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.
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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. |
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