During the 2003 session of the Missouri General Assembly, Sections 99.915 to 99.1060 were added to the Revised Statutes of Missouri and designated collectively the "Missouri Downtown and Rural Economic Stimulus Act." Sections 99.915 to 99.980, RSMo, deal with the downtown portions of that act and provide a basis for diverting increases in state and local taxes to assist in the construction of infrastructure and, in the case of the local taxes, redevelopment of privately owned substandard and blighted areas within central business districts in Missouri towns and counties.

The Missouri Downtown Economic Stimulus Act ("MODESA") is basically a modified and enhanced version of tax increment financing. Those familiar with tax increment financing will find the concepts and approaches in the Real Property Tax Increment Allocation Redevelopment Act, Sections 99.800 to 99.865, RSMo (the "TIF Act") are incorporated into MODESA.

Two significant advantages will exist for communities and developers using MODESA rather than provisions of the TIF Act:

1. The concept of "other net new revenue" in MODESA allows up to 50 percent of the new individual state income taxes generated by new jobs created within a development project area and up to 50 percent of the incremental state general fund sales taxes to be captured for the purchase of paying for public infrastructure required to make a project possible. Under the TIF Act, the state contribution to local projects is limited to 50 percent of the state income taxes increment or one-half of the incremental increase in general fund sales taxes.
State and local tax revenue under MODESA is captured for a period of up to 25 years, rather than the 23-year period provided in the TIF Act.

With the two exceptions indicated above, all of the benefits accorded by MODESA are available to communities (generally with less administrative hassle and fewer requirements for oversight from the state) using the TIF Act.

One of the most significant differences between MODESA and tax increment financing is found in the areas where MODESA may be used and the types of projects which may be subject to financing through MODESA. A "development area" in MODESA¹ is severely limited in the following specific respects:

• The development area cannot exceed 10 percent of the land area of the municipality.
• The development area must be located in the central business district (defined as the historic core of a community, which is locally known as "downtown").
• The development area must have generally declining property taxes or population for the preceding 20 years.
• The development area must be contiguous (although there may be three non-contiguous areas so long as they meet all the other requirements for being a development area, including being in the central business district).
• The development area must be a blighted or conservation area².

Once the development area is qualified and approved, development projects may be undertaken within such development areas. Development projects are limited to what is defined in the statute as projects which constitute a "major initiative."³

A major initiative is any public project which promotes either: (1) "tourism, cultural activities, arts, entertainment, education, research, arenas, multi-purpose facilities, libraries, ports, mass transit, museums, or conventions, with an estimated cost of at least $10 million in cities over 300,000; $5 million in cities over 100,000; $1 million in cities over 50,001; and $500,000 in cities of 50,000 or less; or (2) a private project, the purpose of which is the location or expansion of a private business which complies with the following requirements:

Population of Municipality	Estimated Project Cost	New Jobs Created
300,000 or more	$10,000,000	at least 100
100,000 to 299,999	$ 5,000,000	at least 50
50,001 to 99,999	$ 1,000,000	at least 10
50,000 or less	$ 500,000	at least 5

There are significant requirements in MODESA regarding the content of development plans and required findings which must be made before such plans may be approved by a local community. Section 99.942.1, RSMo, provides the following requirements for a development plan: A development plan shall set forth in writing a general description of the program to be undertaken to accomplish the development projects and related objectives and shall include, but need not be limited to:

(1) The name, street and mailing address, and phone number of the mayor or chief executive officer of the municipality;

(2) The street address of the development site;

(3) The three-digit North American Industry Classification System number or numbers characterizing the development project;

(4) The estimated development project costs;

(5) The anticipated sources of funds to pay such development project costs;

(6) Evidence of the commitments to finance such development project costs;

(7) The anticipated type and term of the sources of funds to pay such development project costs;

(8) The anticipated type and terms of the obligations to be issued;

(9) The most recent equalized assessed valuation of the property within the development project area;

