Seeking Out Tax Increment Financing Continues To Be A Feasible Pursuit
Seeking Out Tax Increment Financing Continues To Be A Feasible Pursuit
In the current environment of tight capital markets and difficult economic conditions, financing development projects through public private partnerships is becoming more prevalent. Now more than ever, municipalities need new development projects in order to grow their tax base and increase economic activity, while developers need financial assistance from the municipality in order to make new development projects viable. Established by state law in 49 states and the District of Columbia (Arizona is the lone exception), tax increment financing ("TIF") provides a mechanism that encourages development activity without raising taxes or redirecting any existing tax revenue.
How do TIFs work?
The governing body of a municipality designates a defined geographic area as a TIF district. The assessed value of all property within the district is frozen at the amount shown on the tax rolls in the year the TIF district is created ("Base AV"). Taxes generated by the Base AV are passed through to each public taxing agency annually. As development activity occurs and the assessed value within the TIF district increases, the incremental increase in assessed value ("Incremental AV") is used to pay for qualifying projects that benefit the TIF district. When the TIF district is terminated, usually after 20 30 years, all of the property taxes are passed through to the public taxing agencies. The graph below illustrates how property taxes are allocated when a TIF is utilized.
What can be financed with a TIF?
The improvements authorized to be financed with a TIF vary from state to state, but in general the scopes are broad and all types of public infrastructure are eligible, including roadways, bridges, water and wastewater facilities, drainage facilities, pedestrian
walkways, landscaping/park improvements, lighting, parking facilities, and mass transit improvements. In some states, land acquisition and the construction or renovation of private
buildings can be financed with TIF proceeds.
What are the benefits of a TIF to a Developer?
TIFs do not place any additional tax burden on property within the TIF district. The same amount of property taxes will be paid whether or not a TIF is formed. A TIF simply redirects a portion of the property taxes that would have been used to pay for general government services and instead uses it to pay for improvements that directly benefit property within the TIF district.
The incremental property taxes generated within a TIF can be used to secure tax increment bonds. As such, TIFs create an additional source of financing for projects that may otherwise be infeasible by borrowing against future property tax revenues.
TIFs can be a useful tool for developers when negotiating (or re-negotiating) development agreements with municipalities by providing another option for funding project improvements.
What are the benefits of a TIF to a Municipality? TIFs are often used to channel funding toward improvements in distressed or underdeveloped areas where development might not otherwise occur.
The portion of property taxes allocated to a municipality is
often just a fraction of the overall property tax bill. By utilizing
a TIF, a municipality can capture a significantly higher portion
of the property taxes paid within the TIF district, thereby
providing the municipality with more funds for local public
improvements.
If TIF bonds are issued, they are typically special obligations rather than general obligations. Because the bonds are not general obligations of the municipality, they do not require voter approval, the faith and credit of the municipality is not at risk, and the bonds will not exhaust the power of the municipality to incur debt.
What types of projects typically utilize TIFs?
Most states do not limit the type of projects (residential, commercial, industrial, mixed use, etc.) that can utilize TIFs. However, TIFs have historically been used as an economic
development tool, and have generally been used to generate economic activity, create jobs, and/or create substantial sales tax revenue. However, in the current economic environment,
municipalities are likely to be more willing to utilize TIFs to generate development of any kind. When requesting a TIF for a development project, proponents should clearly identify the amount of taxes/fees generated during construction, the number of construction jobs, the overall economic output caused by construction of the project, the number and type of
permanent jobs, and any ongoing taxes/fees that will be generated by the completed development.
Should I request TIF for my Project?
Ironically, the best time to pursue or approach a municipality about using TIF for your development project is when the economy is bad, because it's relatively easy to provide a financial proforma that's lackluster, thus justifying the need for project subsidy. Based on our experience, it takes a minimal amount of time and money to approach a municipality about their level of interest in possibly doing TIF for your project. If you know that your project lies in a TIF district, you would be remiss not to inquire with the municipality about the use of TIF for your project, especially in these economic times. The only word of
caution when doing this is to understand that TIF is a niche/boutique area of real estate and there are certain things you need to sayand not saywhen talking to a municipality.
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