TIF - How does it work?

[kard]

Anyone care to just lay it all out there?

How does it work?  Good aspects, bad aspect, other interesting snafu's, etc?


One side question - If a sales tax increase is passed during the life of a TIF, is that revenue also diverted?  Also, are ALL portions of tax diverted, of is it possible some are not (ie - could ATA taxes still be collected while others are diverted)?


Thank you, to anyone who feels like writing an essay.

[mean]

Well, as you're already aware, a TIF project diverts a portion (at least 50% for KCMO projects, iirc) of the tax revenue generated by a development, and hands it back to the developer for a specified period of time (20-25 years). Unless specifically written into the TIF, I think their taxed revenue percentage is frozen, regardless of changes to taxes outside the TIF district. I'm also not aware of any way to work it so that we collect taxes for one particular use but not another; and even if we could, it seems like there would just be a bureaucratic nightmare arguing whether ATA service or police or fire protection is more important, etc.

The good thing about TIF is that you get development you wouldn't have otherwise gotten, and if everything goes according to plan the TIF creates enough developer interest and momentum in an area that you create demand for non-TIF developments.

The bad things about TIF are situational. First of all, some TIF projects take away developments that pay full taxes (say, a Wal-Mart at Bannister) and replace them with TIF developments (say, a Wal-Mart at Blue Ridge), resulting in a net loss for the city even if the new development creates 2-3 times as much revenue--let's not forget that the city is still on the hook for the old infrastructure, etc. Another obvious bad thing is the possibility that a certain percentage of all TIF projects will not generate enough tax revenue to reimburse the developer, in which case the city is responsible for paying the piper, reducing the net revenue available for city services. Yet another bad thing about TIF is that it is unfair to competing businesses. If I run a brewpub in midtown and pay full taxes, and the city lures a competing brewpub to the P&L district who is only paying 25% taxes, how can I expect to compete? This also leads into the fact that even though supporters of rampant TIF abuse apparently really believe that TIF creates something from nothing, it doesn't; it largely diverts revenue, much of which would have otherwise been spent at a full-tax-paying business, to a business that pays a fraction of the taxes. Naturally, this results in a net loss of revenue for the city.

Anyway, TIF can be a great tool if used sparingly. But when it is abused it hurts the city, it hurts the economy, and it does a terrible disservice to the taxpayers...even as they beg for more. It is truly a twisted addiction.

[LenexatoKCMO]

"hands it back to the developers" is a rather inaccurate and predjudicial statement - the money is typically used to finance some public infrastructure associated with the project - (roads, parking garages, etc.)  For example, the TIF on the P&L is funding the parking garages, not the actual retail buildings. 

[mean]

I disagree. I mean, the money is handed back to the developers. Sure, it is ostensibly to reimburse them for infrastructure, demolition, site cleanup, etc., but the net result is that they get a percentage of their taxes handed back to them. I'm not making a value judgment at all, just explaining what happens. How is that inaccurate?

[LenexatoKCMO]

How is that inaccurate?

Because the way you were making it sound would lead one to believe that the tax dollars are just going into the pocket of the developer - in reality they are going to pay for a particular part of the project - roads, parking garages, etc. 

Mean, I am a Libertarian - I would personally prefer that the damn transaction taxes didn't even exist in the first place, let alone the TIF phenomenon that springs from them.  But unfortunately that is the national system right now, and there is zero upside in having our city try to be some sort of test case for what happens when you do away with it. 

[mean]

Of course they are going into the pocket of the developer. Where else would they be going? Into my pocket? Into the city's general fund? Of course not. What are you getting at?

Anyway, your second paragraph is just silly. Where did I say to do away with it? Pointing out well-known problems while saying, "it's a useful tool," is hardly tantamount to advocating "doing away" with it.

[kard]

I was shooting for more of a manual on how it works, not a debate. 

Use your Wiki voice. 

[LenexatoKCMO]

Of course they are going into the pocket of the developer. Where else would they be going? Into my pocket? Into the city's general fund? Of course not. What are you getting at?

It doesn't go into anyone's "pocket".  Of course the developer saves money by not having to build the parking garage (or road, or whatever) himself but that is nowhere near the same thing as just handing them the cash.  You make it out to sound like we are bribing the developers with a check that they can cash and just turn around and use to buy themselves a vacation house in the bahamas.  The money goes to build something. 

[mean]

You're really going overboard with the pointless semantic pedantry. Tax revenue that would otherwise go to into city coffers is returned to the developer, EOF. I'm sorry you took my use of the phrase "hands it back to the developers" to imply that the executives were using TIF reimbursements as bonus checks or whatever.

[Highlander]

Yet another bad thing about TIF is that it is unfair to competing businesses. If I run a brewpub in midtown and pay full taxes, and the city lures a competing brewpub to the P&L district who is only paying 25% taxes, how can I expect to compete? This also leads into the fact that even though supporters of rampant TIF abuse apparently really believe that TIF creates something from nothing, it doesn't; it largely diverts revenue, much of which would have otherwise been spent at a full-tax-paying business, to a business that pays a fraction of the taxes. Naturally, this results in a net loss of revenue for the city.

