What is Tax Increment Financing (TIF)?

We often hear of terms in real estate that get thrown around with little to no explanation. I would like to take a few minutes to shine a light on the TIF concept and use. Tax Increment Financing (TIF) is a tool for financing economic development. While conceptually similar, individual TIF programs and legislation are uniquely designed and applied in each state that has authorized the use of this financing mechanism. The low-interest debt that is issued to developers on behalf of the government is backed by future gains in tax revenues. Typically these tax revenues originate from increased property values, but alternative tax bases, such as increases in sales tax volume can also be considered as collateral. Some quick notes about TIF include the following:

  • Not a tax credit program, unlike historical tax credits, new market tax credits, energy tax credits, etc.
  • Rule of Thumb ratios of private to public funding (TIF is a portion of the public financing mix) range from 8:1 to 12:1. However the public funding is typically front-loaded on the project schedule to account for heavy investment in public infrastructure.
  • Due to budget constraints, has become the primary (in some cases, the only) tool that municipalities use to finance improvements related to the public benefit.
  • Freezes collection of tax increases in designated TIF districts in order to fund debt offerings. In some cases the freeze is 20+ years.
  • Can set-aside portions of debt to fund social programs such as workforce development, job retention, libraries, schools, daycares, etc. This will help alleviate community concerns of lost tax revenues.
  • Reserved for blight, brownfields, or targeted industry growth; but in most states, greenfield development is accomplished under the umbrella of “economic development”
  • TIFs do not directly affect tax rates in the community, but may raise overall tax collections due to increased property values and sales volume.
  • TIF needs are assessed using at least one of the following three categories:
    1. TIF District Designations (Blight, Economic Development, etc.)
    2. “But For” test
    3. Cost/benefit analysis
  • Typically administered through the local redevelopment agency.

I hope this article helps the reader better understand what TIF is, and how it can be administered. If you have additional questions, please drop me a note.

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