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DAN MORALES
*TTcJRNEYCENERAL May 6, 1996
The Honorable Fred Hill Opinion No. DM-390
Chait
Committee on Urban A&its Re: Whether a city that terminates a
Texas House of Representatives reinvestment zone pursuant to section
P.O. Box 2910 311.017(a) of the Tax Code may create a
Austin, Texas 78768-2910 new reinvestment zone with identical
geographic boundaries for the purpose of
setting a new tax increment base, and
related questions (RQ-703)
Dear Representative Hill:
You ask whether a city that terminates a reinvestment zone pursuant to section
3 11.017(a) of the Tax Code may create a new reinvestment zone with identical geographic
boundaries for the purpose of setting a new tax increment base. Chapter 3 11 of the Tax
Code, the Tax Increment Financing Act (the “act”), authorizes the governing body of a
municipality to designate a contiguous geographic area in the jurisdiction of the
municipality as a reinvestment zone to promote development if the area meets certain
criteria. See Tax Code $8 311.003, ,005. Section 311.008 of the act authorizes a
municipality to “exercise any power necessary and convenient to carry out this chapter.”
See also Tex. Const. art. VIII, 9 l-g (providing that the legislature may authorize various
political subdivisions to grant relief from ad valorem taxation on property located in a
reinvestment zone and to issue bonds or notes to finance the development of rehtvestment
zones). A reinvestment zone terminates on the earlier of the termination date designated
by the ordinance creating the zone or the date on which all project costs, tax increment
bonds, and interest on those bonds have been paid in full. Tax Code 8 311.017(a)(l), (2).
An earlier termination date may be designated by an ordiice adopted subsequent to the
ordinance creating the zone. Id. § 3 11.O17(a)(1).
Section 311.012 defines the crucial terms “tax increment,” “captured appraised
value,” and “tax incrementbase”as follows:
(a) The amount of a taxing unit’s tax increment for a year is the
amount of property taxes levied by the unit for that year on the
captured appraised value of real property taxable by the unit and
located in a reinvestment zone.
(b) The captured appraised value of reai property taxable by a
taxing unit for a year is the total appraised value of the property for
that year less the tax increment base of the unit.
The Honorable Fred Hill - Page 2 (DM-390)
(c) The tax increment base of a taxing unit is the total appraised
value of all real property taxable by the unit and located in a
reinvestment zone for the year in which the zone was designated
under this chapter.
Section 3 11.013 provides that each taxing unit that taxes real property located in a
reinvestment zone shall pay into the tax increment fund for the zone an amount equal to
the tax increment produced by the unit less certain specified deductions.1
By way of background, you explain that the City of Dallas (the “city”) passed an
ordinance designating a reinvestment zone in December 1988, to take effect on January 1,
1989, and to terminate on December 31, 2008. The tax increment base of the
reinvestment zone-the total appraised value of all taxable property in the reinvesrment
zone for the year in which the reinvestment zone was designated, that is, 1988-was
$48,299,020.00.
In 1990, the city made a bridge loan to the reinvestment zone in the amount of
S2,100,000.00, anticipating that the tax revenues on the captured appraised value of the
real property in the reinvestment zone would enable the reinvestment zone to repay the
loan by the end of the twelfth year. Despite improvements in the reinvestment zone since
1989, the total appraised value of all taxable real property in the reinvestment zone had
decreased to $32,577,087.00 as of January 1, 1993. Because the total appraised value of
all taxable real property in the reinvestment zone has decreased since. 1988, the captured
appraised value of the property in the reinvestment zone is a negative number. You
suggest that this situation is anticipated to continue and that it is very unlikely that the
reinvestment zone will generate any revenues for the foreseeable future.
It is not apparent from your letter or the exhibits appended thereto that the city has
issuedany tax increment bonds or notes to finance the reinvestment zone. We assume that
there are no claims against the tax increment find other than the city’s loan to the
reinvestment zone. We do not address the termination of a reinvestment zone in
circumstances other than those at issue here.
In light of this factual background, you ask, “If the City terminates the Zone by
City ordinance pursuant to [section] 3 11.017(a) of the Act, can the City then create a new
be omt has explainedthe tbeoty ofthe fimncing of a reinvestmentzoneas follows:
Under this s&me, the exiting tax revenuesof each “taxiag unit” arc
fmzea;thetsxincxcmcn tfimuicingbondsarcsold;theimprovanaltssrc
oom; Ihe “blighted area” is revitalized; properly v&es soar and ad
valomnIaxmvelmes increase. TheitIeradIaxmvenoes okuandaboveIhe
taxincmmcntbasarethenwcdtoretircthefaxi nerement fioaociog
ObligaIiOtlS..
El Paw Communiry College Dist. Y. City of El Paso, 698 S.W.2d248, 250 flex. App.-Austin 1985).
rev ‘d on other grounds. 729 S.W.Zd2% vex. 1987).
p. 2138
The Honorable Fred Hill - Page 3 (DM-390)
[] reinvestment wne with geographic boundaries identical to those of the original Zone for
the purpose of setting a new tax increment base pursuant to [section] 3 11.012(c) of the
Act7” We believe the act permits these steps. First, section 3 11.017(a) of the act clearly
permits a municipality to establish the termination date of a reinvestment zone in an
oniinance adopted subsequent to the ordinance creating the zone.2 Second, the act sets
forth various criteria for a minvestment wne, see id. 8 3 11.005, as well as restrictions on
the composition of a reinvestment zone, see id. 8 3 11.006. These criteria and restrictions
do not preclude the creation of a reinvestment wne in a geographic area that formerly
comprised a reinvestment wne. We believe that if a geographic area satisfies these criteria
and restrictions, it is eligible to be designated as a reinvestment wne, regardless of its past
histoty. Of course, if the existing reinvestment wne is terminated and a new one created,
the city must adhere to the procedures for creating a reinvestment zone in cmating the
new zone, just as it would in creating any other zone. See, e.g., id. $8 3 11.003 - .004.
