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"But for" municipal incentives, certain developments would never happen. But it isn't that simple.






Sam Polsky is a principal of Polsky & Associates Ltd., a law firm based in Chicago.






hen 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 transpire.

      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 as well.


      A 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 TIF.

      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.

June 2002

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