of the questions most frequently asked by developers is: "How
much TIF assistance can I get for my project?"
As most real estate professionals
know, tax increment financing is a way for municipalities to capture
new real estate and sales tax revenue generated by new commercial
or industrial development. A project that's in a designated TIF
area may use "incremental" real estate or sales taxes
to finance a portion of the costs of development.
But how much TIF assistance is available
and how is that determined? Municipalities and taxing districts
will naturally want to keep the TIF assistance to a minimum, to
have the full value of newly developed property on the tax rolls
as soon as possible. Developers, of course, want the maximum assistance
to increase their rate of return.
Developers need to ask three questions
in order to assess the amount of TIF assistance for any project:
What is legally allowed -what is financially available - and what
is politically viable?
The first test is a legal one: Are
costs to be reimbursed with TIF dollars classified under the TIF
statute as allowable "redevelopment project costs?" The
most common categories of TIF assistance include costs of acquisition
of land and improvements, demolition, site preparation including
environmental clean up, clearing and grading of land, rehabilitation
of existing improvements, public works, streets, roadways, traffic
improvements, relocation, job training, and interest costs.
These broad legal categories of costs
are the first threshold in determining the level of TIF assistance
for a particular project. For most developers, finding enough "redevelopment
project costs" will not be especially difficult, since acquisition
costs and site improvement work will frequently comprise a large
portion of a development budget. The TIF Act provides plenty of
allowable categories for a developer to recoup some major costs.
Now we come to the next issue. Although
a development project may have millions of dollars in eligible TIF
costs, municipalities will generally only assist a project if it
generates enough TIF revenue to support the assistance requested.
A project that generates only
$2 million in new real estate and sales tax revenue (one or both
sources can be used for TIF) will generally not receive more than
that in TIF assistance, even though there may be $5 million in qualifying
TIF eligible expenses.
This is a common problem for developers
who want to redevelop a site that isn't vacant and is occupied by
taxpaying businesses. Although higher taxes will be due after redevelopment,
if those base taxes are substantial, new incremental taxes may not
be sufficient to support needed TIF assistance.
But even if a project generates sufficient
increment to support a TIF request, it has to deal with the next
and perhaps most important threshold, the political one. Although
the project may be in an existing TIF district, it must comply with
the comprehensive plan for the municipality and must be consistent
with what the municipality desires to see at that particular location.
TIF assistance, unlike zoning, is entirely discretionary -even if
the use is permitted, a city may not want to encourage a development
Part of a city's analysis will involve
whether a developer is likely to develop the site, in a manner that
is acceptable to the city, without TIF assistance, also known as
the "but for" requirement. Although a plain "vanilla"
project could be built without TIF, a municipality may agree to
pay for upgrade costs by using TIF dollars. So specialty exteriors,
more costly landscaping, and additional public improvements may
be demanded to secure the necessary approvals, and those costs added
to the TIT package.
Then there's a "gap" analysis,
which is often required to prove that the rate of return without
TIF assistance is inadequate, and that a developer could not do
the project otherwise. Cities may require that only the amount of
the "gap" be funded by TIF.
Notwithstanding the amount of eligible
costs or gap requirements, some cities also have policy guidelines
for the amount of TIF assistance awarded, relative to a total development
budget; in the Citv of Chicago that percentage is about 251%. In
such a case, a project of $20 million would support TIF assistance
of about $5 million.