Economy design

Targeted Tools

Targeted Tools

 Represent fastest growing area of development finance.

 Goal of targeted tools is to catalyze investment and transform the

real estate values of a geographic area.

 Three general categories:

1. Special assessment district financing

2. Tax increment financing

3. Tax Abatement

 These categories often overlap and work in conjunction with each

other as a layered financing mechanisms.

Targeted Tools: Special Assessment

Special Assessment District Financing

 Mechanism by which business, industry, commercial districts and governments generate funds by applying special tax assessments on geographic areas.

 Two general structures:

1. Business and Neighborhood Districts - Self assessment - BID, SID, NID, etc.

2. Government Districts - Sometimes self-assessed, often govt. created - SSD, SAD, CFD, CDD, TID

Business & Neighborhood Districts

 Business and Neighborhood Districts help to support a variety of services:

 security and safety patrols

 snow removal

 promotions, marketing and events

 graffiti removal

 beautification and cleanliness programs

 economic development

 Typically run by property owners in defined area

 Property owners voluntarily impose tax to provide for infrastructure improvements or enhanced public-type services

Types of Business & Neighborhood Districts

 Business Improvement Districts (BID)

 Special Improvement District (SID)

 Community Improvement District (CID)

 Community Development Authority (CDA)

 Neighborhood Improvement District (NID)

Government Districts

 Services and improvements directed by local government in defined

area

 Can be initiated by property owners or by local government

 Special Services District (SSD)

 Special Assessment District (SAD)

 Community Facilities District (CFD)

 Community Development District (CDD)

 Transportation Improvement District (TID)

Benefits of Special Assessment

 Can be leveraged with bonds

 Not development-dependent

 Can span two or more jurisdictions

 Generally strong collection enforceability – lien status

 Can be combined with TIF

Challenges of Special Assessment

 Overburden to property owners

 Less likely to approve other necessary tax increases?

 If assessment can be imposed with less than unanimity, litigation is

common by non-approving property owners

Targeted Tools: Tax Increment Finance

Tax Increment Finance

 Second and most common targeted form of financing.

 First created in 1952 in California to act as a catalyst for redevelopment areas.

 Quickly spread across the country – 48 states and District of Columbia have

enabling legislation.

 Referred to by a variety of names:

 TIF - Tax increment financing (most states)

 TAD - Tax allocation district financing (GA)

 PDF – Project Development Financing (NC)

 TIRZ - Tax increment reinvestment zones (TX)

 California currently does not have a TIF law

What is TIF?

 Special authority provided to a local governmental jurisdiction which allows

them to allocate specific tax revenues towards the redevelopment,

development or renovation of the built environment.

 A mechanism used to capture the future tax benefits of real estate

improvements to pay the present cost of specific improvements.

 TIF is used to channel incremental taxes toward improvements in distressed

or underdeveloped areas where development would not otherwise occur by

using the increased property or sales taxes that new development generates

to finance qualified costs related to development.

What is Increment?

 Increase in taxes resulting from development

 Difference between base frozen tax and future generated taxes.

 Types of taxes used:

 Real estate – most common

 Sales tax

 Income tax

 Gross tax

 Value added tax

Why Use TIF?

 Encourage development, eliminate blight, addresses environmental issues

 Adaptively reuse old buildings and facilities for modern day commerce and

economic development.

 Finance critical infrastructure while shifts portion or all of financial burden

for infrastructure to the private sector through public-private partnerships

 Advances economic development or redevelopment projects that otherwise

may not move forward in today’s economy

 Attracts economic development prospects by having infrastructure financing

plan in place

 Create jobs and preserve and strengthen the tax base

Who Controls TIF?

 States authorize enabling legislation.

 Local governmental jurisdictions (city or county) designate districts or project

areas.

 Development agencies or other entities implement the program.

 Private developers, real estate and financial institutions partner with

development agencies.

Common TIF Developments

 Mixed-Use

 Residential

 Commercial

 Industrial

 Amenity Creation

 Retail Development

 Transportation

What can TIF Finance? (Generally)

 Infrastructure Improvements

 Site Preparation

 Facility / Amenity Construction

Such as:  Public Infrastructure  Land Acquisition  Relocation  Demolition  Utilities  Debt Service  Planning Costs  Direct Costs of Development (typically only in blight situation)

Typical Improvements - Infrastructure

 TIF is commonly used to finance necessary infrastructure improvements that

allow a deal to move forward. While each state’s TIF statute establishes

eligibility, some common infrastructure improvements that typically qualify

include:  Publicly owned and maintained utilities

 Sanitary sewers

 Wastewater treatment facilities

 Lift stations

 Force mains

 Transmission lines

 Sewer pump stations and related equipment

 Drainage facilities including storm sewer systems, collection and detention

facilities, pumps, inlets, canals and related channel equipment

Typical Improvements - Infrastructure

 TIF can be used to finance a number of expenses related to infrastructure.

