veryone
has heard of tax increment financing, but less well known is another
type of municipal incentive that can particularly benefit retail
developments – sales tax financing agreements. They are misunderstood
yet increasingly effective incentive tools that developers should
consider for certain retail projects. The City of Chicago doesn’t
offer them but most surrounding municipalities will consider sales
tax incentives as a way to attract a favored tenant or project,
or to help finance extraordinary development costs.
The legal distinctions between TIF
and sales tax agreements are substantial, including the following
key points.
- Sales tax agreements rebate to the
developer a portion of new local sales taxes generated by a project,
thus reducing project costs.
- Only those incremental sales taxes
paid to the municipality can be rebated, typically 1%, but his amount
can be higher for home-rule municipalities authorized to levy additional
sales taxes.
While newly generated sales taxes my also be part of a TIF, sales
tax agreements can be totally independent of a TIF plan.
- If independent of a TIF plan, no
“blighting” finding is usually necessary, although there
may need to be finding that the property was vacant or under-utilized
for at least one year.
- The political process for setting
up a sales tax financing plan is easier than that for a TIF, since
no tax district approval or hearings are required.
Most municipalities already have the authority to pledge the local
portion of sales tax receipts to be used for infrastructure or general
development purposes.
The benefit for a developer is relatively
clear-cut. Sales tax agreements take a portion of new sales tax
generated from a new retail project and pay those taxes, when received,
to a developer as a reimbursement for project costs. Many such agreements
pay interest on the sums being reimbursed, meaning that developer
receives the net present value of its costs.
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If
a project generates $60 million in annual sales, at least $600,000,
or 1%, of that figure will be available to the municipality; and
in many customary agreements one-half of those taxes, or $300,000
per annum, may be available to be rebated back to the developer
over a 10-year period. This could add about $3 million in gross
funding, or $2 million in net present value, to the development’s
bottom line.
While sales taxes can also be used
in conjunction with a TIF, they can be used independently, avoiding
the necessity of a TIF plan and eligibility findings. Also, no hearings
are needed before local taxing districts, and there’s no need
to convene cumbersome joint review boards, since no other taxing
districts are involved. From a municipality’s standpoint sales
tax dollars potentially coming out of its coffers rather than from
overlapping taxing districts. Nevertheless, if a major retailer
won’t relocate in that municipality “but for”
the sales tax assistance, the municipality wouldn’t receive
any new sales tax dollars in that case.
Many of the factors that justify
TIF incentives also justify sales tax financing: difficult land
assemblages, obsolete subdivisions, or infrastructure needs. All
of these are among the reasons that municipality might enter into
a sales tax incentive agreement with a developer.
Of course, higher-grossing tenants will yield a higher value to
any sales tax incentives. Developers will want to include sales
taxes from all users, even those users who buy their own parcels.
There’s no restriction on pledging sales tax revenue from
all property owners who are part of an overall development plan.
Since development costs may frequently include large infrastructure
or other public improvement costs to benefit all users, the developer
will be entitled to the sales tax incentive needed to pay for those
improvements.
Sales tax financing may be useful
for any project in which there are any extraordinary costs or site
issues, and which will produce significant sales taxes. This type
of incentive agreement can mean more dollars, with fewer set-up
hassles, for both developer and municipality.
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