Tax Increment Finance (“TIF”) has been much in the news recently and, albeit delayed, may well be a way forward for UK regeneration projects that need a little help to make them happen. The potential of TIF to assist is clearly shown by the experience in the United States where it has served as a tool to address funding for redevelopment activities for 60 years. All but one of the 50 states has enacted enabling legislation permitting the use of TIF. As federal moneys to support redevelopment decreased, states and local government turned to the TIF model to invest in infrastructure and to pay the related costs by capturing the increase in property and other tax revenues generated by the improvements.
PURPOSES OF TIF
TIF is used to accomplish a range of public purposes such as elimination of blight, the construction and repair of infrastructure and environmental remediation. In the United States, blight is an important element to the use of TIF. Blight typically means that there are structures in significant disrepair, inadequate street layouts, unsanitary or unsafe conditions or public realm, inadequate public facilities and often environmental contamination. The TIF model may also be used to encourage development by financing basic public infrastructure, including public streets, water and wastewater facilities, car park facilities, storm and sanitary sewer systems and parks and green spaces. TIF usually represents “gap funding” for the private sector, particularly for “brownfield” projects throughout the United States.
Redevelopment Plan and TIF District The TIF model generally includes a standard set of tasks. At the outset, the sponsoring state or local government engages in extensive discussions with the private developer proposing a TIF-supported financing arrangement as a part of the preparation of a redevelopment plan. Because most states prohibit direct aid to private businesses, virtually all TIF-enabling legislation requires a finding of public purpose by the governmental entity that “but for” the TIF assistance the private development and financing within the TIF district would not occur. The redevelopment plan also indentifies the tax revenues that will be included in the TIF. The TIF generally comprises the revenue generated by the real estate taxes attributable to the increase in assessed value within the TIF district following the approval of the redevelopment plan. If sales tax revenues are also committed, the increase in such revenues above the base amount is added to the TIF stream. Other innovative revenue streams, such as “public improvement fees”, may also be incorporated in the financing model. By capturing these incremental revenues, the government entity is able to apply moneys generated by the redevelopment to pay the public costs of the redevelopment.
As an essential part of the redevelopment plan, the state or local government must determine the geographical boundaries within which the incremental revenues will be captured and applied to pay the costs of improvements, referred to as the “TIF district”.
TIF districts can be single or multi project based. A single project approach typically limits the number of required participants, but also results in a revenue stream to support a financing that is wholly dependent upon the performance of that project.
On the other hand, in order to address more widespread blight conditions and to encourage broader development activity, a TIF district may be drawn to include a larger number of projects and properties and taxpayers. This may permit a more coordinated approach to infrastructure development and may attract a number of different private developers. The broader revenue stream offered by the inclusion of a diverse group of properties may provide more stable support for the financing. However, a broader plan may also generate political opposition from other impacted taxing entities and from surrounding neighbourhoods.
After the scope of the TIF district is identified and a redevelopment plan is adopted, the initial assessed value of the real estate within the TIF district must be established as at the date on which the plan was approved, as well as the initial base collections if sales tax increment is also committed to the financing. The increase over these “base amounts” is ascribed to the development projects and applied directly to support those projects financially.
Sources of TIF Revenues Enabling legislation may limit the tax increment to be captured solely to real estate taxes. For TIF to work in these instances, it is essential that the assessed value of the real estate rises. There may be situations where a highly successful redevelopment drives increases in property values to levels that make it difficult for existing residences and businesses to stay in the TIF district and pay the higher taxes. Therefore public policy may dictate that a portion of the increment revenues are not made available to support project financing, but rather must be applied to pay the costs of additional municipal services, such as police and fire protection, required to support the new development.
A more recent variation used in some jurisdictions is the use of “public improvement fees” (“PIF”) or “retail sales fees” that function much like a sales tax or VAT. PIF is measured by a percentage of the gross sales price of goods and/or services, and as long as it is not anti-competitive, it is charged in addition to other state and local taxes levied on retail sales transactions. In order to encourage new commercial development, some of the state or local sales tax may be waived in favor of the PIF charge, thus dedicating the PIF to public improvements for the particular development in question.
PIF is usually imposed by the private developer, not the state or local government. It is not a “tax,” but is based in contract as part of the development covenants imposed on the land, and is also included in the leases with retail tenants.
FORM OF FINANCING
TIF transactions generally take one of two general forms. Where the private developer is able to finance project expenditures, including the public improvements, on a current basis, the state or local government may prefer to provide the TIF on a cost reimbursement basis. In that structure, the governmental entity expends the tax increment revenues on a “pay-as-you-go” basis, often after the improvements have been constructed. Public expenditures are therefore more closely aligned with the actual in-ground development of the projects. The source of reimbursement is limited to increment revenues actually available to the governmental entity, and the private developer assumes the risk that growth in revenues falls short of projections and thus extends the period for reimbursement. The reimbursement approach avoids the market risks associated with an up-front borrowing by the governmental entity.
The most common alternative involves the sponsoring government providing funding “up front” for the public infrastructure elements of the project where the private developer is unable to advance funds for such costs from its own financing sources, to be repaid from the TIF revenue stream. In this case, the borrowing occurs prior to constructing the improvements that will generate the increment revenues. Interest is associated with the construction of the project is generally reflected in the interest rates required to market the revenue obligations. Since the various enabling statutes generally provide for a termination of the increment after a certain time period – often in the range of 25 to 30 years – marketing of the revenue obligations is heavily dependent upon a feasibility analysis that demonstrates an ability to repay the obligations within the time period that the increment revenues may be collected and applied for that purpose.
The government published a consultation on 18 July 2011 which seeks views on the way the government should introduce TIF schemes within its general business rate retention proposals. The consultation ends on 24 October and the relevant government department has indicated that it plans to introduce business rate retention from April 2013.