While what is eligible varies by state, some examples of common TIF eligible

expenses include:  Public roads and streets

 Bridges

 Lighting

 Traffic signals and related equipment

 Decorative pavers

 Medians

 Turn lanes

 Property used for right of way

 Compensable utility relocations that occur due to the placement or construction

of a roadway

 Beautification components and related hardware

Typical Improvements - Infrastructure

 TIF may finance improvements beyond typical infrastructure needs to include

pedestrian-friendly amenities such as:  Hiking and biking trails

 Pathways that facilitate intermodal transportation

 Sidewalks

 Bike lanes in street right of way

 Pedestrian bridge systems that link commercial centers to transit systems

 Sky bridges that link public buildings

 Public tunnel systems for private buildings

 Pedestrian platforms for rail or light rail transit systems and similar facilities

Two Categories of Public Improvements

 Generic Public Improvements  Roads, bridges, sidewalks

 Utility extensions (water, sewer, electric, gas, telecommunications)

 On-site Public Improvements  Environmental Remediation

 Parking facilities

 Landscaping

 Storm water management

Requirements for Use of TIF (generally)

 Establish TIF District

 “But for” Analysis

 Feasibility or Market Study

 TIF or Development Plan

 Development Agreement

Leveraging TIF – Securing Debt

Bond Financing

 Challenges based on speculative revenue stream

 Could be tax-exempt

Pay-As-You-Go Financing

 Developer responsible for financing and providing necessary security to lender

 Harder to do tax-exempt financing

Project-Specific & District-Wide TIF

 TIF application is either project-specific or district-wide, depending

on the scope of the effort: whether it is one site or an entire

neighborhood.

 Both methods also have limitations and varying levels of risk.

Project-Specific TIF

 Usually a single project or single piece of property  Specific user so generally less complicated  Cleaner process / fewer parties  Funds typically go to public improvements necessary to make project feasible

(parking garages, infrastructure and sewer / water improvements)  In certain states, funds can be used to acquire land  Often, land is controlled by single owner  Effective in providing gap financing for a particular improvement  More risk since the success of the project often relies on one user  More difficult credit hurdles for bond investors  Can cause unfair development advantage  The community buy-in process must be fair and transparent  Used as a complement to other finance mechanisms addressing the greater

community

District-Wide TIF

 Multiple users and potentially many property owners.

 Transactions more complex and require significant due diligence

 Traditionally applied to large area of land or entire neighborhood

 Communities use to eliminate blight and deterioration in larger areas.

 Typically support major infrastructure projects such as roads, traffic lights,

landscaping of public areas, parks, parking garages and other public benefit aspects

 Can support infrastructure and preparation of “ready to go” sites as part of an

industrial, medical or research park

 Can allow land assembly

 Can raise community suspicions of driving longtime property owners out of area

 Can be frustrating for property owners and developers outside the TIF area

Simple Project-Specific TIF Example

Using Up-Front Method of Financing:

 Existing property generates $50,000 a year in real estate taxes.

 Government designates the property as a “TIF” district.

 Tax base is frozen at $50,000 level.

 New project is proposed for the site and will in effect raise overall tax base

generated to $150,000 (and rising) a year once completed.

 Developer agrees to make significant investment and seeks TIF funds from

govt. for eligible public improvements.

Simple Project-Specific TIF Example

 Government conducts “but for” test and agrees to TIF deal and issues tax-

exempt bonds to finance proposed infrastructure improvements.

 Bonds are issued generating cash for the project (several options on actual

financing mechanism).

 Once project is complete, new assessment is completed on property

($150,000 in taxes a year as indicated before).

 Frozen base ($50,000) continues to flow to pre-existing coffers (city, county,

schools, state, etc.).

 Increment (additional $100,000) goes towards debt service on the bonds that

were issued for the project.

Simple Project-Specific TIF Example

 Increment is used to pay back bonds over time, anywhere from 10-40 years.

