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Financial Best Practices

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Tax Increment Financing 101

by Derek C. Zimmerman, Baylor, Evnen, Curtiss, Grimit & Witt, LLP and Bryan Shank, Union Bank & Trust Company

Tax Increment Financing, or TIF, is a tool cities or municipalities use to incentivize redevelopment. If eligible, the private developer may use TIF funds for the public benefits of the private redevelopment project based on the estimated increase in property tax valuation of the property resulting from the project. The funds are made available through a bond, and are generally funded over 15 years. During this time, the developer of a project pays the property taxes which then go to pay off the bonds that have been issued. In some cases, a lender may finance the TIF in the form of a loan so the funds would eventually go to repay the TIF loan.

TIF benefits the developer by assisting with certain public items such as streets or sidewalks through the increase in the assessed value of the property. Likewise, the city or municipality receives the long-term benefit of the increased valuation of the property after the bond is retired, and is able to encourage redevelopment by minimizing risks of the redevelopment that may not otherwise occur if not for the availability of TIF.

To be TIF eligible, an area must be designated as blighted. This is done through a blight study that determines the area has the presence of any combination of: a substantial number of deteriorated or deteriorating structures; the existence of defective or inadequate street layout, faulty lot layout in relation to size, adequacy, accessibility, or usefulness, insanitary or unsafe conditions; deterioration of site or other improvements; diversity of ownership; tax or special assessment delinquency exceeding the fair value of the land; defective or unusual conditions of title; improper subdivision or obsolete platting; or the existence of conditions which endanger the life or property by fire and other causes.

To date, all states except California use TIF as a tool for redevelopment projects and if a project is TIF eligible it provides benefits to both the private developer and community where the redevelopment project is taking place.