Tax incremental financing (TIF), why isn't this a bigger deal?

Question

So my question/discussion is concerning Tax incremental financing (TIF), this seems to be a big pot of money in many areas. It seems many of the districts around the country start TIFs because there is a need to spur development in that area.

If there is a need, why aren't people jumping all over it? Is it that they are, and its too difficult/competitive? Hopefully, I bump into someone on BP who has experience in this area

Joel Owens · Answer

Forgot to mention that there are also LEGACY components to development. For instance a local developers family has been there for 100 years etc. and they love the town and area. The already have thriving businesses and other projects that have done very well.

While this new project is not likely to make them much money etc. they want to give back and help the place they love so much stay alive and thrive. An outside developer looking in from an investment stand point could generally care less about all of that and it's dollar in and dollars out for them.

Kyle Mack · Answer

Right, thanks @Joel Owens for the insight

Joel Owens · Answer

Not necessarily.

There is what a county or city WANTS an area to be and then there is what MAKES MONEY for a developer with a project.

A project can look pretty when finished and the county, city loves it and all the public does and the developer lost millions on it. Real estate in most cases is a FOR PROFIT business.

I will give you an example. Here about 5 years ago the area was slated for townhomes but there were too many distressed houses. A developer wanted to go in and put apartments. Everyone was against it and said they would approve townhouses. The developer told the council that without the city putting in big bucks they couldn't do the project as it was a money loser.

The land plan called for a certain thing but it wasn't investible at that time in the cycle. As a developer you have to meet with their economic development council and hash out what they are offering and if that project type will work or not.

Kyle Mack · Answer

Thank you for your responses!

@Douglas Dowell totally, agree, alot of debate up here in Milwaukee right now with the use of public funds for sports stadiums.

@Joel Owens thank you for the insight. I get what you're saying, but if a town was marketing themselves as a TID and trying to entice development, you would think that a developer wouldn't have to deal with as many hurdles.

This specific town has land set aside for development and has mentioned TIF opportunities and a vision for the types of development they want on the land. As a developer, if a person followed exactly the plan they had outlined, which is in line with the political powers, you would think that there wouldn't be as many hurdles. Why wouldn't developers be all over it then?

Joel Owens · Answer

Most of the country call them TIF. In GA we call them TAD's ( tax allocation districts ).

They were used like crazy by developers during the last boom. The good part for developers is you can pay more for land because you are getting an offset from the funds. If you didn't have this the project wouldn't work at higher levels.

Proponents say they are good because it funds projects that create jobs and gives a property tax increase revenue for the district. Opponents says it takes a long time to pay back the funds and takes away money that could be better used in other areas. So there are pro's and con's to it and it's how the developers spin and sell it to the public to buy in.

Most of the property tax revenues are based on the school assessments. Here in GA years back there was a little know loophole that didn't require school approval for TAD's using counties and cities funds. They closed off that loophole and it essentially crushed TAD's getting approved once the economy started going down. The schools want their hand out of with the money collected for property taxes. That's what stalled the beltline in Atlanta as the development and money paid for parcels was based on getting TAD funding. Without the funding and the cost paid for the land the projects would lose money. I think a lot of the developer owners walked away and the land was foreclosed. New buyers came in and bought at a much lower basis. It's all about what you can buy the land for, the cost to clear it horizontally and put utilities in, and how much to build it vertically and finish out with the highest and best use to go there. The developers that bought to make the project work based on getting TAD funds made a big mistake. Great if you can get it but do not plan on it.

The project I worked on assembling 20 parcels on 25 acres for a 650,000 sq ft mixed use project and after build value of 150 million dollars was using TAD funds. Using these funds and getting approval is a very sophisticated process and is not easy. I didn't do it but saw the developer I worked for how involved it was and they had decades of experience. Even if you can't get these type of approvals there are other types of bonds etc. you can get from the city or county to help with projects.

It's competitive like anything in life. For example our DOT ( department of transportation ) system is backed up with road requests for about 20 years. There is funding at the state level and then counties and cities have to kick in some coin for new road projects and fixing existing ones or doing road widening etc. So tons of applications come in and you have to sell your project as being the best one to pick and why it is needed the most.

Hope it helps.

Douglas Dowell · Answer

Hello Kyle,

I did some research in law school about this exact question. My conclusion was the political barrier to utilizing TIF is daunting. The diversion of public tax base revenue or suspension thereof has always been subject to intense political debate. Very similar to debate when public funds are proposed for a new sports stadium. The state statutes define "blight" differently and that's where the battle ground is.

The very real constraint in my mind also public coffers were decimated by the great recession and they need every cent of the tax base rolling in. It seems to me that the appetite to grant TIF districts has always been controversial but with strained tax base I would guess even more daunting.

I have never personally been involved in this space so my experience is limited. This is just my take on the state of TIF.

Tax incremental financing (TIF), why isn't this a bigger deal?

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