Tax Increment Financing (TIF):

Andrea ClinkscalesBrian Henry

“The only game in town”- Chicago Mayor, Richard M. Daley

Function of TIF

A specific geographic area for TIF district is defined.

Tax assessment values for properties this area are “frozen”.

Taxing jurisdictions may only collect taxes from these properties at the frozen or base value for a specific period (usually measured in decades).

As real assessment values rise, property owners continue to pay higher taxes.

The difference between the taxes collected at the base value and the real value is diverted to a special TIF fund.

This fund is used to finance investments within the TIF district.

TimeTIF base year

Frozen tax base

Tax increment

Increasing assessed value with redevelopment

TIF Conceptual ScenarioA

sses

sed

Val

ue

History: 1950s – 1990s

Introduced in 1950s as last resort to finance slum or blighted areas

Federal development money in grants, tax breaks, and bonds decreased in 1970s

Used sparingly until 1980s when many states passed TIF-enabling laws or amended old laws to expand TIF

Redefined blight more broadly Added economic development as essential public purpose Included industrial areas with labor surplus or

decommissioned military bases

More amendments to TIF-authorizing laws Allowing construction of low to moderate-income housing

or workforce development

TIF Theory & Central Conflict

* BUT: There are conflicting academic studies which disagree on this central point.

• TIF spurs economic development that otherwise would not occur • An area is blighted or stagnant, it needs help

•Without help there will be no change

• Investments are made which make the area more attractive

• New investment in the area starts a positive cycle for further private improvements

Other Pros & Cons

Not a new or direct tax

Self-financing Less effected by debt

limits and other checks

Flexible and specific to problems

Takes money from other jurisdictions (like schools)

Can be seen as developer subsidy

Can cause an increase in tax rates (just a backdoor tax increase)

Administrative costs, higher interest rates

“As I see it, TIF is another tool in the community toolbox; works best in portions of community where new development is anticipated; and should be focused at a rather limited set of specific improvements. It does not take the place of regular capital improvements; is really only a bookkeeping concept, but wow . . . it has accomplished so much.”

Peter Ryner Director of Community Development

Peterborough, NH

Industry Opinion

TIF Today

Legal in 49 states and Washington D.C. Prohibited in Arizona

APA’s Planning magazine (March 2007): “development credit card for the city: Buy a project now and pay it off in the future”

Often first “municipal government revenue development tool” considered by local governments

Once used to restore blighted areas – now used to restore “blighted municipal budgets” Funding all kinds major building projects

Does it really work?

Most cities report increases in property values as a result of TIF Few cities report declines Success depends on location, markets, local

wealth Best results in metropolitan communities and

rapidly growing suburbs

Two examples to illustrate Successful TIF Heavily criticized TIFs

Success: Portland Development Commission (PDC)

Citizens of Portland, Oregon voted to create PDC in 1958 to improve neighborhood livability

PDC is the agency in Portland that administers TIF

Characteristics

Controlled by a 5-member board of commissioners Local citizens appointed by the Mayor and

approved by City Council Quasi-governmental in nature

Because executive reports to the board of commissioners rather than directly to the Mayor or other City Commissioners

Unique organization: high degree of coordination in urban renewal, housing, economic development, and redevelopment

The River District

PDC controls 11 urban renewal areas One of the most successful is the River District

River District plan calls for a high density urban residential neighborhood

The Pearl District

The Pearl District neighborhood is located within a sub-area of the River District

Many achievements here can be credited to Hoyt Street Properties, a major Pearl District landowner and developer

In 1994 Hoyt Street purchased the old Burlington Northern rail yard 34-acre Brownfield site

River District Map

1980s

1980s initiated strong potential for improvement Availability of low cost warehouse-to-loft

conversions attracted a number of artists to the area

Adventurous investors began to buy property

Met all conditions for TIF success: Blighted Potential for redevelopment Central location near downtown Strong private-public partnership

