In connection with their commercial, industrial, and residential developments, developers are often required to construct roads and other infrastructure improvements as a condition to obtaining necessary permits. While these improvements may benefit the general public and not just the particular development, the developer must confront the challenge of funding the entire cost of the improvements.
As federal and state dollars have fluctuated, often downwardly, for development projects, one tool that has been successfully used for more than 25 years by developers not only in Pennsylvania but also nationwide is tax increment financing (TIF). In the Lehigh Valley, TIFs have been successfully used for the redevelopment of the Bethlehem Steel property in south Bethlehem, the Chrin interchange project on Route 33, the Hamilton Crossings project in Lower Macungie Township, and the West Hills Business Center in Weisenberg Township. Pennsylvania’s TIF Act was enacted in 1990, and while the TIF Act and TIF in general are sometimes misunderstood, TIF is comparatively simple at its core.
The purpose of the TIF Act is to alleviate blight in areas within municipalities that have become blighted for various reasons, such as economically or socially undesirable land uses or the defective design of buildings. Usually, a blight resolution is adopted by the local municipality’s planning commission. The TIF Act requires that the tax increment financing be accomplished through either a county industrial development authority or a municipal redevelopment authority.
The basic structure of TIF is as follows:
- The local municipality designates by ordinance or resolution a certain geographical area as a “TIF District,” which can remain in effect for up to 20 years.
- The redevelopment authority or industrial development authority issues bonds that are sold to investors. The proceeds from the sale of the bonds are used to pay public infrastructure costs such as roads. In some recent transactions involving TIF, the authority has issued promissory notes to the Commonwealth of Pennsylvania in exchange for the proceeds of interest loans, resulting in the avoidance of significant “cost of issuance” fees.
- Upon completion of the development project, the property in the TIF District will have an increased real estate tax assessment value, resulting in the payment of increased real estate taxes by the owners of properties in the TIF District. This tax increase is known as the “tax increment.”
- The three taxing bodies (county, municipality, and school district) agree to allocate all or part of the increased taxes received from properties within the TIF District to the redevelopment authority or industrial development authority to meet principal and interest payment obligations to the holders of the bonds or promissory notes.
- Once the authority’s TIF loan, i.e. the bonds or proceeds, is repaid, the taxing bodies retain 100% of the total taxes generated from the TIF District.
Security for the payment of debt service on the bonds or promissory notes is a critical issue. Almost invariably, the full faith and credit of any of the taxing bodies cannot be used as credit support. A means that has been successfully utilized, however, is the creation by the local municipality of a Neighborhood Improvement District (“NID”) under Pennsylvania’s Neighborhood Improvement District Act. If the incremental tax revenues in a given year are insufficient to meet the debt service payments on the bonds or promissory notes, special assessments will be levied on the properties within the NID in amounts necessary to cover the insufficiency.
TIF sometimes faces opposition because it is viewed as a tax subsidy. But having the right team of professionals to address misperceptions about TIF and to implement a sound TIF plan can result in a TIF being a valuable economic tool for the success of the development project.
If you have any questions about this post or any other related matters, please email me at jlushis@Norris-law.com.