Can a SD city use tax increment financing (TIF) to fund the public infrastructure (streets, curb, gutter, water/sewer mains) in a new residential subdivision, where the city's contribution stops at the infrastructure and individual lot owners pay for their own homes?
Plain-English summary
Tax increment financing (TIF) is a tool cities use to fund public improvements that support new development. The mechanics: the city designates a TIF district. The base property-tax assessment is set at the district's value before improvements. Any tax revenue from increased property value (the "tax increment") after improvements is captured and used to pay for the improvements (often by retiring bonds the city issued to fund the work).
For commercial and industrial projects, TIF is widely used. The 1978 SD TIF enabling act (SDCL ch. 11-9) was originally restrictive on residential development. The original SDCL 11-9-42 said: "A tax incremental district shall not be used for development of residential property." That broad prohibition shut TIF out of residential projects entirely.
In 1985, the SD Legislature changed direction. Senate Bill 133 (1985 S.D. Sess. Laws ch. 102) was titled "An Act to permit use of tax incremental district for development of residential property." The bill narrowed SDCL 11-9-42 to its current form: "No tax increments shall be used for the construction of residential structures."
The narrower 1985 language opened a clear path. TIF funds couldn't be used to build the houses themselves, but they could be used to install the infrastructure (roads, curb, gutter, water mains, sewer mains, sidewalks, drainage) that a residential development required.
In 2008, the City of Aberdeen was considering whether to grant two requests from local developers to create TIF districts to help fund infrastructure placement in planned residential housing developments. Individual landowners would purchase lots and build their own homes. Brown County was concerned about the tax implications. Brown County State's Attorney Dorsett asked the AG.
The AG's answer was yes. The plain language of SDCL 11-9-42 prohibits using TIF money for the construction of residential structures. Reading "residential structures" plainly, the term refers to actual residences (houses, duplexes, apartments). Installing infrastructure (streets, curb, gutter) is not constructing residences. So the City could use TIF for the infrastructure.
The AG worked through standard SD interpretive doctrine. "Residential" plainly means used as or by residents. "Structure" plainly means something that is constructed. Together, "residential structures" refers to things constructed for use as residences (Martinmaas v. Engelmann, Benson v. State). The narrower prohibition didn't reach the broader category of residential-development infrastructure.
The legislative history reinforced the textual reading. The 1985 Senate Bill 133 was titled to permit TIF use in residential development. The title would make no sense if the amendment had been intended to keep the broad prohibition in place. The amendment was a deliberate narrowing.
The bottom line: City of Aberdeen could establish the TIF districts as proposed. The TIF money could pay for the streets, curb, gutter, and other public infrastructure in the residential developments. Individual lot owners would still pay for their own homes (the TIF couldn't subsidize that), but the supporting infrastructure was permissible.
Currency note
This opinion was issued in 2008. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. SDCL ch. 11-9 has been amended periodically. The general distinction between residence construction (prohibited TIF use) and residential infrastructure (permitted TIF use) is structural and likely stable, but check current text and any subsequent AG opinions before relying on this for a real project.
What the opinion meant at the time
For the City of Aberdeen in 2008, the opinion green-lit two planned TIF districts. The City could proceed with creating the districts, issuing TIF bonds (if needed), and using the captured increment to pay for the planned roads, curb, gutter, and similar infrastructure.
For Brown County (which had raised tax-implication concerns), the opinion confirmed the legal authority for the TIF, leaving the county to address its tax-impact concerns through the standard TIF processes (county commission consultation, public hearings, taxing-jurisdiction notice).
For SD real estate developers in 2008, the opinion confirmed that residential infrastructure TIF was a usable financing tool. Developers could approach cities about TIF support for the front-end infrastructure costs of a subdivision, with the developer building lots and individual homeowners building (or purchasing from a builder) their houses.
For SD city finance officers and bond counsel, the opinion provided certainty for structuring residential-development TIF districts. The line was clear: infrastructure yes, residences no. Bond documents and project descriptions had to be drafted within those limits.
For county auditors and other taxing jurisdictions (school districts, special districts) affected by TIF districts, the opinion meant the option of city TIF for residential-development infrastructure was real and would likely be used more in coming years. The taxing jurisdictions had to plan for the effect on their tax base during the TIF term.
For homebuilders and individual lot purchasers, the opinion was indirect but important. TIF-financed infrastructure typically meant lower lot prices than developer-financed infrastructure (because the developer recoups infrastructure cost in the lot price). The opinion validated a financing path that could support more affordable lots in new developments.
