Tax-Increment Financing or TIF

How does TIF work?
In local government, it is often the case that citizens will debate the merits of a public role in economic development. As the rules of the economic development "game" have changed over the years, cities have been faced with the decision of whether or not to be participants in this game or be left behind altogether.

Tax-increment financing or TIF is one of the tools that cities use to stay in the economic development game.

In the view of many, TIF is the single, best economic development tool available to both small towns and large cities irregardless of whether either has money on-hand or not.

TIF is often a controversial program to use. The very use of TIF may sometimes cause people to ask why it is being used, question how it is being used, or criticize the way it is used. Further, there are some who say that the public should have no role. And, it's often the case that long-standing businesses who never received any help will wonder why a city will try so hard to offer financial incentives to new companies when the long-standing businesses may have gotten any help in the past.

The first thing that we should note is that TIF can't help everybody or every type of project. TIF will work only when something new is built that will increase a property's taxable value.

When land and buildings are taxed, the revenue that is collected is divided between the city, the county, the local public school district, and the local community college. The assessed value of a property that is taxed before a project occurs can be thought of as the "base value." TIF works best in an undeveloped area such as empty land because TIF freezes the amount of tax money that goes to these public entities at the base value it was at before the new development happened. After the development is completed, the county assesses the newly improved property and the owner has to pay his full share of taxes under the same tax rates as everything else in its category.

The additional payable tax money that is the difference between what the property was taxed before the development was started and after the development was completed is called the "tax-increment." But, under TIF, instead of being divided between the city, county, school district, and community college as it is on the base value, the new tax-increment can be used for a limited number of years to help pay for the costs of doing the development. After that period of years expires, the new tax-increment is again divided among the city, county, school district, and community college.

The philosophy behind TIF says that the loss of the new tax-increment for that limited number of years is acceptable because, if this financing tool had never been offered to begin with, the project would have never happened or would never have been developed to the level that it was and; therefore, the new tax-increment wouldn't have been created anyway.

TIF, then, can be seen as an investment in a community's future where an initial benefit is at first postponed, but a greater reward happens over time.

For example, in the case of Maquoketa, there is a senior housing project that will play a major role in the redevelopment of a one-half block of the Central Business District. In this project, tax-increment generated by the new housing units be rebated to the developer for a period of years to help make the project financially feasible. As the project proceeds, the City will be losing the new tax-increment during those years, as far as the City's general fund budget goes, but after this time is up, the City and the other taxing entities will have the new tax-increment for all of the rest of the lifetime of that development. And, during those first years and beyond, the community will realize the benefits of redeveloping that part of our downtown area.

In cases where TIF is used to provide up-front financing (examples are Clover Ridge Place and Generac) in the form of a bond, the major difference that using TIF makes is this: Instead of making the developer pay both debt payments and taxes, we are allowing the developer to reimburse the City through its taxes for a limited number of years and with interest.

TIF can be applied in two ways. The first method is called the "up front" method. The second method is called the "pay-as-you-go" or "rebate" method. These two methods are examined in the section, "Comparison of TIF Methodologies."

Comparison of TIF Methodologies

1.) "Up-front" TIF Method

Developer receives grants from municipality to pay for a portion of or specified development costs.

* City issues debt and takes the risk depending on factors such as:

How crucial is it to develop the property? Manufacturing, high tech.

How difficult is it to develop the property?

Land acquisition, site improvement and public improvement costs tend to be more acceptable than building and equipment costs.

* City provides a loan or arranges a bond for $100,000 to the developer, up-front, either before the project begins or by the time it is substantially completed.

Example: The $100,000 bond is amortized over life of TIF district, for example, over 10 years with 8 years of increment.

* The developer signs a minimum assessment agreement which covers the amount of yearly debt service on the bond by promising to pay a minimum amount of taxes on the overall project each year † whether the project is executed or not. Although the assessment agreement is a promise to pay a specific minimum amount of taxes each year, the assessment agreement is not equal to securing traditional collateral.

* Developer receives $100,000 whether anything is developed or not.

* Examples of up-front TIF projects in Maquoketa:
CRI
Woodform
Awesome Car Wash
Shoreline Development, Phase 1
Generac                                                                                                                    Family Dollar

* Best used when:
- Developer's other financing is known to be in place
- The City is trying to recoup initial costs of a development
- "Gap" financing is needed up-front
- Specific difficulties within the project may require up-front financing
- Collateral is available.

