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? In part one of our series on TIF funding, we’re going to go over the basics. Let’s call this TIF 101.
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 tax increment financing 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.
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? Contact Matt Mellott for more info on TIF projects.
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