Karen Tiedemann is a partner with the law firm of Goldfarb & Lipman LLP and can be reached at ktiedemann@goldfarblipman.com. Lynn Hutchins is a partner with Goldfarb & Lipman LLP and can be reached at lhutchins@goldfarblipman.com. Rafael Yaquian is a partner with Goldfarb & Lipman LLP and can be reached at ryaquian@goldfarblipman.com.

AB 2 (Chapter 319, Statutes of 2015) provides new opportunities to use tax-increment financing to address cities’ economic development needs. Although AB 2 draws heavily from community redevelopment law, it also imposes limitations on the use of tax-increment financing. City officials seeking creative ways to finance economic development projects should take a look at the tools provided by AB 2.

What’s New in AB 2?

AB 2 authorizes the use of tax-increment revenue to improve infrastructure, assist businesses and support affordable housing in disadvantaged communities through the creation of Community Revitalization and Investment Authorities (CRIAs). AB 2 sets the rules and procedures for creating and operating CRIAs through the adoption of community revitalization and investment plans (also referred to as Revitalization Plans) and designation of community revitalization and investment areas (also referred to as revitalization areas).

Types of CRIAs

AB 2 authorizes the creation of two types of CRIAs that are considered separate public bodies from the city or any participating taxing entities.

The first type is a single-member CRIA consisting only of the city or county that creates the authority. In the second type, one or more local governments can join with one or more taxing entities to create a joint powers authority to function as a multi-entity CRIA.

All taxing entities and special districts
in a particular jurisdiction, except school and community college districts and redevelopment successor agencies, can participate in CRIAs. A community that previously sponsored a redevelopment agency cannot create a CRIA unless the successor agency to the former redevelopment agency has received a finding of completion from the California Department of Finance and makes specified findings.

There is no clear advantage to selecting one type of CRIA over the other, except that taxing entities might be more likely to pledge tax-increment funds and commit long term to a CRIA that provides the taxing entities a role in its governance. The governing body of a single-member CRIA is appointed by the city council (or board of supervisors) and must consist of three members of the sponsoring community’s legislative body and two members of the public who live or work within the revitalization area. In contrast, a majority of the members of a multi-entity CRIA must be members of the legislative bodies of the public entities that created the CRIA and include at least two members of the public who live or work within the revitalization area and are appointed by the other board members.

Where Can CRIAs Function?

CRIAs must limit their revitalization activities to designated revitalization areas. Unlike redevelopment project areas, property included in a revitalization area need not be blighted. Instead, revitalization areas must meet very specific statutory requirements. In particular, at least 80 percent of the property located within the revitalization area must be characterized by:

• An annual median household income that is less than 80 percent of the statewide annual median income; and
• Three of the four following conditions:
• A nonseasonal unemployment rate 3 percent higher than the statewide median unemployment rate;
• Crime rates 5 percent higher than the statewide median crime rate;
• Deteriorated or inadequate infrastructure, such as streets, sidewalks, water supply, sewer treatment facilities and parks; or
• Deteriorated commercial or residential structures.

Alternatively, a revitalization area may be established within a former military base with largely deteriorated or inadequate infrastructure and structures. Revitalization areas can include areas located in a former redevelopment project area, but the Revitalization Plan must acknowledge that the tax-increment amounts payable to a CRIA from this property are subject and subordinate to any pre-existing successor agency enforceable obligations.

What CRIAs Can and Can’t Do

CRIAs are generally authorized to:

• Adopt a Revitalization Plan;
• Provide funding to rehabilitate, repair, upgrade or construct infrastructure;
• Undertake brownfields cleanup;
• Provide for low- and moderate-income housing;
• Acquire and transfer real property, including through eminent domain;
• Provide for seismic retrofits of existing buildings;
• Issue bonds;
• Borrow and accept funds or assistance from the state or federal government;
• Fund owner or tenant improvement loans;
• Fund the construction of specified structures for provision of air rights (a type of development right in real estate, referring to the air space above a property); and
• Provide direct assistance to businesses for industrial and manufacturing uses, subject to specific exceptions.