Two things.  First, not many people mention the competition aspect.  To me, that makes TIF's a bit like Pandora's Box.  Once out, particularly for projects that can indeed stand on their own, it's difficult to reign them in again as the benafactors competitors will, perhaps rightly so, request the same consideration as part of fairplay.  I guess the redeeming part of the P&L District will be that rents will be so high that there probably won't be unfair competition at the store level (but then again, I do not know what the comparisons are with other high-rent districts like the Plaza).

I'm not sure I agree 100% with the second part of that statement though.  While that may be true of developments like the P&L District (although I would defend that TIF on the basis of being a lesser evil to infuse some life into downtown), a TIF that brings the Boeing HQ into KC is indeed creating something where nothing existed.  No diversion of taxes in those cases.  I do not like TIFs used to benefit the service industry, in those cases, the industry is extracting wealth from the community and is truly diverting revenue away from the city.  I make exceptions for certain projects that are critical for the creation of vibrancy in the core (these are few).  Bringing in jobs or visitors from outside the city, however, creates wealth for the city and those are the projects that TIF's should primarily be reserved for. 

[ComandanteCero]

ok... here's what i know.

Tax increment financing (TIF), is a financing tool used by the public sector to encourage development in blighted areas.  There are lots of variations on how it is used, and what it applies to, but here's a general take on it:

A blighted area is an area where very little economic activity is occuring, where development will most likely not occur without the intervention of the public sector, the city/state tries to induce development by lowering development costs.  So, if TIF is going to be used, a city usually must declare a particular area/district blighted (and each city/state has a set of conditions and indicators that have to be met to declare something blighted), and usually note the current tax level on the properties.  This latter component is important when figuring out the "tax increment".

So what is the tax increment?  Generally, when any development occurs (in any area, blighted or not), and an improvement is made, the city usually taxes a property based on the new (higher) assessed value.  The difference between the pre and post improvement level of taxing is called the "tax increment".  With TIF, in a blighted area, the city says to the potential developer, "we will divert that future, hypothetical, tax increment that will result from your improving the area, into the project itself.  We will absorb some of the cost of developing in this area, and make this project more feasible, by putting the additional tax revenues that will result from this project into the project itself". 

So, here's a generic run through of the process.  Let's say there's this blighted area (it may be officially declared blighted, or you may push for it to be declared), and you want to propose a project.  You run the numbers, and realize that the expected rate of return on investment just isn't cutting it for your potential investors/financial backer/bank.  You realize, that with the city's help, you might be able to lower the cost of the project, and raise the rate of return.  You figure the area is blighted, and this is a candidate for Tax Increment Financing. 

You first run the project numbers, and show the city what the expected rate of return on your investment will be, and how it doesn't quite cut it for your investors.  But you've done some calculations, and you think TIF might help.  So, the city says, well, if this project could go through, it would be valued at "X" amount within "Y" number of years, and we could tax it at this particular rate.  From our calculations if this project were built, over the course of 15 years (for example), we would collect "Z" amount of money more than what the property would provide at its current level (in other words they calculate the tax increment over a period of time).  Ok, we're willing to publicly finance this part of the project (i.e the parking garage), which should not be worth more than the calculated Z amount, and forgo that amount of property tax for the next couple of years to make this project happen.  So then, the developer factors this in lowering his costs, and hopefully, that should increase the rate of return on his investment, and will get banks/investors to finance the project. 

Now, here's an important point: it is up to the city, to figure out what is an acceptable rate of return and whether the developer's numbers and projections are accurate.  A developer might inflate costs, might have exaggerated projections or assumptions of demand/supply, or the projected worth of the finished project etc.  The city has to have people on staff that are practically developers themselves, who know the local market, who know what things cost, and know how to analyze a pro forma and see if things check out.  Sadly, many (if not most) public agencies don't really have those kinds of people, they usually have someone who just takes for granted that the developer did his/her homework, and that the numbers being presented are accurate and honest.

But the idea is that in a way, you can provide financing today based on funds that would have gone into city coffers in the future.  The city is directly subsidizing development while theoretically improving a blighted area, and raising surrounding property values in the process, so that the long term, overall effect is one of increased tax revenue and less blight.

edit: I should add, deals can be structured in a number of ways.  the TIF can be a lump sump given to pay an improvement, or it can be pay as you go.

[mean]

While that may be true of developments like the P&L District (although I would defend that TIF on the basis of being a lesser evil to infuse some life into downtown), a TIF that brings the Boeing HQ into KC is indeed creating something where nothing existed.  No diversion of taxes in those cases.

Well, that depends, but yeah, I agree for certain non-retail TIFs. I should have been more specific. Certainly, if all it would take to get Boeing to KC was a (reasonable) TIF plan, it would be nearly impossible for any sane person to turn it down.

