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Increment Financing is a widely used tool for economic development,
but there are some additional things you may not know about TIF
that may benefit your development:
Tax Free Returns: Many of todays
TIF deals are based on "pay as you go" models. This means
that no bonds are sold to yield immediate proceeds. Instead, a Developer
Note is commonly issued which is an obligation to pay the Developer
from future TIF revenue, generally real estate taxes and a portion
of sales taxes, as collected. The payments to the Developer offset
some of the cost of the project.
But some of these payments may include
interest on the TIF Note, and if the Developer Note is structured
correctly, that interest could be tax exempt. If payments to the
Developer are based on a percentage of the entire TIF area, as opposed
to specific revenue from one development, the interest portion of
the TIF payments may be tax exempt. Of course, municipalities may
want to offer a lower interest rate on a tax-exempt Developer Note,
but the savings can still be substantial. Just because tax-exempt
bonds are not issued, dont assume that interest payments under
a Developer Note cant be tax-exempt. Although the IRS Code
can be inscrutable, and there may be some other factors that the
issuers tax or bond counsel may consider, there are ways to
achieve tax-free interest returns under the right conditions.
Intergovernmental Agreements instead
of TIF: Although your project may not qualify under traditional
TIF standards as a "blighted" or "conservation"
area, or if your municipality does not want to engage in the political
discourse of TIF, you might be able to achieve similar benefits
by entering into an Intergovernmental Agreement. Under such an Agreement,
new real estate tax dollars generated by your project might be refunded
or abated by the various taxing districts that otherwise receive
the real estate taxes generated by the project. This is in essence
a contractual TIF type of arrangement that can be used for reimbursing
certain development costs. Intergovernmental Agreements avoid the
legal requirements of TIFs and their procedures but can sometimes
yield similar benefits.
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TIF
and 6B?: Most municipalities generally considered TIF and 6B status
incompatible, but that is changing. 6B status under the Cook County
ordinance allows certain industrial developments to be assessed
at less than half the normal rate (16% instead of 36%) for 10 years,
phasing back to full assessment after 12 years. Since TIF captures
new real estate taxes and 6B reduces those same taxes, these are
really two separate incentives that work in opposite directions
6B lowers your taxes, TIF uses increased taxes to fund development
costs.
But TIF and 6B need not be incompatible.
For certain large projects, municipalities may agree to reduce taxes
under 6B and also utilize TIF to get the benefit of increased taxes
over the base taxes. For example, lets say base taxes on an
undeveloped basis are $10,000 After total development the
taxes will be $700,000 If the industrial project qualifies
for 6B status taxes will be reduced to approximately $310,000 -
The increment available will be $300,000, and if this is in a TIF
district some or all of that $300,000 increment may be available
to the developer for up to 23 years. If only TIF were used there
might be $690,000 in savings ($700,000 less $10,000 base) available
annually, but the project would have to have sufficient eligible
costs (acquisition, environmental, site and public improvements,
rehabilitation, for example) to utilize all of that increment (on
a capitalized basis about $7,000,000) so not all of those
funds may be available to be paid to the developer. If you cant
use all the increment for eligible cost it becomes more important
to look at the possibility of using 6B benefits to capture some
or all of the excess incremental taxes that might otherwise be lost.
Of course, a municipality may not be in favor of granting both 6B
and TIF status for the same project if the perceived benefit to
the community doesnt warrant that level of assistance, but
often both programs may be appropriate to attract a desired project
to a municipality. The City of Chicago has used both TIF and 6b
together when the developer has justified the need.
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