“Good For You”TIF 101
Starring:Sean Lentz
Act 1: Background• What is Tax Increment Financing?
Act 2: Implementation, Rules, and Financing• Creating a TIF District• Creating a Project Plan• Financing Projects
Act 3: Best Practices, Challenges, and Success Stories• TIF Policies and Best Practices• Handling the Challenges• Successful Case Studies
Playbill
1
Economic development tool used in Wisconsin and many other states
Allows cities to capture incremental property tax revenue from growth in defined area and use that revenue to benefit that area
Key acronyms:TIF = Tax Increment Financing (the tool)TID = Tax Increment District (where the tool is used ‐ boundary)
What is Tax Increment Financing?
2
Since 1976 has been THE most powerful economic development tool available to local government
Intent:Promote economic development and redevelopmentAddress lack of other incentives and financial resourcesPromote cooperation between public and private sectorsCounteract economic downturn (mid 70’s recession)
TIF in Wisconsin
3
Blighted Site before TIF District
2/3/2019
4
Redeveloped Sites
2/3/2019
5
As of 12‐31‐17:
2,122 districts have been created since 1976.
869 districts have been dissolved.
1,261 active TIDs currently in existence.
Over 420 communities in Wisconsin have used TIF (out of 593 Cities and Villages)
TID Utilization
6
How Does TIF Work?
7
Act 2 Part I: Implementation and Rules
2/3/2019
8
Combination of increment value of existing TID(s) and proposed base value of new district(s) CANNOT exceed 12% of total Equalized Value
At least 50% of land area in proposed TID is:BlightedIn need of Conservation/RehabilitationIn need of Environmental RemediationSuitable and zoned for Industrial development Suitable for Mixed‐Use development as determined by any combination of:
• Industrial• Commercial• “Qualifying” Residential (limited to 35% of total area newly platted)
Property must represent contiguous area and cannot extend beyond corporate limits
Requirements for TID Creation
9
• Purpose•A Plan that describes details of TID and Future Projects
• Project Costs•Projects can be phased and their costs laid out in order to plan for an adequate revenuestream•Description of Costs•Description of Development/Redevelopment
• Financing Plan•Cash Flow Forecast•Financing Tools•Estimated life of proposed district
Project Plan Elements
2/3/2019
10
“But For” Analysis
“But For” the use of Tax Increment Financing (TIF), the development expected in the Tax Increment District (TID) would not occur as proposed
More fundamentally, is it a good project?What local needs or objectives are met?Consistency with land use and other planning documentsConsideration of alternative usesGoverning body and public support?Is the assistance request in line with your risk tolerance?
11
1. Plan Commission/Jurisdiction prepares project plan2. Convene Joint Review Board (see next slide)3. Public Hearing of Plan Commission4. Governing Body approval (official “Creation Date”)5. Joint Review Board approval6. State approval (procedural and legal review)
Note: variety of date/procedural/notice requirements at each step
Procedure to Create a TID
12
City Attorney or Attorney letter of review needed for TID creation
Joint Review Board• City Member• Public Member• School District Member• Technical College Member• County Member
Cast for Creating a TIF District
2/3/2019
13
Eligible Project Costs
• Public works & improvements• Financing costs• Real property assembly costs
(land write-down)• Professional service costs• Admin/Organizational costs• Contribution to Community
Development Authority orRedevelopment Authority
• Relocation costs• Pro-rated costs of utility
infrastructure• Cash grants (requires
developer agreement)• Environmental remediation• Projects within ½ mile of
district• All costs must directly relate
to purpose of the TID,including ½ mile
14
• Costs of constructing or expanding administrative, police, fire, community,recreational, library and school buildings
• Costs of constructing or expanding facilities if similar facilities are financed onlywith utility user fees
• General government expenses unrelated to the TIF district
• Costs associated with newly platted residential development (except in Mixed Usedistricts with “qualifying” residential)
Prohibited Project Costs
15
Boundary amendmentMay add and/or subtract property
• Must remain contiguous• Must be in compliance with 12% test to add territory (unless subtraction)• Limit of 4 allowed during life of district
Plan amendmentUsed to amend list of projects to be undertaken
• Types of projects or dollar amount(s)
Revenue SharingNo limit to number allowed (except maximum expenditure period)
Essentially same procedure as establishing TID
Amendments
16
Maximum time period TID can incur expenses or obligate revenues related to project plan
5 years shorter than maximum life
After expenditure period ends, TID may continue to pay:Debt service on existing obligationsContractually‐obligated expensesOngoing administrative expenses
Expenditure Period
17
A district may remain open until the earliest of the following:The district’s maximum life is reached, which varies by type of district and when createdWhen total tax increments (revenues) collected are sufficient to pay all of the district’s project obligations (expenses)When the City/Village/Town passes a resolution to close the district, but no later than the anniversary date in the year of max life
At closure:Remaining funds (surplus) distributed proportionately to taxing jurisdictions (shared benefit); OR,Any unreimbursed project costs become general liability of the municipality (this risk not shared)
Maximum Life
18
Maximum Life
Type of District Prior to Oct. 1, 1995 Oct. 1, 1995 ‐ Sept. 30, 2004 Oct. 1, 2004 or Later
Blight Elimination 27 Years 27 Years (+4)* 27 Years (+3)*
Conservation or Rehabilitation
27 Years 27 Years (+4)* 27 Years (+3)*
Industrial 27 Years 23 Years 20 Years (+3)*
Mixed Use NA NA 20 Years (+3)*
Town NA NAExp. Period + 11 Years (16
Years Max.)*District eligible to receive an extension to maximum life
TID Creation Date
19
