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TIFs are widely used development tools, but not fully understood.












     Tax increment financing stimulates private development in underperforming areas by using the tax revenue boost from property revitalization to pay a portion of project costs. Most states make some provision for municipalities to designate TIF districts. The incentives offered can make the difference between an intractably underutilized area and a feasible development deal. These 10 steps can help pave the way toward successful TIF funding.

     Determine the project’s eligibility. Does the project meet state standards for qualification as a TIF area? To proceed with a TIF, most states require findings that the site has certain characteristics such as obsolescence, deferred maintenance, deterioration, environmental contamination, poor land use or a combination of similar factors. Requirements vary widely, though, and in some instances a project may receive TIF designation if the municipality simply demonstrates the area is in need of economic revitalization.

     Survey the political landscape. Even the best project needs political support to proceed. TIF funding is a highly discretionary mechanism that requires buy-in from the municipality and other tax districts deferring a portion of their revenues to move the development forward. Because school districts receive a substantial amount of real estate taxes in many jurisdictions, securing district consent, or at least averting vocal opposition, can prove critical.

     Understand the legal process. The process of securing legal approval of a TIF district varies widely from place to place. In some jurisdictions, the municipality governs TIF approval. Elsewhere, other taxing districts control the process or at least play a major part in public hearings. The interplay of political and legal processes affects project timing. Hearing requirements and government approvals can take 120 to180 days; political issues can extend the process much longer. Beware of jurisdictions where voter referenda or appeal processes may complicate TIF approvals.

     Know the pool of available taxes. Are projects restricted to real estate taxes, or can they use other taxes? Most TIFs use real estate taxes, but sales-tax TIFs are an option if the project generates an identifiable dollar amount of these revenues for the municipality. Additionally, in some jurisdictions individual tax districts pledge their real estate-tax TIF revenues independently. For example, the city and county tax districts might agree to participate while the local school district might withhold its involvement.

     Determine the incremental taxes. The upper limit on TIF funding is the total amount of new, or incremental, taxes generated. If a project is expected to generate $40 million in incremental taxes over the 20-year life of the TIF district, the net present value of that amount is the realistic maximum funding, subject to eligible costs (see below).





Currently, operational facilities or occupied buildings can set an area’s existing tax base so high that incremental taxes from the new development will fall short of the project’s financing needs. If project timing allows, reduce the existing tax base by vacating or demolishing properties targeted for redevelopment before the TIF is put in place.

     Identify eligible costs. For TIF districts, eligible costs can include land assembly and purchase, site conditions, environmental cleanup, public infrastructure and similar items. Even if these costs are legally eligible, the governmental authority may not want to reimburse for them unless they are deemed extraordinary — meaning the developer must show they exceed the normal costs customarily encountered. Environmental remediation, unusual site conditions and infrastructure improvements benefiting more than the individual project are good candidates for eligible costs.

     Consider the "but-for" requirement. Many states require that a municipality determine that no meaningful capital investment would occur in a given area "but for" the formation of a TIF district. Sometimes the municipality makes this requirement project-specific by conducting a gap analysis to determine how much TIF assistance is necessary to make the development feasible. The developer must ensure that this analysis fairly and reasonably estimates financial returns and demonstrates that the project cannot work without TIF assistance. The TIF amount may be based on what the governing authority considers a fair internal rate of return with, versus without, municipal assistance.

     Structure a TIF note or bond deal. While some TIF deals are structured as developer notes, bonds are an option for the right kind of development. TIF bonds supported by property taxes are relatively straightforward; bonds supported by sales taxes are more difficult to structure. Special-service areas or business-district taxes can supplement or provide additional security to make TIF bonds feasible.

     Look for any strings attached. A TIF is a great development tool, but in this public/private partnership some restrictions may apply, from prevailing wage requirements and minority hiring guidelines to operational covenants. Find out about these limitations before negotiations begin.

     Be reasonable. It is far better to ask for a measured amount of TIF assistance than to start at an unreasonably high figure with the idea of negotiating downward. Developers do better by honestly setting forth the amount needed to make the deal work. This approach requires both sides to negotiate in good faith. But, ultimately, gaining the trust of the municipality is the single most important element in successful TIF negotiations.



December 2005

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