|
Tax
Increment Financing (TIF), sales tax financing, and special service
areas have all been used to fund public/private partnerships for
qualifying real estate development projects. Recent amendments to
the Illinois Business District Development and Redevelopment Act
(65 ILCS 74.3 et seq) make Business Districts another viable financing
tool for developers and an alternative to TIF. As property acquisition
and development costs escalate, implementation of a Business District
may be the means to achieve the necessary hurdle rate for a development
otherwise on the margins of financial viability.
Business District financing is a tool
that can enhance TIF revenues or be used instead of other public
financing mechanisms, with many less restrictions. A short analysis
of other public/private financing mechanisms illustrates advantages
of Business District financing under the right circumstances.
TIF Pros
- Captures future real estate tax increment
- Provides bonding authority for funds
to pay project costs
- Can be used in conjunction with sales
tax financing, Special Service Area financing, and Business District
financing
TIF Cons
- Requires a very specific "blight" finding
- Requires a lengthy process involving
public hearings, forming a joint review board, and notifying property
owners
- Requires the political will of the community
and school districts
Yet another public
financing vehicle, Special Service Area (SSA) financing, allows the
levy of an additional real estate tax on property in a designated
area that may be used to pay for public improvements in that area.
However, SSA Financing is generally unpopular with commercial users
because it financially means a direct increase in property taxes.
Special Service Areas Pros
- SSA tax is an additional real estate
tax which is bondable
- Funds are used for improvements in the
Area
- SSAs can be created and the SSA tax
imposed in a short time frame
Special Service Areas Cons
- Higher property taxes
- Consent of a majority of affected property
owners and requires the vote of affected property owners
Sales Tax Financing Pros
- Timeframe is short: no public hearings
or land owner consent needed
- Revenue is from existing sales tax,
no new tax is imposed
- Generally, very little restriction on
the use of the funds
- Minimum statutory requirements must
be met
Sales Tax Financing Cons
- No bonding authority, so pay-as-you-go
is the only option
- No authority to impose an additional
tax
The Business
District Act gives municipalities, whether home rule or not, the authority
to impose a tax of up to one percent on retail sales in a Business
District and to issue bonds supported by the new sales tax to pay
for project costs. Previously, a municipality could use a portion
of the local share of State sales tax to fund development projects
but only pay-as-you-go financing was available – there is no
bonding authority.
Financing under the Business District
Act has another advantage: it gives municipalities the authority to
pledge a portion of the one percent local share of the State sales
tax collected within the Business District to support bonds. Without
the Business District authority, municipalities could only pledge
local sales tax on the pay-as-you-go basis.
|
|
The
Act does not define Business District project costs in the same
detail as contained in the TIF statute, but refers to the payment
of project costs set forth in the Business District Plan adopted
by the municipality. Generally, costs reimbursable under the TIF
Act would be reimbursable Business District costs if they benefit
the district and are contemplated by the plan.
Business District Act Pros
- Provides bonding authority for funds
to pay project costs
- Allows an additional sales tax to be
imposed
- Allows the local share of sales tax
to be pledged and bonded
- Can be used in conjunction with sales
tax financing, TIF and SSA financing
- The District can be formed in a short
time frame and does not require land owner consent
- Greater latitude in defining eligible
costs
Business District Act Cons
- Commercial users might disfavor a higher
sales tax
- Requires a "blight" finding, although
much more lenient than TIF requirements
- Involves public hearings
Let's say a developer
wants to build a 500,000-square-foot shopping center but needs $20
million in a public-private partnership to cover certain on- and off-site
project costs and the developer needs immediately available financing
rather than pay-as-you-go financing.
The site is vacant land that does not
otherwise qualify under the TIF statute as blighted. The municipality
is willing to pledge a portion of the one percent local share of State
sales taxes that would be generated by the new center, but as a non-home
rule community it doesn't have the authority to issue bonds based
on those sales taxes, nor would the taxes alone be sufficient to generate
the net bond proceeds the developer needs when coverage factors are
taken into account. If it's found that, for example, there is obsolete
platting, or inadequate street layout, a Business District can be
formed giving the municipality the authority to impose up to a one
percent Business District tax on sales at the new center and the authority
to issue Business District bonds to pay for Business District costs.
Also, under the authority of the Business District Act, the municipality
pledges a portion of the one percent local share of the State sales
tax generated by the new center and issues sales tax bonds to pay
for project costs. If total sales from the new center are $150 million
per year, and the Business District tax is one percent, and the municipality
pledges 50 percent of its one percent local share of the State sales
tax, then approximately $2.25 million per year will be available to
support the $20 million in bonds.
With the recent amendments, the Business
District Act has become an important tool for developers in structuring
public/private partnerships. Alone or in conjunction with TIF, sales
tax financing, and Special Service Areas, Business Districts can be
formed to provide developer financing for public/private partnerships
that just might make the difference for a successful project.
Deborah A. Faktor, a partner with the
Chicago-based law firm Polsky & Associates, Ltd., represents developers
and corporations nationwide in public/private financings, including
tax increment financing, sales tax financing, and economic development
bonds. She provides counsel on the acquisition and sale of commercial
and industrial properties, the structuring of public/private partnerships,
and the documentation of those transactions. Her corporate work has
included acquisitions, mergers, leveraged buy-outs, and a variety
of financings such as senior, mezzanine and subordinated debt, debt/equity
conversions, preferred stock, and warrants.
Deborah can be reached at dfaktor@polskylaw.com. |
|