Common questions
Q: What is tax increment financing (TIF)?
A: A municipal financing tool where the increased property-tax revenue from new development is captured and used to pay for the public improvements that supported the development. The base assessment is locked in; the increment above the base flows to the TIF until the project is paid off.
Q: What does SDCL 11-9-42 prohibit?
A: Per its plain language, the use of tax increments "for the construction of residential structures." That is, TIF money cannot be used to build houses, duplexes, or apartments. It can be used for other public improvements supporting a residential development.
Q: What is "residential infrastructure" that TIF can fund?
A: Roads, curb, gutter, sidewalks, water mains, sewer mains, storm drainage, traffic signals, street lighting, sometimes parks and pedestrian improvements. Anything that is public infrastructure rather than the residences themselves.
Q: What if the city wanted to use TIF to subsidize home construction (e.g., for affordable housing)?
A: The 2008 opinion's reading of SDCL 11-9-42 would block that direct use. SD's affordable-housing programs use other tools (state grants, federal block grants, low-income housing tax credits). TIF cannot be used to actually build the residences.
Q: How does the TIF affect other taxing jurisdictions (county, school district)?
A: During the TIF term, those jurisdictions receive their share of the base assessed value but not the increment. The increment goes to the TIF until the project is paid. After the TIF ends, all taxing jurisdictions share the higher post-development assessment.
Q: What was the 1985 Senate Bill 133 change?
A: Before 1985, SDCL 11-9-42 broadly prohibited any TIF use "for development of residential property." Senate Bill 133 narrowed the prohibition to "construction of residential structures." The change was deliberate, and the bill's title explicitly said it was to "permit use of tax incremental district for development of residential property."
Q: What kinds of residential developments fit this opinion?
A: Subdivisions for single-family homes. The opinion would also apply to townhouse, duplex, or apartment developments where the city's role stops at public infrastructure. The key fact is that the TIF money is going to infrastructure, not to the residences themselves.
Q: Does the city have to use TIF? Could it fund the infrastructure differently?
A: TIF is one option. Cities can also fund infrastructure through general fund, special assessment districts, developer reimbursement agreements, or various other tools. TIF is attractive because it captures development-driven property-tax revenue without requiring up-front general-fund expenditure.
Q: What were Brown County's concerns?
A: The county worried about the tax implications: during the TIF term, Brown County would not receive its share of the increment, only its share of the base. For a sizable residential development, that could affect county tax revenue for a decade or more. The opinion confirmed the legal authority but did not address whether the City should exercise it.
Background and statutory framework
SD's TIF enabling statute, SDCL ch. 11-9, was originally enacted in 1978. The framework set up the mechanics: city-designated TIF districts, base-value lock-in, increment capture, use of increment to pay project debt, termination of the TIF when debt was retired or after a maximum term.
The 1978 act contained the residential-restriction provision in what became SDCL 11-9-42: "A tax incremental district shall not be used for development of residential property." That language was broad. It blocked any TIF use in connection with residential development.
By the mid-1980s, the policy environment shifted. Cities argued that the residential-development infrastructure gap (streets, water, sewer for new neighborhoods) was holding back housing growth and that TIF was a natural fit for infrastructure financing. Developers argued similarly. The Legislature responded with Senate Bill 133 (1985), titled "An Act to permit use of tax incremental district for development of residential property."
The 1985 amendment changed SDCL 11-9-42 to its current narrower form: "No tax increments shall be used for the construction of residential structures." The amendment preserved a prohibition on direct house-building subsidies (a policy concern about cities directly subsidizing private home construction) while opening the broader infrastructure-financing path that had been blocked under the 1978 language.
The AG's interpretive task in 2008 was to read the post-1985 SDCL 11-9-42. Standard SD construction doctrine applies. Words are given plain meaning and effect (Martinmaas v. Engelmann). Statutory intent is determined from what the Legislature said, not what reviewers think it should have said (Benson v. State).
"Residential structures" plainly refers to actual residences. The dictionary supplies the components: "residential" means "used as a residence or by residents," and "structure" means "something that is constructed" (Merriam-Webster's Collegiate Dictionary, 10th ed., 1993). Together, the terms refer to something constructed for use as a residence.