Prohibited activities include:

• Providing direct assistance to automobile dealerships on previously undeveloped land;
• Providing direct assistance to a development of five acres or more if the land was not previously developed for urban use and will generate sales taxes (unless the principal permitted use is office, hotel, manufacturing, or industrial); and
• Providing direct or indirect assistance to a development or business used for gambling or gaming. 

What’s in the Plan

Before conducting any activities, a CRIA must adopt a Revitalization Plan identifying the specific activities it will carry out and finance. Each Revitalization Plan must include:

• Elements describing the plan’s principal goals and objectives;
• A description of the deteriorated or inadequate infrastructure in the revitalization area and the program for constructing adequate infrastructure;
• An affordable housing program;
• Estimated revenues and expenditures;
• A program to remedy or remove hazardous materials; and
• A program to provide funding for or to facilitate economic revitalization.

The Revitalization Plan is also subject to certain time limits, including a:

• 30-year time limit on establishing debt;
• 45-year time limit for plan effectiveness;
• 45-year time limit on repayment of debt and receipt of tax increment; and
• 12-year time limit for acquiring property by eminent domain.

A Revitalization Plan can be adopted only after three public hearings are conducted and cannot be adopted if 51 percent or more of the residents and property owners in the revitalization area object to the plan. Adoption procedures can also include voter approval in some circumstances. Adopted Revitalization Plans must be reviewed annually and provide an opportunity to make amendments
to the plan.

The process for preparing and adopting a Revitalization Plan is similar to the redevelopment plan adoption process. Unlike redevelopment plans, Revitalization Plans are subject to protest procedures every 10 years during which property owners and residents within a revitalization area may object to the Revitalization Plan. If 51 percent of property owners and residents object to and vote against the Revitalization Plan, future revitalization activities may be frozen permanently, but those in progress prior to the vote may be completed.

How a CRIA’s Activities Can Be Funded

Before or after adopting a Revitalization Plan, an eligible taxing entity may adopt a resolution directing the county auditor-controller to allocate tax-increment funds from properties located within a revitalization area. A taxing entity can set the time frame for its pledge and may limit the use of the funds for specific purposes or programs, similar to a negotiated redevelopment pass-through agreement. Prior to adopting such a resolution, the taxing entity and the CRIA’s governing board must agree in writing to limit the use of tax-increment funds for administrative and overhead expenses. A taxing entity can revoke the resolution upon 60 days’ written notice to the county auditor-controller, subject to repayment of debt issued by the CRIA.

Funding for Affordable Housing

At least 25 percent of tax increment allocated to a CRIA must be deposited into a Low- and Moderate-Income Housing Fund and used to increase, improve and preserve the community’s supply of affordable housing. If a CRIA makes specified findings, it can transfer these funds to the housing authority within the CRIA’s sponsoring community or to housing successors of former redevelopment agencies.

In addition to providing funding for affordable housing, AB 2 protects low-income residents of the designated revitalization areas. The number of housing units occupied by extremely low-, very low- and low-income households cannot be reduced during the term of the Revitalization Plan, and any low- or moderate-income housing units that are destroyed or removed within a revitalization area must be replaced within two years.

Which Tax-Increment Financing Tool Is Right for My Community?

Cities interested in using tax-increment financing to spur economic development can choose from myriad new programs, including the tools introduced by AB 2. In addition to CRIAs, communities may wish to consider the costs and benefits of using other tax-increment financing tools, including Infrastructure Financing Districts (IFDs), Enhanced Infrastructure Financing Districts (EIFDs), Seaport Infrastructure Financing Districts (SIFDs) and Infrastructure Revitalization Financing Districts (IRFDs). The ultimate decision about which tax-increment financing tool is most beneficial for a particular community, however, depends on the unique circumstances in each city.

Additional Resources

A Summary of California Tax-Increment Financing Tools for Community Economic Development

About Legal Notes

This column is provided as general information and not as legal advice. The law is constantly evolving, and attorneys can and do disagree about what the law requires. Local agencies interested in determining how the law applies in a particular situation should consult their local agency attorneys.

This article appears in the April 2016 issue of Western City
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