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





Sam Polsky is a principal of Polsky & Associates Ltd., a law firm based in Chicago.






ax 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 today’s 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, don’t assume that interest payments under a Developer Note can’t be tax-exempt. Although the IRS Code can be inscrutable, and there may be some other factors that the issuer’s 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.



     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, let’s 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 can’t 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 doesn’t 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.

January/February 2002

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