What is a TIF and how does a TIF work?
By RJ Johnson October 17, 2018
The above video explains how a TIF works.
TIF, or Tax Increment Financing, is an economic development tool used to encourage economic growth and create jobs by allowing developers to pursue developments that they normally wouldn’t pursue if they had to fund the projects on their own.
Typically, a developer will have to prove three items to be true in order to receive approval. Number one, that the area is blighted or that conservation is needed to keep the area from becoming blighted. Number two, that you can’t afford the development on your own, this is called the “But For” test. Number three, that the project you’re seeking to create is going to benefit the entire community and not just the developer. Typically, once approved, the annual tax property increases are restricted or frozen at the current level. The increment above that frozen level is then used to pay off the financing over time.After the completion of the project, the surrounding real estate may increase in value, generating additional tax revenue for the community. The additional goods sold from the real estate can increase the sales tax revenue from the community as a byproduct.
For example, let’s say there’s 100,000 square foot shopping center in your community that is run down and needs to be redeveloped. The real estate taxes on the property are a $1.00 a square foot, or $100,000, annually. Your community wants to have a new grocery store in town so the developer designs a plan in which will include a new grocery store, new sidewalks, approved streets and roads and so on and so forth. Let’s assume these improvements cost $ 10 million.The new property along with the improvements are estimated to increase the property’s real estate taxes to $4.00 a square foot or $400,000. The difference between the $100,000 and the $400,000 is $300,000. This $300,000 is the increment. The increment is then multiplied by 20 years, equally roughly six million dollars. Then, it is discounted by a discount rate and any associated underwriting fees. This would result in about a four million dollar TIF for the developer to either bond or to collect quarterly as a pay-as-you-go.The real estate taxes are paid by the retail tenants that occupy the real estate, say the grocery store in this example. Once the TIF has been paid in full, the community will now have the benefit of the tax revenue which is at $4.00 a square foot instead of $1.00 a square foot. As well as any additional sales tax revenue generated from the real estate.
That, in a nutshell, is how a TIF works.
To learn more about TIF or Tax Increment Financing contact Tri-Land HERE.