policy, the approach of compelling private developers to contribute land or cash as a condition of securing an approval for new housing is quite plainly a regulatory taking.  In no other segment of our development economy do we require private developers to commit their private funds to help solve a broad societal problem, such as housing affordability, absent clear legal authority from the legislature.  For example, developers are routinely required to contribute land or cash to cities for the creation of new park systems as part of new developments based on an explicit grant of legislative authority; notably this policy applies to all forms of development, such as commercial and industrial, not solely housing.   No such legislative grant of authority has been extended to so-called inclusionary housing ordinances.  If challenged, it is most likely that Minnesota courts would render invalid such ordinances as lacking either constitutional or statutory support.

Recently the Minnesota Supreme Court unanimously determined that a city’s general transportation fee policy was invalid and illegal because it lacked appropriate statutory authority, which authority cities have been seeking from the Minnesota legislature for many years.  The transportation fee was imposed in addition to costs incurred by developers to construct all the necessary transportation improvements for given development projects.  The policy enabled cities imposing such a fee to illegally secure millions of dollars from developers, willingly or unwillingly, as the price of receiving approvals to which the developers were otherwise entitled.  Fortunately, virtually all cities who had been collecting a general transportation fee suspended this practice based on the unequivocal decision of the Supreme Court.

The same argument applies to the spate of inclusionary housing ordinances.  Credit Bloomington with constructing a thoughtful ordinance that seeks to balance its regulatory stick with the possibility of a bag of carrots to offset the financial burden imposed by its ordinance.  But the ordinance is selectively applied to only a segment of new housing construction and there is no certainty of receiving an offsetting “credit” once the city completes its review.  Make no mistake, Bloomington’s ordinance, as with those of Minneapolis and Edina, are sticks first, with no assurance of a sweet-tasting carrot in the end; developers will hesitate to pursue new housing projects in the city absent certainty of the financial trade-offs required under the new ordinance.  Unfortunately, the real losers under the city’s ordinance may be those most in need of new housing.

Real estate investors across the country are asking how to tap tax benefits for investing in projects in low-income areas, known as “Opportunity Zones” under an obscure provision of the 2017 Tax Act. They may not have to wait much longer – the federal government just released guidance for comment.

Nuts and Bolts

A little background is needed since the program is so new.  As part of last year’s Tax Cut and Jobs Act, authors of the bill included tax benefits to defer or reduce capital gains taxes.  According to the IRS, an Opportunity Zone is an economically distressed area of a community where new investments, under certain conditions, may be eligible for preferential tax treatment.

After the bill became law, the Governor’s office, designated 128 low-income census tracts as Opportunity Zones eligible for investment under the new law and the U.S. Secretary of Treasury approved the designation.  The principle benefit of investing in an economic development project within an Opportunity Zone is the deferral of taxes on prior capital gains.  In addition, if an the investor holds the investment in an Opportunity Fund for at least 10 years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged.

A qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding an Opportunity Fund.  Investors don’t need to live in the Opportunity Zone to take advantage of the tax benefits.  Investors simply need to invest in a qualified Opportunity Fund.

Tax Benefits

To qualify for the tax benefit, the investor self certifies.  In other words, there is no approval by the IRS to certify eligibility.  The taxpayer completes a form issued by the IRS and attaches that form to their taxpayers Federal Income Tax Return for the taxable year.  As an example, if an investor sells stock in 2018 and invests in a qualified opportunity fund within 180 days of that sale, the investor can defer the gain on the sale.  At the time of filing a federal tax return, the taxpayer may elect to defer all or some of the gain.

There are a few important things to keep in mind when deciding whether to use this economic development tool to spur redevelopment of the property. This is an investor incentive, not one that is awarded to individual companies.  All incentives relate to capital gains, present and future, not operating revenue or cost.  There are no upfront appropriations by local, state or federal government.  Because the program is market based, investors will determine whether or not they see tax benefits through investment in economic development projects.

In short, the program offers investors three specific incentives for investing unrealized capital gains in eligible projects.

  1. Deferral – an investor may defer capital gains taxes until 2026 by investing and keeping unrealized gains in an Opportunity Fund.
  2. Reduction – the original amount of capital gains on which an investor has to pay deferred taxes is reduced by 10 percent if the Opportunity Fund investment is held for five years and another 5 percent if held for seven years, for a total reduction of 15 percent.
  3. Exemption – any capital gains made on investments made through the Opportunity Fund accrue tax free as long as the investor holds them for at least ten years.
Proposed Guidance Released

The Treasury Department and the IRS recently released guidance for the Opportunity Zone tax incentive and will take public comments until a hearing for January 10, 2019.

After that, the guidance will be finalized to give better direction on how investors can use this new economic development tool.  In the meantime, investment firms have already begun creating Opportunity Funds by aggregating investments based on the assumption that there will be a limited window in which to make qualified investments.

Recently the Minnesota Supreme Court invalidated a municipality’s use of an unauthorized transportation fee to fund projects that are not directly tied to a specific project. It also invalidated a city’s use of a development contract to “negotiate” such an illegal fee into the contract. Minnesota cities have long contended that development contracts are bona fide arms-length agreements which reflect true give-and-take between the parties. The Supreme Court rejected this argument on the basis that a city’s police power authority created an overarching pressure on a developer to concede the transportation fee or risk project denial. You would think this settles, finally, once and for all, this vexing issue. You would be wrong.


