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.
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.
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.
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
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.
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.
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.
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
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.
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
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.