Tax Increment Financing (TIF), An Overview

Special thanks to Matthew Galan, a summer associate at Kohrman Jackson & Krantz, for his assistance in the preparation of this article.

I. What is TIF?

TIF stands for Tax Incremental Financing. TIF is a tool for economic development that communities use in an attempt to stimulate private investment and development in targeted areas. The community, through a TIF, captures the increase in tax revenue generated by the private development itself. The community then uses those very same excess tax revenues to pay back the private investors that footed the initial bill for the public improvements and infrastructure required to make the new private development a success.

TIF requires significant communication and coordination among a variety of players and levels of government, as well as analysis and planning. This is one of the more administratively complex programs available to local legislative authorities, so prudent use of experienced legal counsel is recommended for the creation of a successful TIF.

II. When is TIF used?

A TIF is used to address site and infrastructure development obstacles for a project. Obstacles can include site assembly and preparation, environmental contamination, public infrastructure, blighted conditions that impair development, investment needs for commercial districts or large areas, targeted investment of tax revenue needs, lack of private commitments, and TIF district expansion constraints.

Effective use of a TIF targets districts in need of public investment to address infrastructure issues, blight and generation of new development. Use of a TIF is appropriate when comprehensive economic and redevelopment plans are integrated and can only be completed “but for” the TIF (i.e. without the TIF, there would be no project). Lastly, TIF’s are best used when clear objectives and thresholds for projects are established through broad community representation on a TIF advisory board.

III. Why would a community want TIF?

The use of a TIF can aid a community’s fight against blight by incurring the costs of development or by reimbursing a developer for redevelopment costs that normally fall upon the developer alone. Depressed areas are redeveloped, the community and local economy is improved, and property taxes remain unchanged.

Property taxes remain the same under TIF because TIF is not a method of taxation. Rather, TIF is a creation of new debt through the issuance of bonds. For example, the community sells bonds to raise money for an urban renewal project, which are the incurred costs. As the renewed area becomes more valuable, it generates more property tax revenue for the community compared to the area in its blighted state. The increased difference in tax revenue from renewal is used to pay the debt service on the bonds.

Essentially, the community is selling debt as bonds to investors. These investors are paid a return on their investment through the property tax revenue of a refurbished parcel of land. The community does not have to raise property taxes because the refurbished parcel generates the increased tax revenue through its more valuable redeveloped status. The developer profits from the undertaking because it does not have to foot a portion of the cost of refurbishment. The community gains urban renewal from a private developer without footing the bill or assuming financial risk. Lastly, the bond holders, through increased tax revenue, collect a fixed return on their investment.

IV. What are the advantages of using TIF?

· Can be a powerful tool to help finance projects.
· Does not divert funds from an existing budget so political support can be more easily acquired.
· TIF use can overcome site problems or costs.
· Correct use can generate new investment, employment, and tax revenues.

V. What are the disadvantages of using TIF?

· Tax revenue for other government uses and services is diverted (investors have to be paid back).
· Obstacles to development may not be overcome, but rather subsidized (i.e. without the TIF, would the project happen anyway?).
· TIF is a complex, costly, and time consuming tool for financing public infrastructure.
· There is incentive for higher density development to cover financing costs (most bang for your tax buck).

VI. Examples of TIF

A. Good Example

There is a vacant building on a piece of land in your city. The location has some strong commercial potential if public improvements are made to entice business development. For whatever reason, such as inadequate infrastructure, private development is unlikely in this location.

To foster development, the local government and school board agree to participate in a project to redevelop the area. Certain parcels of land are formally designated as a TIF district. Improvements under the newly created tax increment district are planned to include infrastructure. At the time the TIF district was created the property is assessed at a base value of $1 million. The taxes on the base assessment continue to go to the local government, county, school board, and other public entities that receive income from property taxes in that district. Upon improvements to and development of the land in the TIF district, the parcels now have an assessed of $11 million.

The tax increment of the project is the newly assessed value of $11 million minus the original assess value of $1 million. The additional revenue of $10 million is not taxed for the general fund. Instead, the money is separately taxed and deposited into a special fund in an amount equal to the new property tax liability. This additional money is devoted to repayment of the bond investors, and upon termination of the project, to the three original participants (city, county, school board). Because the value of the parcel increased to a substantial degree, the TIF not only increased the value of the parcel, but also generated enough money to repay investors.

B. Bad Example

Your city has an area where mixed development consisting of both residential and commercial uses could succeed. There already are some small businesses present, but the addition of a large centrally located department store is believed to be crucial in rebuilding the retail power of the area.

The area, as currently assessed, is valued at $30 million. In preparation of the private developer’s vision, the redevelopment authority plans on purchasing land, relocating businesses, and constructing plazas. The assessment of the newly completed property is estimated at $50 million. The redevelopment authority sells $15 million in bonds to get the project started through initial public improvements.

The project is completed without a multiplier effect while subsidizing competition for other department stores. The forecast for the project is overstated, and the newly assessed value is only $35 million, a $5 million increase. With such a limited increase, the city cannot repay the debt of $15 million. The city must now increase taxes to retire the debt. All the city accomplished was a job shift and some increased economic activity.

VII. What can a community do to make TIF a reality?

The TIF process is complex. Communities must first determine how best to administer a TIF and exercise its powers to encourage targeted development or redevelopment. To designate a TIF area, the community must conclude that the proposed area qualifies under the applicable state statute. In Ohio, the Ohio Revised Code Sections are 5709.40-43 for municipalities, 5709.73-74 for townships, and 5709.77-79 for counties.

After legislation is enacted authorizing the use of TIF, necessary steps must be taken (contract, constitute boards, incur long-term debt) to effectuate the development or redevelopment. The use of experienced legal professionals to navigate these complexities is not only helpful, but practical.

If the TIF project is successful, the increased assessed value of the TIF area will produce incremental tax revenue. The community can use this money to pay off its incurred debt by contributing to the development or redevelopment. After the statutory period of time expires, or when the debt is retired, the TIF district will terminate and the community (and other recipients of property taxes in that area) will receive both the base tax revenue and the incremental tax revenue from the former TIF district.