Decoding Tax Increment Financing (TIF)

Tax increment financing (TIF) is a tool used to fund economic development by capturing future increases in property tax dollars generated from new industrial, commercial, or even residential development. This increase in property tax dollars is the incremental increase in assessed value that is typically determined by an assessor once the construction of the improvements are completed.

Origins

TIF originated in California several decades ago as a way to give cities the ability to raise money for development projects – projects that would then attract matching federal funds. TIF is now utilized in all states except Arizona.

How Is TIF Used Today?

TIF is used to promote economic development in specific geographic areas. Proceeds from TIF can be utilized for any capital project that serves or benefits an economic development or redevelopment area. TIFs are often used to eliminate blight, address environmental issues, facilitate reuse, and encourage overall economic development.

Developers can use TIF funds in a variety of ways, such as building or updating public infrastructure, acquiring land, relocation, demolishing existing structures, funding debt service, planning for the development of the project, or paying for utilities.

Eligibility

Not all geographic areas are eligible for TIF. The basic premise for eligibility is that a town or city must designate certain areas as an area to be redeveloped, which is the foundation of the TIF district. This is usually done at the request of a corporation or developer; however, it’s possible for a city to designate certain areas as blighted or in need of economic revitalization prior to any parties showing interest in that area.=

Types of TIF

The laws governing TIF vary from state to state, but there are three main variations:

1. Bond financing: The most common form of TIF, a local government will issue bonds backed by a percentage of the projected increased property tax revenues. The developer and the municipality must consider additional issues such as taxable vs. tax exempt interest, security for bonds and who will bear the risk.
2. Pay as you go: Incremental property tax revenues are used to compensate the developer yearly for construction costs.
3. Tax rebates: The developer pays the tax increment and the city will refund that same amount. In these instances, TIF agreements are typically issued for 25 years, but they can vary by municipality and project.

Obtaining TIF

While TIF is certainly powerful – and can generate funding that would not have been generated otherwise – obtaining it is a complex, multi-step process that should be navigated with the help of trusted advisors.

To determine whether TIF makes sense for your development project, reach out to your KSM advisor or fill out this form.