[ComandanteCero]

It should be clear, there is a difference between tax abatement and TIF.  I think people are confusing the two.  In a tax abatement, you are just not collecting tax.  In TIF, you are using the supposed tax money to pay for some part of the improvement.  And the use of tax abatements aren't necessarily based on whether an area is blighted or not.  Anyway, two different tools, used differently and in different cirucmstances.

[eliphar17]

I'd like to throw this in - in a TIF project, the public subsidy is ALWAYS directed to a particular part of the project that clearly benefits the public or would otherwise be something the government might reasonably be expected to pay. The most common example (at least outside of the urban core) is that the tax money is directed to pay for infrastructure improvements that either make the new development accessible, i.e. roads and traffic lights, or utilities and connections like water and sewer. Within the urban core, as we've seen, the public subsidy often pays specifically for the parking garage at an infill development.

I agree with those who say it's misleading to use the phrase "money in the developer's pocket," because it doesn't go to anyone's pocket. It goes directly toward construction costs. The developer has drawn up a project and realizes it needs things like a garage or new roads or sewers, things that are necessary but don't really add to the project's revenue. So he goes to the city and says how about a TIF to pay for these things, so that I can attract financing to cover the rest of the project? Without the TIF to pay for the unprofitable parts of the project, the developer usually can't work the numbers to make the overall project worth investing in.

See the HOK building for how this can become controversial. TIF money paid specifically for the garage in the building, so it's technically owned by the city. But it hasn't been open to the public as it should be. http://forum.kcrag.com/index.php/topic, ... #msg216489

[DaveKCMO]

i heard that TIF makes hair grown on your palms. is that true?

[KCTigerFan]

No, but Jesus hates TIF. 

[aknowledgeableperson]

"hands it back to the developers" is a rather inaccurate and predjudicial statement - the money is typically used to finance some public infrastructure associated with the project - (roads, parking garages, etc.)  For example, the TIF on the P&L is funding the parking garages, not the actual retail buildings. 

Here is an article from Sunday's Star:
http://www.kansascity.com/mld/kansascit ... 829175.htm

The language they use is:
Tax increment financing, also known as TIF, takes new tax money generated by a project and redirects at least half of it back to developers to pay for parking garages and other public infrastructure.

Yes, the language used is alittle misleading but one can say "for half of the taxes generated by the project, instead of going into the city's funds and used for general putposes, they are redirected and used to pay for bonds issued to fund the public portion of the project".

[aknowledgeableperson]

Anyone care to just lay it all out there?

Here is one way to show how it works.  The names were changed to protect the innocent and numbers are used for illustration only.

By the Plaza there is a company, named RH Building Block (RHBB)that wishes to relocate to downtown.  Currently it generates $10M in Earnings Tax that goes into the city's general fund.  The building it occupies generates $100,000 in property taxes that goes into the city's general fund.  The city welcomes RHBB downtown by approving a new building for the company and approves a TIF project to help in the costs of the building and its parking garage.  These structures are built on land that generated a very small amount of taxes for the city.
When RHBB relocates to its new building $5M of the Earnings Tax goes into the city's general fund, the other $5M is used to help retire the bonds used for the parking garage.  The property tax of the new office building structure is $200,000 but only $100,000 remains with the city - the other $100,000 is used to help retire the bonds used for the parking structure.  But the $5.1M is not enough to pay the annual debt service on the bonds so an additional $510,000 is taken from the city's general fund to make the annual bond payments.
What happened to RHBB's old office building?  It is sold to another entity and the city has granted its new owner a TIF plan to redevelop that site.  Since RHBB left the site it was not generating any E-Tax so now 50% of future E-Taxes will be diverted to help pay for bonds issued for public improvements at the site.   

[mean]

I agree with those who say it's misleading to use the phrase "money in the developer's pocket," because it doesn't go to anyone's pocket. It goes directly toward construction costs.

Boy, it must suck for all the material suppliers and contractors to have their pay for the construction costs spread out over the entire life of the TIF!

Oh wait, it doesn't work that way. The developer pays up front and then puts the redirected tax money in their "pocket" or, more literally, on their balance sheet in QuickBooks or whatever.

[LenexatoKCMO]

Boy, it must suck for all the material suppliers and contractors to have their pay for the construction costs spread out over the entire life of the TIF!

Oh wait, it doesn't work that way. The developer pays up front and then puts the redirected tax money in their "pocket" or, more literally, on their balance sheet in QuickBooks or whatever.

Actually no (and you are continuing to mislead the thread to push your agenda) - A bond is issued by the city to pay the up-front construction costs and that bond is paid down by the tax revenue.  The developer isn't going to "pay up front" - hell they probably aren't going to move an ounce of dirt unitl that bond gets issued.  It is entirely possible for the TIF infrastructure construction to be managed by a contractor unrelated to the developer of the primary project - in which case not a cent of tax-related money would ever actually hit the books of the developer at any point in the project's lifetime.