Tax Increment Financing: Explore Benefits, Challenges

Tax Increment Financing (TIF) is a powerful tool for economic development, but it comes with its own set of challenges and considerations. Understanding TIFs can help stakeholders make informed decisions about its implementation.

What is Tax Increment Financing?

Tax Increment Financing is a government-sponsored mechanism designed to boost redevelopment or regeneration, typically within struggling urban areas. It allows local governments to issue tax-free bonds based on the value of future tax collections from a designated area or district.

The government can immediately use the bonds' value to finance key infrastructure developments, land purchases, or environmental remediation work.

How does Tax Increment Financing work?

Tax Increment Financing works by capturing the increased property tax revenue generated by the development and using it to fund the project. This increased revenue is known as the “tax increment.”

TIF periods generally range between 15 and 25 years. During this time, tax revenues up to the standard threshold are used normally for municipal spending on schools, infrastructure, and other local priorities. Any tax income above that threshold goes to pay off the bond debt.

Purpose of Tax Increment Financing

The primary purpose of TIF is to spur economic development in a particular area by providing a mechanism to increase the tax base and revenue.

TIFs are commonly used for affordable housing developments in blighted areas, which are neighborhoods with declining property values and higher concentrations of poverty. This is expected to lead to improved neighborhood quality and an increase in affordable housing supply.

Eligibility requirements

To qualify for Tax Increment Financing, a project generally is in a blighted area with declining property values and higher concentrations of poverty; however, on some occasions, we have consulted with clients on Tax Increment Financing in market rate developments.

The project should also comply with the Secretary of the Interior's Standards for Rehabilitation, which encourage an efficient contemporary use while retaining parts of the building significant to its historic, architectural, and cultural values. Further, rehabilitation and improvement expenses must be more than either $5,000 or the owner's adjusted basis of the building and its structural improvements.

Advantages and disadvantages

Advantages

• Economic viability — TIFs can make a planned project far more economically viable to developers.
• Increased tax base and revenue — TIFs generally increase a district’s tax base and revenue.
• Improved neighborhood quality — TIFs can lead to improved neighborhood quality and an increase in the supply of affordable housing.

Disadvantages

• Approval challenges — TIFs require approval from local government, which can be difficult depending on the community.
• Funding competition — There can be many parts of government and the private sector seeking funds, which can lead to challenges in fund allocation.
• Impact on public education — An extreme example occurred in California, which discontinued TIF practices in 2012 after property tax revenues appeared to be directed away from local public education.

There are different types of TIF incentive package structures — each with different income tax implications. Therefore, it’s important to work closely with your tax advisor to guide you through the TIF cycle of your real estate development.

Thank you to Brian Duren and Jim Witt for their assistance with this blog post.

How we can help with Tax Increment Financing

CLA can help you increase your return on investment by employing strategies and leveraging market conditions for overall profitability. Our team uses deep industry knowledge to identify financial, tax, operational, and strategic opportunities across all phases of the real estate investment life cycle.