2.) "Pay As You Go" or "Rebate Method" of TIF

* Developer is responsible for providing all up-front financing.

The municipality assumes no risk of developer default if the source of payment is limited to tax increments derived from the project. In effect, the municipality allows the developer to recycle taxes paid from the project.

A "pay as you go" arrangement provides leverage to the municipality. It may condition its obligation to make the payments on continued satisfaction of certain requirements (e.g. maintain the project as a revenue producing facility that satisfies certain minimum full time employee requirements).

A municipality need not resort to the somewhat risky and unreal security that a reversionary interest or subordinate mortgage provides if the developer should default.

* Developer and banker create debt and take risk.

Example: * City estimates aid over life of project to be $100,000.

* Aid comes to developer in the form of an annual rebate of tax paid on the new increment. According to sources, a $1 million development would generate a $22,000 annual rebate in a 10 year TIF with 8 years of increment at 9%. The annual rebate can be used to pay debt service on the developer's $100,000 loan from the bank.

* Developer receives rebate only on new increment on parcels that are actually developed.

* TIF district expires at point where targeted amount of aid is reached or when last year of TIF district expires, whichever comes first.

Examples of "Pay as you go" or "Rebate" TIF in Maquoketa:
Shoreline Development, Phase 2
Maquoketa Company
Maquoketa Housing LP (Olive Street)                                                                                               Hainstock Housing Subdivision                                                                                                          Westgate Plaza/MOCO Realty Project on West Platt Street

* Best used when:
- City wants to take a lesser role in the project                                                                                                 - City is trying to lessen the impact on its constitutional debt limit.
- A minimum assessment agreement is not desirable
- Collateral is not available.

Uses of TIF

In Maquoketa, TIF has been used in the following projects:

1.) 1990 Industrial Park. TIF is being used to make annual debt payments on a loan that purchased the City's original industrial park.

2.) Maquoketa Company. TIF provided a grant that allowed the company to expand its building.

3.) Woodform Inc. TIF provided a grant that allowed the company to expand its building.

4.) Clover Ridge Place. TIF allowed the City to reimburse itself for the construction of a street and underground utilities in order to serve a new 40 unit senior citizens independent living-assisted living-Alzheimer's facility.

5.) Awesome Car Wash. In this project, the City assisted in the development of a Car Wash, but the project was more than that. TIF not only provided for water and sanitary sewer extensions to the Car Wash, but it paid for building those extensions with excess capacity to possibly serve future develops, farther from the community.

6.) Tom Kane/Pacific Coast Feather Warehousing Project. The City will use TIF to reimburse itself (within the 4 years allowed by Iowa Law for losses on fair market sales of land) for providing an incentive to a developer to construct warehousing space in the City's 1990 industrial park. TIF is also providing for reimbursing the City for an extension of sanitary sewer lines that will serve the project.

The Alliance Pipeline Building was constructed in the Fall of 2000 using rebated TIF as an incentive for the Developer.

7.) Alliance Pipeline. The City will use TIF to reimburse itself (within the 4 years allowed by Iowa Law for losses on fair market sales of land) in order to provide an incentive to a new company wishing to a new facility in the City's 1990 industrial park. The company will build a new office complex and warehousing space. The Company plans to employ at least 8 full-time jobs.

8.) Shoreline Addition. The City will use TIF to both provide up-front financing and a rebated TIF incentive over 10 years of tax collections to assist in the construction of streets, sewer, and water for a new housing subdivision.

9.) Maquoketa Housing LP. The downtown Central Business District is in a TIF district. For this project, TIF will be used to assist in the redevelopment of one-half block of the downtown area. The project will involve the removal of dilapidated structures and the construction of 18 senior housing units. Since the downtown TIF district is created to removal what the law calls "slum and blight," the district will have a 20-year lifetime. In the case of Maquoketa Housing LP, the City will rebate annual TIF increment derives from the development for a period of 20 years or until a cap of $350,000 is reached--whichever comes first.

10.) New 2000 Industrial Park. The City will likely amend the 1990 Industrial Park TIF District to the New Industrial Park TIF District (near New Hwy 61/Old Hwy 61) in order to pool tax increment from both district to finance a $1.2 million GO bond. The bond will pay for land, streets, and the extension of water and sewer from the City.