Above: The streetcar running in mixed traffic along Nicollet Avenue (City of Minneapolis)

About one percent of Minneapolis' tax capacity will be redirected next year toward a fund intended to one day pay for a streetcar line.

The city's unique method for funding a 3.7-mile Nicollet Avenue streetcar, a project that remains far from certain, is hitting its stride as several new apartment towers have opened. Those buildings now have $5.4 million in city tax capacity, which will aid the streetcar "value capture" district next year rather than helping absorb the growing cost of city services.

If the district did not exist, the city could theoretically raise tax collections for city services by an additional one percent without having an added impact on taxpayers, city finance officials said last week. Or, if tax collections remained as proposed for next year, the burden on existing homeowners would be slightly reduced.

The streetcar district was established in 2013 with the permission of the Legislature to aid a line that would run from approximately Kmart to Kramarczuk's on East Hennepin -- largely in mixed traffic. Unlike tax increment financing, which pays for development with new taxes generated by that development, the streetcar district redirected taxes from a number of anticipated buildings toward a potential future project.

A penthouse on the 36th floor of LPM Apartments offers spectacular views of the Minneapolis skyline and surrounding area. (JIM GEHRZ)

Those buildings are now complete in and around downtown: Nic on 5th, LPM Apartments, 4Marq apartments, 222 Hennepin, Red20 and Xcel Energy's new headquarters. As they've opened, the city tax capacity of the district has risen from $3.6 million last year to $5.4 million in 2017. The city's gross tax capacity is about $550 million.

The city's contribution to the district next year will be less than $5.4 million, since only part of the capacity is taxed. But the total amount generated for the district next year will be possibly more than $5.4 million, since it also pulls from the county and school district's tax capacities.

City officials said they pursued tax increment financing for transit -- not currently an allowed use of the tool -- but were unsuccessful at the Legislature.

The district is expected to one day pay for about $60 million in debt toward a $200 million streetcar project -- though it will need to raise more than $60 million to cover interest. When it was approved, city officials said it would likely generate about $5 million a year.

The city has not identified who will pay for the remainder of the project, though federal funding would likely play a role.

Above: The proposed streetcar as it would appear travelling along East Hennepin Avenue.

The special district has its critics. Former council member and budget chair Paul Ostrow has criticized the project for devoting tax growth to a "pet project."

“To me it’s quite simple," Ostrow said last week. "If there are the concerns there are about property taxes, one obvious fix is the city has the absolute ability to decertify that streetcar district."

Others say it is a prudent investment in the city's future growth.

“Transit investment, particularly fixed rail transit investment, has pretty much proven itself as a development driver," said council member Kevin Reich. "And development driving, of course, adds to our tax base. And adding to our tax base is the winning game plan. Just holding tight and cutting when you want to cut is not a growth game plan.”

An environmental assessment is currently underway for the line. A draft of that assessment is expected to be released in 2017, with the review's completion expected by the end of that year.