an aging shopping center at a great location but it's obsolete,
partially vacant, deteriorating, and needs a lot of work. You –
a developer – would love to be creative and do that deal.
The site qualifies for tax increment financing, or TIF assistance,
but most of the extraordinary redevelopment costs involve on-site
work and very little public infrastructure. Can you make it work?
It's likely that your municipality can help pay for your extraordinary
off-site public infrastructure work. But how about your extraordinary
acquisition or on-site costs? If your project is in a TIF District
you might be able to get some of these costs reimbursed by the municipality,
but it will depend on the status in your jurisdiction.
Some form of TIF is available in almost all of the United States,
including all Midwestern States. Just to reiterate, TIF allows a
municipality (or sometimes a county or township) to use newly created
tax revenue (usually real estate taxes but also sales taxes in Illinois
or Missouri) to help fund new improvements. This re-direction of
new tax revenue is warranted by the fact that "but for"
the TIF assistance a project could not proceed, and only new tax
revenue is used to fund the improvements (the "but for"
is not a requirement in the states of Iowa and Michigan).
But what type of "improvements" can TIF funds be used
for? As a broad principle, public tax funds can be used for any
"public purpose." But different TIF statutory provisions,
as well as state constitutional considerations, may impose further
limitations. In Illinois and many other states, the TIF statute
is fairly broad in allowing TIF funds to be used for land acquisition
and on-site costs. As the Illinois Supreme court recently restated
in Friends of Parks et al. v. The Chicago Park District 786 N.E.
2d 161, (2003), "the consensus of modern legislative and judicial
thinking is to broaden the scope of activities which may be classified
as involving a public purpose." However, TIF laws in some
Midwestern states, because of constitutional restraints or otherwise,
limit TIF expenditures to public improvements.
Most state statutes limit use of tax
funds (and by extension TIF funds) to "public purposes,"
but general economic development is included within that ambit.
In Illinois, Indiana, Wisconsin
and Missouri, TIF funding can be used to pay for land acquisition
and certain site costs within designated TIF areas, even though
no streets, roadways or other public infrastructure are built. In
Illinois, TIF funds can be used to reimburse a developer for portions
of his interest expense and in Missouri, Wisconsin and Illinois,
TIF funds can be used for rehabilitation or reconstruction.
These states would also allow reimbursement
to developers for even on-site costs necessary to prepare a site
for development. Those costs could be for acquisition, and in some
states, environmental remediation, or for grading or balancing of
a topographically difficult site. Iowa's law, taking into account
the urban renewal statute as well as the TIF laws, allows for a
broader reading of allowable reimbursable costs that would also
seem to include certain private development costs, although not
as broad as Illinois or Missouri.
Michigan and Ohio have much more restrictive
statutes that, in general, limit TIF costs to public infrastructure;
furthermore, Michigan does not allow TIF for retail development.
So if you're doing a project in those states it's unlikely you will
be able to recover extraordinary site costs that aren't considered
public improvements. And if you need to assemble many parcels for
your development and need a municipality's help for a land "write
down," it's unlikely to be available in those jurisdictions unless
the municipality itself is the land purchaser.
Restricting TIF to only public infrastructure
improvements, while certainly helpful to some projects, may be too
restrictive for projects that need TIF the most. That's why
most states will allow TIF help where it's most justified:
to redevelop infill or urban sites where the major extraordinary
costs may be assembling land, demolishing buildings, dealing with
site constraints and similar items – even where few, if any,
public roads or off-site infrastructure are necessary. But in Michigan
and Ohio, it may be difficult to use TIF funds for project costs
other than for public infrastructure needs.
Sam Polsky is a principal of Polsky
& Associates, a law firm based in Chicago. He can be reached