 Once bonds are paid off, the property taxes are “unfrozen” and the full tax

base generated goes to existing coffers (city, county, schools, state, etc.).

 THE KEY - No new taxes are requested and no existing taxes are used in

the financing of the project.

Graphically Speaking

3 Critical Public Policy Considerations

1. Due Diligence

2. Transparency

3. Accountability

Due Diligence – Do the Work!

 Go through all the step necessary to ensure an acceptable level of satisfaction.

 Take a conservative approach

 Application process and fees are okay

 Crunch all the numbers and do the math

 Request more data

 Ask lots of questions

 Be thorough and dig deep

 Seek partnerships with developers who want to provide all the numbers

 KEY - Don’t accept assumptions

Due Diligence – “But for” Test

 The “but for” test is a public policy test for measuring the appropriate

need for TIF financing.

 Major part of the community buy-in process.

 TIF authorizing agencies should be conducting this test for every project.

 Provides a rational and justification for approving TIF funding.

 Eliminates the argument that the funding is “corporate welfare”.

 Sets the appropriate amount of TIF funding for the project. The project

may not require 100% of the TIF funds for debt service and this test will

help establish the necessary financing.

Due Diligence – “But for” Test

 The test should be conducted using financial models or impact

programs and outside professionals are almost always more equipped

to crunch the numbers.

 Seek professionals if uncertain. They provided a 3rd party point of

view and are invaluable to the process.

 Be aware and beware of the assumptions!

Transparency – It’s All Out There

It is not enough to act transparent, you must actually be transparent.

 Best Practices – open meetings, open records, all laws followed, sound

leadership, community events, web/newsletters, single point of contact, etc.

 Address Failures – Play the “what if” game and answer the “what now”

questions.

 Build Consensus – Determine primary, secondary and tertiary considerations

for various stakeholders. Be prepared to compromise and be creative in

addressing conflicting objectives or interests

 Strategize – Plan changes, roadblocks and find champions for solutions that

come from third party supporters (not always the government entity) (i.e.

Federal Reserve in Kansas City)

Accountability

 Be accountable to stakeholders, report success and failure, draft policies that meet goals and objectives. For instance:

 Application and approvals process

 Use standards – industrial, blight, retail philosophy

 Investment participation level policy

 Geographical targeting policy

 Transportation and housing policy

 Consider what the broader goals are in pursuing TIF:

 Big picture items (jobs, investment, physical change)

 Master plan, redevelopment strategy, etc.

Accountability

 Create process for vetting TIF developer assistance

 Establish a framework for community input

 Determine how TIF implementation can best meet objectives

 Document steps taken and results to aid in debt approval at the public level

 Detail the fiscal impact for each entity

 Diagram the increment financing process

 Provide sufficient analysis of the economic and fiscal impact and benefit to the city

Targeted Tools: PACE & Abatement

Property Assessed Clean Energy (PACE)

 PACE financing is a mechanism for achieving energy improvements on existing

privately-owned buildings through special assessment financing

 Loans are provided by private capital sources

 Loans are paid back via the property owners’ property tax bills

 Loan stays with the property, even if the property is sold or transferred

 New property owner assumes the special assessment and must make assessed

payments

PACE – Process (generally)

1. Property owner identifies necessary and qualified energy efficiency upgrades, retrofit and/or generation investment for their home or business

2. Private capital provider (bank, energy company, etc.) provides loan to property owner for improvements

3. Once completed and certified, municipality places a special assessment on that property’s tax bill.

4. Assessment is collected during the regular property tax payment process with payments made to the private lender via the municipality.

5. Over time, the loan is paid off and the property sees measurable energy savings

PACE Benefits

 PACE is a very flexible and easily implementable financing tool

 Currently authorized in over 35 states and hundreds of local programs

 Programs can be established to address a single piece of property, a district, a

region or an entire state

 Communities can create broad programs that encompass larger geographic

districts and allow for multiple uses whole also being tailored to specific

targeted users

 Tax bill enforceability ensures strong repayment thus eliminating private

capital provider’s risk

Tax Abatement

 The reduction of an entities tax liability for the purpose of job creation,

investment or retention/location of business in community/state

 Widely used through United States

 Performance based approach emerging

 Highly political, often a zero-sum outcome with inner state/city business

relocations

 #1 tool in state development agencies toolbox

 Notable abuse, misuse and failures