TIF 101: Tax Increment Financing (TIF): How Does That Work?
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- เผยแพร่เมื่อ 8 ก.ย. 2020
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Here’s a term you’ve probably heard in the news: Tax Increment Financing, or TIF. What is TIF? Why is it so controversial? How does that work?
I’m Matt Mellott with Sterling Commercial Real Estate Advisors. In part one of our series on TIF funding, we’re going to go over the basics - let’s call this TIF 101.
Now, before we get started, it’s important to note that here at Sterling CRE, we work on commercial sales and developments that involve TIF funds. From our experience, we know TIF projects aren’t all good and they aren’t all bad. We also know that TIF is a misunderstood tool. This series is meant to help clear up some of the confusion about TIF, first by simplifying some of the concepts and then by looking at some local case studies.
First, TIF funds can only be spent in TIF districts. The boundaries of TIF districts - like the ones in Missoula are established by ordinances, which are local laws. In general, a city council or county commission creates the ordinance after gathering public input.
Cities create TIF districts to help fund improvements to an area that is in serious disrepair or lacks infrastructure. When and where a TIF district can be applied depends on state and local laws.
Montana Law says that TIF funds can only be used to pay for certain building expenses. Those are things like road widening and extensions, installation of sidewalks, street lighting, curbs and gutters. Extending water, sewer and broadband to areas of town that lack access are also common uses for TIF funds.
So, where does the money for TIF come from? This is where it starts to get interesting. And where the controversy comes from.
All landowners in a TIF district pay taxes based on the value of their property - just like a residential home has taxes that are assessed depending on what the property is worth.
In a TIF district, the base value of properties are frozen for a period of time - often between 20 and 30 years. During this time, the tax revenue from this base value will be distributed to all the usual sources you see on your tax bill, like schools, parks, and public safety.
TIF funds are generated from the difference between the value of an improved property and the frozen base value. If big improvements are made on a building in a TIF district, then that building has a higher value, and therefore pays more taxes. That’s the “increment” part of Tax Increment Financing: the incremental amount between the actual value of a property and that frozen-in-time amount.
That was a lot of info, so let’s sum it up. On one hand, TIF funds can be allocated to a developer to improve a neighborhood that might be in desperate need of investment. These incentives encourage redevelopment and improvements in an area where a project might otherwise not pencil out.
But on the other, those same TIF funds aren’t helping to support the day to day services in that same district. Schools, public safety and other levies in the district don’t get any of that additional tax revenue because it’s all going back into the TIF bucket.
So, say a developer decides to build a new facility in a TIF district - how would they get TIF funds to help them expand the surrounding infrastructure?
Whoever is making the improvements in a TIF district applies for the funds. That application is then considered by the agency stewarding the TIF funds. The redevelopment agency can choose to fund the full request, deny the request, or just fund parts of the amount that was applied for.
In the next part of our series, we’ll cover a project that was an easy win, one that penciled out to benefit both the private developer and the city.
Thanks for watching How Does That Work?
Thanks! I live in Helena. I work IT at the Legislature. I see TIF every once in a while. This was a pretty clear explanation. So there's a group that decides how much if any TIF money a project will get. TIF projects normally look to fix up the neighborhood in dozens of ways such as tearing down shady buildings and building shiny buildings with better sidewalks and parking. I see you have a couple more shows in this TIF series. You have at least 102 and 103. I'll watch
Thanks Saint! It's a complex topic and we're happy to help break it down.
Thank you so much! I’ve been googling TIF Districts since it keeps coming up with a job I’m about to start and it hasn’t made sense till now.
You're so welcome!
Can a Mayor use TIF money to make payroll?
Thanks for your question. In Montana, state law allows for an urban renewal agency to manage TIF monies. These agencies can operate through a five-member board or as a department inside of the local governing body - so, a mayor may not unilaterally decide how funds are dispersed. We always love to learn more about how other states manage their TIF programs - are there areas where a single municipal official can determine the way funds are spent?
@@sterlingCRE can a mayor do tht without board approval?
That would depend on the specific state and municipal policy guiding the TIF district - is your question about a Montana TIF district?
@@sterlingCRE Dolton IL
@@stayfocusedmedia TIF regulations vary state to state, and city by city and, with our expertise is in Montana markets, we wouldn't be able to weigh in on TIF regulations in other states. However, you may want to start by first researching state codes for TIF regulations and then carefully reviewing specific municipal policy and procedure documents for the TIF district in question.