(10) An estimate as to the equalized assessed valuation after the development project area is developed in accordance with a development plan;

(11) The general land uses to apply in the development area;

(12) The total number of individuals employed in the development area, categorized by full-time, part-time, and temporary positions;

(13) The total number of full-time equivalent positions in the development area;

(14) The current gross wages, state income tax withholdings, and federal income tax withholdings for individuals employed in the development area;

(15) The total number of individuals employed in this state by the corporate parent of any business benefiting from public expenditures in the development area, and all subsidiaries thereof, as of December thirty-first of the prior fiscal year, categorized by full-time, part-time, and temporary positions;

(16) The number of new jobs to be created by any business benefiting from public expenditures in the development area, broken down by full-time, part-time, and temporary positions;

(17) The average hourly wage to be paid to all current and new employees at the project site, categorized by full-time, part-time, and temporary positions;

(18) For project sites located in a metropolitan statistical area, as defined by the federal Office of Management and Budget, the average hourly wage paid to nonmanagerial employees in this state for the industries involved at the project, as established by the United States Bureau of Labor Statistics;

(19) For project sites located outside of metropolitan statistical areas, the average weekly wage paid to nonmanagerial employees in the county for industries involved at the project, as established by the United States Department of Commerce;

(20) A list of other community and economic benefits to result from the project;

(21) A list of all development subsidies that any business benefiting from public expenditures in the development area has previously received for the project, and the name of any other granting body from which such subsidies are sought;

(22) A list of all other public investments made or to be made by this state or units of local government to support infrastructure or other needs generated by the project for which the funding pursuant to this act is being sought;

(23) A statement as to whether the development project may reduce employment at any other site, within or without of the State, resulting from automation, merger, acquisition, corporate restructuring, relocation, or other business activity;

(24) A statement as to whether or not the project involves the relocation of work from another address and if so, the number of jobs to be relocated and the address from which they are to be relocated;

(25) A list of businesses that are competing with the business benefiting from the development plan in the county containing the development area and in each contiguous county;

(26) A market study for the development area;

(27) A certification by the chief officer of the applicant as to the accuracy of the development plan.

Even if the development plan contains the foregoing requirements, it cannot be approved unless and until the findings required by Section 99.942.3, RSMo, are made by the appropriate authority:
The development plan may be adopted by a municipality in reliance on findings that a reasonable person would believe:

(1) The development area on the whole is a blighted area or a conservation area. Such a finding shall include, but not be limited to, a detailed description of the factors that qualify the development area or project pursuant to this subsection, a written statement, signed by members of the governing body of the municipality or authority confirming that the information has been independently reviewed by the members of the governing body of the municipality or authority with due diligence to confirm its accuracy, truthfulness, and completeness. The study shall be of sufficient specificity to allow representatives of the authority or the municipality to conduct investigations deemed necessary in order to confirm its findings;

(2) The development area has not been subject to growth and development through investment by private enterprise and would not reasonably be anticipated to be developed without the implementation of one or more development projects and the adoption of local and state development financing;

(3) The development plan conforms to the comprehensive plan for the development of the municipality as a whole;

(4) The estimated dates, which shall not be more than twenty-five years from the adoption of the ordinance approving any development project, of the completion of such development project and retirement of obligations incurred to finance development project costs have been stated, provided that no ordinance approving a development project shall be adopted later than fifteen years from the adoption of the ordinance approving the development plan and provided that no property for a development project shall be acquired by eminent domain later than ten years from the adoption of the ordinance approving such development plan;

(5) In the event any business or residence is to be relocated as a direct result of the implementation of the development plan, a plan has been developed for relocation assistance for businesses and residences;

(6) A cost-benefit analysis showing the economic impact of the development plan on the municipality and school districts that are at least partially within the boundaries of the development area. The analysis shall show the impact on the economy if the development projects are not built pursuant to the development plan under consideration. The cost-benefit analysis shall include a fiscal impact study on each municipality and school district which is at least partially within the boundaries of the development area, and sufficient information from the authority to evaluate whether each development project as proposed is financially feasible;

(7) The development plan does not include the initial development or redevelopment of any gambling establishment; and

(8) An economic feasibility analysis including a pro forma financial statement indicating the return on investment that may be expected without public assistance. The financial statement shall detail any assumptions made, a pro forma statement analysis demonstrating the amount of assistance required to bring the return into a range deemed attractive to private investors, which amount shall not exceed the estimated reimbursable project costs.