The association for Minnesota cities has communicated to its members that there are still several work-arounds available to cities that are determined to collect these fees. For example, a city could deny projects that are deemed premature owing to a lack of necessary infrastructure. The irony is that the court decision involved a developer who already had committed to pay for the necessary transportation improvements, inside and outside his development; this in fact is quite routine.

What cities are objecting to now is their inability to collect such fees and save them for future roadway projects some other place at some other time, rather than relying on taxpayers to fund such improvements (assuming another developer doesn’t agree to construct them). One city, and there may be more, has tentatively decided to impose a city-wide development moratorium so it can evaluate how to continue collecting the fees. This will adversely affect multiple development projects that are queued up for approval, putting their long-term viability at risk depending on the duration both of the moratorium and the current real estate cycle.

The battle between developers and cities seems never-ending as cities continue to perceive developers as ripe for fee extraction. And, frankly, too many developers have accommodated cities in their thinking. It might be time for the development community and city representatives to sit down and negotiate a truce.

For more than 30 years, a property owner who claimed that a regulatory action by the government amounted to a compensable taking under the Fifth Amendment to the U.S. Constitution has been required to litigate the issue in state court first, before being allowed to gain entry to federal court. The 1985 case of Williamson County Reg’l Planning Comm’n v. Hamilton Bank, 473 U.S. 172, 105 S.Ct. 3108 established a peculiar form of “ripeness” that required property owners first to exhaust their administrative remedies, and then exhaust their state court remedies before they would be permitted to sue out a federal takings claim in federal court. In other words, the federal courts would not consider a regulatory takings claim to be “ripe” for hearing in federal court unless and until the property owner had first jumped through both administrative and state court exhaustion hoops.

Williamson County’s ripeness doctrine has created confusion for courts and frustration and delays for litigants since it was handed down. The U.S. Supreme Court now seems to be interested in reconsidering Williamson County, signaled by its granting review of a Pennsylvania case that squarely raises the issue of whether property owner Rose Mary Knick may go directly to federal court to litigate her unconstitutional taking claim arising from local officials seeking to enter onto her 90-acre farm to search for ancient burial sites.

Fifteen years ago, a Minnesota litigant’s unsuccessful attempt to entice the Supreme Court to reconsider Williamson County illustrates the dilemma to litigants caused by the case’s ripeness doctrine. Rochester real estate developer Franklin P. Kottschade obtained approval from the City of Rochester in 2000 to develop townhomes on about 16 acres of his 220-acre development site in south Rochester. The city approved the townhomes, but attached numerous conditions to its approval, which resulted in the project becoming economically unfeasible for Mr. Kottschade. A court decision by the Minnesota Court of Appeals described the effect of the city’s conditions on the development: “The city’s imposition of the conditions reduced the buildable area to 4.93 acres, and resulted in a site that could accommodate only 26 of the proposed 104 townhome units[1].”

In a nod to Williamson County’s administrative exhaustion requirement, Mr. Kottschade asked the city for a variance from the conditions that it had just imposed. Unsurprisingly, the city denied the variance request. In an about-face from Williamson County, however, Mr. Kottschade did not follow the state court exhaustion requirement by suing out his regulatory takings claim in state court; instead, he sued directly in federal court for a regulatory taking. Both the U.S. District Court and the U.S. Court of Appeals for the Eighth Circuit dismissed the case based on the controlling authority of Williamson County. The Eighth Circuit pointed out, however, the dilemma that litigants like Mr. Kottschade face because of Williamson County:

The plaintiff [Mr. Kottschade] points out, and justly so, that if he is required to seek a post-deprivation remedy in a state-court inverse condemnation action, he may end up being altogether denied a federal forum for what is undoubtedly a federal right. Such a federal forum, he urges, is guaranteed by 42 U.S.C. § 1983 [the federal civil rights statute] … and a plaintiff has a right to bring a § 1983 claim in a federal trial court, at his option. If plaintiff must go to the state courts, he would presumably need to show, in order to prevail … that a taking had occurred, and that just compensation had not been paid. If the state courts hold for the plaintiff, then all is well, from his point of view, and there would be no need for recourse to a federal forum. But if they hold against him, for example, on the ground that no taking has occurred, doctrines of former adjudication may be a bar to a new action under § 1983 in a federal trial court[2].

What the Eighth Circuit is pointing out is that a property owner may fall victim to two different doctrines of federal adjudication. If the property owner follows Williamson County and sues in state court first – and loses – then when the property owner attempts to seek relief in federal court, another federal doctrine may further thwart federal court consideration of the claim on the merits, under the theory that the claim has already been decided.

Rose Mary Knick may resolve this dilemma. It is being briefed now, but is unlikely to be decided until the Supreme Court’s next session, which will begin in October. Stay tuned.

[1] Kottschade v. City of Rochester, 760 N.W.2d 342, 345 (Minn. App. 2009)

[2] Kottschade v. City of Rochester, 319 F.3d 1038, 1041 (8th Cir.), cert. denied, 540 U.S. 825 (2003)

Last month, the House tax bill threatened to eliminate private activity bonds – a financing tool that has been used for years by local governments to fund critical infrastructure, such as educational facilities, hospitals and affordable housing. Municipal bond experts projected that 20 to 25 percent of the bond market would be lost under this provision, stalling millions of dollars of investment in new projects.

The final tax bill, signed into law just before the end of 2017, did not include the provision. As a result, private activity bonds are still available to fund eligible projects. However, the new law does eliminate tax-exempt refunding of government and nonprofit debt after Dec. 31, 2017. This provision generated a wave of refunding activity in the last weeks of December.

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.