developers negotiate incentive or finance agreements with municipalities,
there is often confusion about whether funds can be used for certain
types of costs. What categories of eligible costs can be paid for
with these funds?
When funds are being used merely for
conduit financing, such as industrial revenue bonds, and no taxes
are being used to fund development, there
are a few restrictions on the use of such funds – so long as
they're used for a qualified exempt or industrial purpose.
But where anticipated tax revenues or other municipality funds are
used to fund development, restrictions on the use of funds may
be more elaborate.
In the case of tax-increment financing,
the statutes set out specific eligible costs for which a developer
may be reimbursed. Categories
of eligible costs include site-preparation costs such as clearing
and grading, environmental costs, public infrastructure and roads,
demolition, rehabilitation costs, job training, financing, 30% of
a developer's interest costs and other administrative costs
relating to the TIF development.
One of the larger cost categories in
many developments may be land acquisition – but this may also
be the most politically sensitive category. Most municipalities will
want assurances that land costs
are reasonable and in line with other developments. However, even
in the case where these costs are supportable, it may be politically
palatable to allocate reimbursable TIF development costs to other
categories, such as infrastructure or site work. To many governmental
policymakers, providing public improvements or preparing a site for
private investment is a more legitimate use of incentives. While
the law clearly provides for such land acquisition costs, the political
landscape may suggest a more politic allocation of funds.
However, there are many cases where land acquisition will be both
legally justified and politically acceptable. These cases might involve
recalcitrant land sellers, such as land owners who must be paid an "assemblage" premium,
or when condemnation is required. Progressive municipalities recognize
that a vacant or underutilized area may not produce revenue for some
time, and it may be better to
help with acquisition costs or write-downs to facilitate development.
In other cases the developer may allocate legally available dollars
to more innocuous cost categories (such as site development or environmental
cleanup), and then use these funds – which are fungible – to
help with a large land assembly cost which may not be the explicit subject
of governmental assistance. The TIF Act does not require there to be tracking
of specific dollars to specific categories, but aggregate TIF dollars
must match aggregate TIF eligible costs.
One eligible cost category for TIFs that isn't widely used is the
provision for 30% of a developer's annual interest cost. This can
be especially helpful for very costly projects that do not have enough
other qualified eligible costs. But there are some restrictions on computing
this benefit and, more importantly, no TIF bond proceeds can be used for
these interest costs. Instead, the developer is repaid its interest costs
as new real estate taxes from the project are generated on an annual basis – the
pay-as-you go model. The developer will have to front-fund this part of
the incentive and wait for payments as taxes are generated.
Major rehabilitations can also be major
beneficiaries of TIF funds, since most rehabilitation costs are eligible.
On the other hand, new
construction of buildings may not be funded with tax-increment
Sales tax rebates and other general economic development funds
have far fewer restrictions on their use. The general caveat is that the
need must be justified – similar to the but-for test (see "The
Complexities of the But For Test," June 2002 Real Estate Chicago,
p.48) – and that the funds promote economic development as a public
purpose. There are no specific statutory restrictions, but developers
may still be subject to the political scrutiny of identifying "extraordinary
cost" categories that justify the incentive agreement. Municipalities
will identify categories of costs that they find palatable, whether or
not this is a legal requirement. The more obvious the extraordinary cost,
the more likely an incentive deal will be approved.