A Downtown Economic Stimulus Authority is created to administer provisions of MODESA within each local municipality. Downtown Economic Stimulus Authorities generally have all of the powers provided to land clearance for redevelopment authorities pursuant to the Missouri Land Clearance for Redevelopment Authority Act⁴ and tax increment financing commissions pursuant to the TIF Act. Such authorities generally consist of five to fourteen members. One member is appointed to represent local community development corporations; one must be an African American business man;⁵ and one is appointed to represent school districts within the municipality. Other members are appointed by the mayor for terms of three years.⁶

Powers of the Downtown Economic Stimulus Authority to acquire property, own real estate, lease and borrow money, allow such an authority to provide tax-exempt financing similar to exemptions pursuant to Chapter 100 bond financing, by virtue of the authority taking title to real and personal property within a development area and leasing it back to a developer with an option to purchase.

Unlike most other redevelopment financing tools, MODESA does not permit the acquisition of property in furtherance of a development project through the use of eminent domain.

While other net new revenues from state taxes may only be used for public improvements such as streets, sidewalks and utilities, economic activity taxes and payments in lieu of taxes may be expended on redevelopment of private property (in the same fashion as such funds may be used pursuant to the TIF Act).⁹

In addition to the locally generated payments in lieu of taxes and economic activity taxes, MODESA allows municipalities sponsoring projects to apply to the Department of Economic Development for the use of "other net new revenues" generated through state taxes collected from new sales and new jobs within a development project area.¹⁰ Other net new revenues consist of the "state income tax increment"¹¹ and the "state sales tax increment"¹² generated by a development project for up to 25 years after the project is constructed.

The state income tax increment is based on an estimate prepared by the Missouri Department of Revenue after an analysis of "the practical tax rate on gross payroll" of salaries and wages paid to new employees and new jobs at a business located in a development project area each year. New jobs are in turn defined in Section 100.710, RSMo, as jobs which did not previously exist within the state. Presumably, therefore, if a Missouri business moves from one location to another, the Department of Revenue will exclude its payroll for the year prior to the relocation from its calculation of state income tax increment within a development project area.

State sales tax increment similarly is one-half of the increase in general fund sales taxes (a total of three percent, or 1.5 percent as the increment). The calculation of the state sales tax increment excludes any amount of sales tax generated by a facility relocating from within the state at its prior location during the prior year from the increment.

The state sales tax increment is only available for use in a development area if "the Missouri Development Finance Board and the Department of Economic Development are satisfied, based on information provided by the municipality or authority, and such entities have made a finding that a substantial portion of all but a de minimus portion of the sales tax increment attributable to retail sales is from new sources which did not exist in the state during the baseline year." ¹³ The exact meaning of the cited language regarding state sales tax increment will have to be determined by the Department of Economic Development (and ultimately the courts). If it is strictly construed, it is unlikely that any retail project will be eligible for the state sales tax increment. If liberally construed, sales tax increment from new types of businesses or businesses with unique brand names (which generate sales that otherwise might go out of state through catalog or on-line sources) may be eligible for the state sales tax increment.

Special treatment is given to out-of-state businesses relocating within the state¹⁴ for the purpose of calculating other net new revenues. Pursuant to Section 99.919, RSMo, when out-of-state businesses relocate into a development project area, the economic activity taxes, state income tax increment and other net new revenues generated by such out-of-state business is calculated based on the full amount of tax revenue generated by the out-of-state business without reduction for revenues generated in the baseline year. In such circumstances, the municipality has the option of allowing the baseline year to be the year before the year in which the development project involving the out-of-state business is approved, or the year following the year in which the out-of-state business development project is approved, in those cases where taxes generated by businesses other than the out-of-state businesses moving into the redevelopment project area decrease in the year following the relocation (presumably because of the displacement by the out-of-state business of other businesses).