Infrastructure in a residential development is not a "residential structure" under that reading. Streets, curb, gutter, water mains, sewer mains are public infrastructure. They are constructed but not "used as a residence." The plain text of SDCL 11-9-42 doesn't reach them.
The legislative history confirms. The 1985 amendment was titled to permit residential-property TIF use. The amendment took the broad prohibition and narrowed it to the construction-of-residences carve-out. If the Legislature had wanted to maintain the broad ban, it would have left the 1978 language alone.
The AG's interpretation creates a workable line. Cities can use TIF for the public improvements that support development (the kind of work TIF was designed to fund) while maintaining the policy preference against direct subsidies for private residence construction. Developers and homebuilders bear the cost of the homes; the TIF bears the cost of the supporting infrastructure.
Citations and references
Statutes:
- SDCL ch. 11-9 (Tax Increment Financing Districts)
- SDCL 11-9-42 (no TIF for construction of residential structures)
- 1978 S.D. Sess. Laws ch. 91 (original TIF act)
- 1985 S.D. Sess. Laws ch. 102 (SB 133 amendment)
Cases:
- Martinmaas v. Engelmann, 2000 S.D. 85, 612 N.W.2d 600
- Benson v. State of South Dakota, 2006 S.D. 8, 710 N.W.2d 131
Source
Original opinion text
STATE OF SOUTH DAKOTA
OFFICE OF THE ATTORNEY GENERAL
April 22, 2008
Kimberly A. Dorsett
Brown County State's Attorney
22 Court Street, Suite 2
Aberdeen, SD 57401
OFFICIAL OPINION NO. 08-01
Use of Tax Increment Financing Districts for the Development of Residential Property
Dear Ms. Dorsett:
You have requested an opinion from this Office based upon the following factual situation:
FACTS:
The City of Aberdeen is considering whether to grant two requests by local developers to create tax increment financing districts to help fund infrastructure placement, including road and curb and gutter work, in planned residential housing developments. Individual landowners would be able to purchase lots within the developments and build their own homes once the needed infrastructure is in place. Brown County is concerned about the potential tax implications should the requests be granted.
Based upon the above facts, you have requested an answer to the following question:
QUESTION:
Whether, pursuant to SDCL 11-9-42, the City of Aberdeen may establish the requested tax increment financing districts.
IN RE QUESTION:
SDCL 11-9-42 states that "[n]o tax increments shall be used for the construction of residential structures."
The purpose of statutory construction is to ascertain the intent of a law from a review of the language expressed in the statute. Martinmaas v. Engleman, 2000 S.D. 85, ¶ 49, 612 N.W.2d 600, 611. The intent of a statute is determined from what the legislature said, rather than what the reviewer thinks it should have said. Benson v. State of South Dakota, 2006 S.D. 8, ¶ 71, 710 N.W.2d 131, 158 (quoting Martinmaas, 2000 S.D. 85, ¶ 49). "Words or phrases in a statute must be given their plain meaning and effect." Martinmaas, 2000 S.D. 85, ¶ 49.
While neither "residential" nor "structure" is specifically defined in statute, the terms are not unclear or ambiguous. "Residential" is commonly defined as "used as a residence or by residents." Merriam Webster's New Collegiate Dictionary 996 (10th ed. 1993). "Structure" is defined as "something that is constructed." Id. at 1167. The terms, when used together, plainly refer to something constructed for use as a residence.
It is my opinion that the plain and unambiguous language of SDCL 11-9-42 only prohibits the use of tax increment districts for the construction of residences, and the statute is not applicable to the construction of infrastructure in a residential development. A clear distinction exists between the two situations. A review of the legislative history of the statute supports this conclusion.
South Dakota's tax increment financing provisions were originally enacted in 1978, and codified as SDCL ch. 11-9. 1978 S.D. Sess. Laws ch. 91. The original language of SDCL 11-9-42 stated that "[a] tax incremental district shall not be used for development of residential property." In 1985 the Legislature passed Senate Bill 133, which was entitled "An Act to permit use of tax incremental district for development of residential property." 1985 S.D. Sess. Laws ch. 102. The bill amended SDCL 11-9-42 to its current language. The Legislature's intent to allow the use of tax increment financing districts to aid in the development of residential property — while prohibiting their use in the construction of residences — is clear.
According to the plain language of the statute my answer to your question is yes; the City of Aberdeen may establish the tax increment financing districts as proposed.
Very truly yours,
Larry Long
ATTORNEY GENERAL
LL/SB/lde