funding new projects with tax-increment financing or other types
of municipal incentives, developers are frequently admonished not
to violate the "but for" test before receiving commitments
for government incentives. What exactly is this test and how do
you meet it? A recent Illinois appellate court decision examined
the "but for" test, providing some insight as to how it
should be applied.
A "but for" test in its simplest form is the requirement
that developers be able to show that a deal could not be done without
TIF, sales tax financing, enterprise zone status or similar types
of assistance. "But for" such assistance, the deal couldn’t
But there are really two kinds of "but for" tests: a legal
one, and a political or practical one. For tax-increment deals there’s
a legal test required by Illinois statutes. To adopt a TIF Redevelopment
Plan, a municipality must also adopt a finding that the "...redevelopment
project area on the whole...would not reasonably be anticipated
to be developed without adoption of the redevelopment plan."
This is a requirement for adoption of the whole plan independent
of a particular developer's project. So, as long as a city decides
to encourage development in an area where it wouldn’t otherwise
be anticipated, the legal "but for" test is met.
The second type of "but for" test relates to assistance
for a particular project within a TIF district. The developer must
show that its return on investment is insufficient; frequently,
this will involve the preparation of a gap analysis, which must
show inadequate returns without TIF assistance. While this is more
of a subjective test for an individual project, it’s a crucial
practical test of the need for incentives that is frequently used
by municipal officials. For example, a developer may show an inadequate
6% return without assistance, but a more acceptable 11% return with
assistance. This kind of showing is often required for other incentives
recent appellate court decision, Board
of Education of Community High School District No. 218 v. The Village
of Robbins, deals with some of these "but for" distinctions.
In the Robbins case, the Village set up a TIF district for the purpose
of inducing development of a waste-to-energy generation facility.
The School District opposed the TIF, arguing that the "but
for" test was not met because the developer of the facility
did not need TIF to make the deal work. The court rejected the School
District's argument and held that the Village of Robbins was unattractive
to business, had poor infrastructure and had not seen significant
growth or development in many years " thus the legal "but for"
test required by statute was met.
But the court went to elucidate the practical "but for"
analysis, on a project basis - that the particular investment of
the facility required TIF assistance in order to make the project
viable, since the rate of return would have been insufficient without
A crucial finding of the Robbins
case is that pre-development activity does not violate the "but
for" " even though the developer acquired the property,
obtained permits, and entered into other contracts necessary for
development " since there was sufficient evidence that the
project would not move forward without TIF, or the promise of TIF
assistance. The contracts entered into by the developer did not
require the developer to commit to the capital investment necessary
to build the project without TIF, but the promise by the municipality
to consider TIF assistance entitled the developer to move forward
with its activities prior to TIF approval.
Even taking into account the flexibility afforded by the court in
the Robbins case, developers should be careful not to tie up property
without including a due diligence clause that clearly allows for
termination of the contract under certain events. Still, a specific
TIF or governmental incentive contingency may not be necessary-
as long as it can be demonstrated that development will not proceed
without the TIF or other requested assistance, and the developer
can cancel the transaction.