Next you ask if the city’s loan to the 6rst reinvestment wne may be treated as a
“project cost” of the second reinvestment zone pursuant to section 3 11.002(l) of the act,
or if the loan could be assumed by the second reinvestment zone. Section 3 11.002( 1) sets
forth a lengthy and detailed deiinition of the term “project costs”:
(1) “Project costs” means the expenditures made or estimated
to be made and monetary obligations incurred or estimated to be
indd by the municipality establishing a reinvestment wne that are
listed in the project plan as costs of public works or public
improvements in the zone, plus other costs incidental to those
expenditures and obligations. “Project costs” include:
(A) capital costs, including the actual costs of the
acquisition and construction of public works, public improve-
m’ents, new buildings, structures, and tixtures; the actual costs of
the acquisition, demolition, alteration, remodeling, repair, or
reconstruction of existing buildings, structures and tixtures; and
the actual costs of the acquisition of land and equipment and the
clearing and grading of land;
(B) financing costs, including all interest paid to holders of
evidences of indebtedness or other obligations issued to pay for
project costs and any premium paid over the principal amount of
the obligations because of the redemption of the obligations
before maturity;
(C) real property assembly costs;
2Xa municipatityhas tssual beads on tehstf of the reim,camult zone,seclion311.017(b)allows
tbcmunieipali~todiaehalgeIbetaxinemnen tpledgedtopayanytmadsandtnterestoatheboadsandto
taminatethcrciwcstmncnttzoaebycstablishingafundtopaythcbondsandintmst Weskumethatthe
cityhasnotissucdanytmdsonbebdfoflherei~ tz4nteatisue.
p. 2139
The Honorable Fred Hill - Page 4 (DM-390)
(D) professional service costq including those incurred for
architectural, planning, engineering, and legal advice and
SeWiCeS;
(E) imputed administrative costs, including reasonable
charges for the time spent by employees of the municipality in
connection with the implementation of a project plan;
(F) relocation costs;
(G) organizational costs including the costs of conducting
enviromnental impact studies or other studies, the cost of
publicizing the creation of the zone, and the cost of
implementing the project plan for the zone;
@I) interest before and during construction and for one
year after completion of construction, whether or not
capitalized;
(I) the cost of operating the reinvestment zone and project
facilities;
(J) the amount of any contributions made by the
municipality from general revenue for the implementation of the
project plan; and
(K) payments made at the discretion of the governing body
of the municipality that the municipality fmds necessary or
convenient to the creation of the zone or to the implementation
of the project plans for the zone.
Clearly, project costs are limited to “‘the expenditures made or estimated to be made and
monetary obligations incurred or estimated to be incurred by the municipality” in
establishing a particular reinvestment wne, and do not include expenditures made by the
municipality in the past in establishing a now deiimct reinvestment zone. We do not
believe that the pre-existing debt of a defbnct reinvestment zone falls within the statutory
detlnition of the term “project costs.” Furthermore, we see nothing in the act that would
authorize a reinvestment zone to assume the debt of a detimct reinvestment zone. In
enacting the reinvestment zone provisions, the legislature careMly delineated the authority
of municipalities with respect to reinvestment zones as well as the powers of the
governing boards of reinvestment zones. See id. 55 3 11.008 (powers of municipality),
3 11.OlO (powers of board of directors), 3 11,011 (project and financing plans). None of
these provisions authorize a reinvestment zone to assume a pre-existing debt of another
entity.
Finally, you ask whether there is any mechanism by which the tax increment base
can be adjusted to account for the severe decrease in the total appraised value of the real
property in the reinvestment zone. Section 311.012(c) expressly provides that “[t]he tax
p. 2140
The Honorable Fred Hill - Page 5 (DM-390)
increment base of a taxing unit is the total appraised value of all real property taxable by
the unit and located in a reinvestment wne for the year in which the wne was designated.”
See Lumpson v. Cig of Beaumont, 687 S.W.Zd 788,789 (Tez. App.--Beaumont 1985, no
writ) (holding that the statutory predecessor to section 311.012(c) reqtired the tax
increment base to be determined on the basis of the total appraised value of all real
property in the reinvestment zone in the year in which the zone was designated rather than
the year in which the zone took effect). There is no provision in the act for changing the
tax increment base, and we are not aware of any other statute which would permit the city
to do so.
SUMMARY
A municipality that terminates a reinvestment zone by ordiice
pursuant to section 311.017(a) of the Tax Code may then create a
new reinvestment zone with geographic boundaries identical to those
of the original zone. A municipality’s loan to the first reinvestment
wne may not be treated as a “project cost” of the second
reinvestment wne pursuant to section 3 11.002( 1) of the act, nor may
such a loan be assumed by the second reinvestment zone. There is
no mechanism for adjusting the taz increment base of a reinvestment
wne to account for a severe decrease in the total appraised value of
the real property in the reinvestment zone. See Tax Code
4 311.012(c).
DAN MORALES
Attorney General of Texas
JORGE VEGA
Fii Assistant Attorney General
SARAH J. SHIRLEY
Chair, Gpiion Committee
Prepared by Mary R. Grouter
Assistant Attorney General
p. 2141