February 4, 1985
Mr. John P. Billings
Deputy City Attorney
Post Office Box 435
Vermillion, South Dakota 57069
OFFICIAL OPINION NO. 85-05
Tax incremental district questions
Dear Mr. Billings:
You have requested an official opinion based on the following factual situation:
FACTS:
The City of Vermillion is presently considering creating a tax incremental district in the blighted area within the city of Vermillion. At the present time, the city has also applied for and has been tentatively approved for a grant to construct a 46-unit multi-family housing project from the United States Department of Housing and Urban Development. This grant is pursuant to Section 17 of the Housing and Urban Recovery Act of 1983. The city would like to have this building constructed in the proposed tax incremental district. Pursuant to the federal act, the use of this building will be targeted for low and moderate income persons. It will be the only structure within the district to be used for residential purposes. The intent of the city is to use the tax increments to fund solely the project costs of land acquisitions and on-site improvements, including the preparation of the property for the construction of the rental unit. Actual building construction costs would be paid out of the H.U.D. grant. As an alternative project plan, the city would also like to utilize tax increment financing to fund the construction of a National Guard Armory within the same tax incremental district.
Concerning these facts you have asked the following questions:
QUESTIONS:
1. Does the restriction against development of residential property contained in SDCL 11-9-42 preclude the city of Vermillion from creating a tax incremental district for the purpose of land acquisition and payment of site improvements leading up to construction of a multi-family unit pursuant to a federal grant?
2. Do these same restrictions apply if the project plan for the tax incremental district include the construction of a National Guard Building?
3. If the city can create a tax incremental district for the above purposes, does SDCL 33-11-7 apply and require that the city hold an election to authorize the expenditure of funds from the project fund when the provisions of SDCL 11-9 do not require any such election?
South Dakota's tax incremental district law was originally enacted in 1978, Chapter 91, Laws of 1978, codified as SDCL 11-9. As stated by our Supreme Court in the case of Meierhenry v. City of Huron, 354 N.W.2d 171 (S.D. 1984), 'the basic purpose of statutes authorizing the creating of tax incremental districts is to enable the increased tax revenues generated by community redevelopment projects to be placed in a special fund for the purpose of repaying the public costs of the projects.' The law in its entirety was constitutionally approved by that case.
IN RE QUESTION NO. 1:
The project plan describing the proposed public works or improvements within the district is for the purpose of reducing blighted areas which impair the growth of the municipality. It should be noted that SDCL 11-9-10, after listing nine factors which are indicative of conditions within a blighted area, continues as follows:
Any area which by reason of: (factors 1 through 9) substantially impairs or arrests the sound growth of a municipality, retards the provision of housing accommodations, or constitutes an economic or social liability and is a menace to the public health, safety, morals, or welfare in its present condition and use, is a blighted area.
The Supreme Court in Meierhenry, supra, at 182-183 holds that the enumerated conditions of blight which would justify the creation of a tax incremental district set forth, with sufficient specificity and certainty, those areas which may be deemed to be the blighted areas for the purposes of the act. Thus, the retardation of provision for housing accommodations is one of the accepted criteria of the law. SDCL 11-9-42 provides, 'A tax incremental district shall not be used for development of residential property,' would at first consideration appear to prevent the expenditure of tax incremental funds for multi-family housing. However, since it is axiomatic that all parts of the statute should be harmonized where possible, and since one of the results of blight may be the retarding of the provision of housing accommodations it could not follow, logically, that on the one hand it is the sense of the law that housing accommodations should not be retarded, while by a second provision, the district should not be used for developing housing.
It is my opinion, therefore, that the provisions of SDCL 11-9-42, with respect to the development of residential property, relate to individual residences. It does not relate to multiple unit rental housing, which more appropriately can be classified as commercial housing. It is also noted that Official Opinion 77-53 relates generally to this subject and addresses the Declaratory Ruling of the Secretary of Revenue, DR 76-3, which held that apartment houses of all sizes should be classified as commercial property when taking into consideration the discretionary formula for reduced taxation pursuant to SDCL 10-6-35.2. That opinion expresses approval of the Declaratory Ruling and confirms that apartment houses, for the purpose of the discretionary formula, must be included within the category of 'industrial, commercial and nonresidential agricultural structures.' It is my opinion that the restriction in SDCL 11-9-42 does not prevent the city of Vermillion from expending tax incremental district funds for the purpose of land acquisition and the payment of site improvements leading to the construction of a multi- family unit pursuant to a federal grant.
IN RE QUESTION NO. 2:
While not specifying any particular type of structure, it is the avowed intention of the law to remove blight and to redevelop the area encompassed by the district to the benefit of the municipality in general. If the planning commission, after due consideration, adopts a project plan as defined by SDCL 11-9-13 and which considers that the construction of a National Guard building would be appropriate for the district, I find nothing in the law to prevent that construction. I would only point out, however, that the financing increment would, of course, not benefit from the National Guard building because governmental property is exempt from property taxation.
IN RE QUESTION NO. 3:
SDCL 33-11-7 describes one method by which governing body may make available land, money or buildings to assist in the construction of a National Guard facility, that is by contribution of such land, money or buildings. If land or money is to be contributed or donated to the National Guard, it is necessary that an election precede such donation. Donation is but one method by which governments may join together in the construction of National Guard facilities. The other is through the cooperative agreement provided by SDCL 33-11-3 of any agency upon agreed terms with the Board of Military Affairs and the governing boards of public corporations or other agencies. Municipalities and counties are authorized to construct and operate public buildings. For example, under SDCL 6-3-1 a municipality may enter into a joint powers agreement with the Board of Military Affairs pursuant to SDCL 1-24 to carry out the public powers, respecting building construction and operation, each is vested with.
The municipality would not be donating the money, but rather spending the money for its own purposes, i.e., to have a share of the facility, thus the provisions of SDCL 33-11-7 relating to donations would not apply. This was the holding in an early Attorney General's opinion, 1957-58 AGR 240, where although there was an election, it was for the purpose of issuing general obligation bonds. The Attorney General held that 'the purposes for which the bonds were issued was more for the purpose of participating or cooperating with the state and federal government in the construction of a National Guard Armory, than to make a mere contribution or donation.' From the results of the election it must have been common knowledge among the voters that the city was making more than a mere contribution or donation, inasmuch as the city will have use of the armory for municipal purposes. This is not in conflict with its use by the National Guard.
It is my opinion, therefore, that if the city is actually participating with the state in the construction of the facilities under a joint use agreement and not merely making a contribution or donation of money, the provisions of SDCL 33-11-7 are not applicable and no election is required for that purpose.
Respectfully submitted,
Mark V. Meierhenry
Attorney General