Hoyt Street Properties

Initially, site was hampered by the Lovejoy Street off-ramp from the Broadway Bridge Divided the property in

half

PDC removed the ramp; Hoyt Street promised to build a world-class, mixed-use, urban community

The Pearl District is now one of Portland’s most distinctive, thriving, up-scale neighborhoods

Pre-TIF

Post-TIF

Critiques

Few exist to-date Pioneering tenants priced out of the

market Average five-year appreciation rate of 50%

made property taxes and rent unaffordable Not strong critique because very few people

actually lived there pre-TIF Likely the City won’t let the profitable 20-

year River District TIF expire Threatens public schools – already in danger

Rebuttals / Added Protections

The Pearl was blighted to begin with and wasn’t generating significant property tax

With TIF, the PDC has been able to fund numerous affordable housing projects Private developers wouldn’t initiate without TIF

incentives If Hoyt Street defaults on development

agreement, the City can recover damages in court

If tax increment revenues surpass what is needed to meet PDC debt obligations, additional money goes to the general fund

Heavily Criticized: The Midwest

Over-use and abuse

Leads the nation in the number of TIF districts per state

Top 3 in the U.S.1. Minnesota: 1,782 TIF districts2. Wisconsin: 871 TIF districts3. Illinois: 458 TIF districts

Chicago

TIF is the dominant economic development tool used by Mayor Daley’s administration

140 TIF districts that cover nearly 30% of the land area, generating nearly $400 million in TIF funds

Establishing a TIF in Chicago

1. Politician, developer, and/or CDC enters discussions with the City planning dept

2. Eligibility study is conducted and a redevelopment plan is created

3. Special public hearing is held if existing housing will be impacted

4. General public hearing is ordered 5. Joint Review board reviews6. Public hearing is held; City does not have to respond

to or act on public input7. Community Development Commission meets and

almost always approves the TIF8. Plan Commission holds another public hearing; again

– it isn’t required to respond to or act on public input9. Proposal goes to City Council for designation

“The only game in town…”

67% of Chicago TIFs were created after 1996

Indicating recent momentum

25% of taxable real estate is subject to TIF diversion

Indicating breadth

A study of 36 TIF districts showed Chicago Public Schools will lose a hundreds of millions in property tax revenue

TIF were administered in areas where property value was growing at a healthy rate – i.e. not blightedChicago Theatre District

Lack of Checks and Balances

Unlike Portland Chicago TIF

revenues aren't itemized on property tax bills

No annual TIF budget or independent oversight Can You Spot the Blight?

Central Loop TIF (Dearborn at Randolph)

Other issues

Causes gentrification Long-time stakeholders are forced into

less desirable neighborhoods Uses eminent domain 2007 property taxes in the hot

condo markets are projected to increase by 100% Due to TIF, property taxes are

increasing faster than people’s incomes

Reform in Chicago

TIF excesses lead to push for accountability and transparency

This summer, Cook County Commissioner, Mike Quigley, introduced three TIF-reform proposals

Increasing negative publicity is affecting perception of TIF and raising awareness

TIF in Washington

First passed in 1982 as Community Development Refinancing Act

Ruled unconstitutional by WA Supreme Court in 1995

Resurrected by 2001 TIF Act

TIF in Washington

• 2001 TIF Act: incredibly weak statute

• School districts exempt

• Fire districts can veto

• Only 75% of increment captured

• Expires in 2010

• Not tested in court

Questions?

Wal-Mart

90% of Wal-Mart stores are subsidized Equals more than $1 billion in tax payer monies

Often from TIF Most Texas (30 deals worth $108 million) Then Illinois (29 deals worth $102 million) In 2002, Wal-Mart sought an $18 million subsidy for a

project to be located on the Near South Side of Chicago.

Project was abandoned due to controversy In Niles, adjacent to Chicago’s south-side, a TIF was

granted to a Wal-Mart developer for redeveloping an old manufacturing

Wisconsin designated a cornfield and apple orchard as blighted so Wal-Mart could qualify for TIF to build a superstore