Getting development done using Tax Increment Financing (TIF) can be a win-win for communities and private property owners. Plenty has been written about what can happen when TIF is used improperly, but with the right expectations, management, and development process, it is a powerful tool to make difficult projects happen and pencil out favorably. The following are five things both public and private entities should keep in mind when considering a TIF project.
A quick definition: TIF is a popular financing tool that allows local governments to invest in needed infrastructure to support a private project and pay for it through the increased property tax revenues generated by redevelopment projects. States and regions have varying laws and regulations, so the following rules-of-thumb should be evaluated within your specific context.
- TIF projects are partnerships.
A municipality establishes a TIF District in order to use this tool to incentivize property development in difficult areas and circumstances. It should be assumed that they want to help! The municipality’s responsibility is to have a specific goal in mind and do a long-term cost-benefit analysis as they consider the financing plan, the effect on the taxpayer, the risk, and the broader public benefit. At the same time, the private entity needs and deserves predictability and timely cooperation. So, in using this tool, there must be a partnership mindset on both sides.
- There will be a lot of process.
Both the municipality and the private developer need to enter this public-private partnership prepared for a lot of process. And it is not without good reason; there is a public investment involved. This is not meant to be burdensome to a private developer, but just like partnering with another developer or investor, there are costs and benefits when there are more parties. And in this case, the other party is the public. Ultimately this should result in a better project – more financially viable for the private owner and more tax base and vitality for the municipality.
- TIF is only one part of a larger capital stack.
A difficult project using TIF may require multiple sources of financing. This could include other public funding programs such as New Markets Tax Credits, historic tax credits, Opportunity Zone financing, local or state public sources as well as conventional equity and debt funding. The municipal infrastructure may be funded in part by TIF and in part by transportation or brownfields grants. This is good leveraging of resources, but also requires some adaptability and patience in hitting all the requirements for each source.
- TIF is an entrepreneurial-deal-making tool.
Getting a difficult project done will inevitably involve risk. The municipality can use TIF entrepreneurially in a way that they cannot always do with other funding sources. Having development agreements in place with the private property owners, following the regulatory process, and getting buy-in from the public and legislative bodies can help to mitigate the risk. But TIF is most commonly (and best!) used in areas where development has been difficult due to significant barriers. Accordingly, there is some risk that both parties must take to close the gap and make it happen.
- TIF has certain limits.
A municipality and an owner need to be realistic about the limitations of TIF. What it can fund, how it can be used, and who must be involved are all typically regulated (to what extent will vary depending on jurisdiction and legislation). Universally, though, municipalities should not (and cannot, under some regulations) apply the “if you build it, they will come” approach. Before a municipality incurs TIF debt there should be legally binding commitments for private development that will generate sufficient tax revenue to pay the TIF debt. Without that, the risk to the municipality and its taxpayers is too high. A private developer must be ready and willing to commit to qualify for this funding.
TIF can be a powerful economic development tool. Because it uses only new tax revenue from projects that would not otherwise occur to pay its costs, it does not add to the tax burden of current taxpayers. Yet, it is complicated and requires in-depth financial and risk analysis by the municipality and willingness of all parties to be flexible and responsive to each other’s needs. Only with this true form of partnership can there be a win-win project.
By: Stephanie Clarke