(1) An estimate that one hundred percent of the payments in lieu of taxes and economic activity taxes deposited to the special allocation fund must and will be used to pay development project costs or obligations issued to finance development project costs to achieve the objectives of the development plan. Contributions to the development project from any private not-for-profit organization or local contributions from tax abatement or other sources may be substituted on a dollar for dollar basis for the local match of one hundred percent of payments in lieu of taxes and economic activity taxes from the fund;

(2) Identification of the existing businesses located within the development project area and the development area;

(3) The aggregate baseline year amount of state sales tax revenues and the aggregate baseline year amount of state income tax withheld on behalf of existing employees, reported by existing businesses within the development project area. Provisions of section 32.057, RSMo, notwithstanding, municipalities will provide this information to the department of revenue for verification. The department of revenue will verify the information provided by the municipalities within forty-five days of receiving a request for such verification from a municipality;

(4) An estimate of the state sales tax increment and state income tax increment within the development project area after redevelopment;

(5) An affidavit that is signed by the developer or developers attesting that the provision of subdivision (2) of subsection 3 of section 99.942 has been met and specifying that the development area would not be reasonably anticipated to be developed without the appropriation of the other net new revenues;

(6) The amounts and types of other net new revenues sought by the applicant to be disbursed from state supplemental downtown development fund over the term of the development plan;

(7) The methodologies and underlying assumptions used in determining the estimate of the state sales tax increment and the state income tax increment; and

(8) Any other information reasonably requested by the department of economic development and the Missouri development finance board.

Once a project is approved for state supplemental funding, a certificate is issued by the Department of Economic Development to the project specifying the amount of eligible funding. The first $150 million of other net new revenues collected by the Department of Revenue are transferred to a State Supplemental Downtown Fund administered by the Department of Economic Development. Appropriations are made each year from that fund by the General Assembly.¹⁵ In the event sufficient funds are not available to fully fund all entitlements pursuant to outstanding certificates, disbursements are made proportionately based on funds which are available. In no event may any development plan receive more funds than it generates, nor may a development plan receive more funds than the estimate contained in the certificate issued when it is approved for state supplemental funding.

A municipality sponsoring a downtown development project may issue bonds or other obligations in its own behalf or through other political subdivisions (for instance, a transportation development district or community improvement district) for the purpose of raising money to pay for improvements required to complete a project.¹⁶ The obligations may be repaid using state and local tax funds payable to the municipality through MODESA. If such obligations contain a recital that they are "issued pursuant to Section 99.915 through 99.980," such a recital "shall be conclusive evidence of their validity and of the regularity of their issuance." Similarly, no lawsuit may be filed challenging the creation of approval of a plan, a project or the organization of a downtown stimulus authority more than 90 days following the act challenged.¹⁷

MODESA is by its terms set to sunset in ten years. No new application will be considered after January 1, 2013.¹⁸

The provisions of MODESA are probably best suited for large projects involving public infrastructure in the central cities of the state. The ability to capture both the state income tax increment and the state sales tax increment in extremely large projects could make a significant difference regarding funds available for infrastructure. Before undertaking a project pursuant to MODESA, a careful evaluation should be made regarding the limitations on the use of the state sales tax increment in Section 99.918(24), RSMo, and elsewhere in MODESA.

For smaller projects and projects involving local sales of staples (for instance, neighborhood shopping centers anchored by a grocery store), there is no apparent advantage to using MODESA over the TIF Act. All of the local taxes available through MODESA are available through the TIF Act and either the state income tax increment or the state sales tax increment is available through state supplemental tax increment financing under the TIF Act.