Act 70 (SB 173) – Enacted November 29, 2017• Existing E‐TIDs still operate under the rules of 66.1106• Any E‐TID created going forward is under the rules of 66.1105 which is the same as
Blight/Rehabilitation TIDs• Still require a DNR certified site investigation report to be approved prior to the TID
being created• TID Base value is $1• The 12% test does not apply• Allows for a maximum life of 27 years with a 22 year expenditure• Allows for a broader use of TID funds (not only related to the environmental cleanup)
TID Law Changes – 2018
20
Act 70 – E‐TID Changes
2/3/2019
Maximum TID LifeExtensions to TID Life AllowedExpenditure PeriodQualificationEqualized Value Test (12%) ExemptionMay be OverlaidBase ValueEligible Project CostsTerritory AmendmentsDonor TID
Only E‐TID may be created to which the test does not apply. (Once closed, another E‐TID can be so created)
YesDOR will automatically certify the base value as $1
Any TID eligible project costs. (Costs must be related to the purpose for which the TID is created)
Up to four total amendments permitted
May only donate to another E‐TID
New E‐TID Law (Wis. Stat. 66.1105)Nov. 29, 2017 or later
27 Years3 Year "Standard" extension and 1 Year Affordable Housing
Extension
22 Years
At least 50% of area must be affected by significant
Environmental E‐TID Law Changes
21
Act 2 Part II: Financing
2/3/2019
22
Several options for financing projects with TIF:
Community “Fronts” Costs (Traditional)• Issue general obligation or revenue debt• Advances from other funds
Pay‐as‐you‐go• Use TIF revenue stream and accumulated balances to pay expenses• Developer agrees to up‐front costs, repaid from TIF revenues
Financing Projects
23
City Funded TIF
• City issues debt or advances funding from other City funds to finance developmentincentives or pay for other tax increment eligible costs (example: infrastructure)
• City uses revenue generated by development in the tax increment district to repayCity debt
• Risk of insufficient revenues is the City’s
• Development Agreement provisions can be used to mitigate some risk (Will discussin more detail later)
24
Pay as You Go / Tax Increment Revenue Bonds
• Developer funds project costs up front
• City agrees to return tax increment revenue paid from new development• Amount• Term• Subject to annual appropriation• Payment dependent on revenue being available, no revenue – no payment
• Shifts risks of insufficient revenue to repay debt from City to Developer while stillallowing for the use of TIF to incentivize a project
• Some projects require up front City contributions
25
“Pay as You Go Model”
Developer /BusinessOwner /Other
City
NewDevelop. orRedevelop.
CreatesIncrement
Value
TaxIncrement
DistrictRevenues
Developer pays for TID eligible expenses
City collects tax revenues from New Increment Value
City uses revenues to reimburse Developer for initial payment on TID
eligible expenses
If Revenues are not generated, City does NOT
make reimbursement
payments
1.
2.
4.
3.
26
Developer Agreements (City Funded TIF)
• Purpose Identify & Assign Responsibilities and Mitigate Risk• Provide protections for public investment• Require committed projects prior to making expenditures and phase expenditures• Require developer “skin in the game”• Model worse case scenario to determine if it can be managed
• Options to protect against cash flow shortfalls• Valuation benchmarks tied to receipt of incentives• Value guarantees• Shortfall guarantees• Direct debt repayment guarantee• Deferred special assessments
27
Developer Agreements cont.
• Enforcement options for developer agreements• Irrevocable letter of credit• Performance bonds• Mortgage lien (on project or other property)• Assignment of securities or other collateral• Restrictions on assignment of developer agreement• Withholding of permits or other approvals• Personal guarantee
28
• Each Option has its risks:• Municipality obligated in most cases to pay debt service even if TID revenue is
insufficient• Advances from other funds may never be repaid• Developer‐assumed risk comes at a cost• Properly constructed development agreements important
Financing Risks
29
Act 3 Part I: Best Practices
2/3/2019
30
Planning/monitoring: Effective ways to mitigate financing riskOptionsSensitivity AnalysisWorst Case Scenario / Back Up Plans
When used proactively and together these can:Better match expenses and debt service to revenuesEnsures TID does not undertake projects it is unlikely to recover
However, cannot fully eliminate risksEconomic cyclesChanges in state lawPerformance of private parties within TID
Planning and Monitoring
31
• Elements• Assists Staff and Elected Officials• When TID will be Used• Process to request assistance• Term• Proforma Analysis• Pay as You Go vs. Traditional• Community Goals
Policies
2/3/2019
32
Act 3 Part II : Challenges
2/3/2019
33
Variety of tools available:• Fund balance utilization (subsidy from another fund)
• Tax levy & user fee (utility) support
• Debt restructuring
• Maximum life extensions
• Increment sharing (“Donation”)
• Territory amendment
• Enforcing security provisions in developer agreements
Tools for Managing Underperforming TIF Districts
34
Are sufficient dollars available in another fund that can be transferred/advanced?
Understand probability of advance being repaid and impact on the advancing fund (including another TID)For municipalities with a credit rating or considering getting one: Be careful about making large General Fund advances!Receivable only as good as the quality of anticipated repaymentGenerally should avoid advancing funds from another TID
Consider having another fund “repay” TID for an originally TID‐funded project the district can no longer afford
Fund Balance Utilization
35
G.O. Debt – community obligated to levy sufficient funds to make entire payment each year, regardless of anticipated revenue source
Utility Revenue Bonds – must increase user rates or apply other available funds to make payment and/or demonstrate coverage requirement
CDA/RDA Lease Revenue Bonds – must apply or consider applying other available funds to make payment
Tax Levy & User Fee Support for TIF Debt
36
Reallocation of TID debt to other fundsExample: water utility may need to assume repayment for TID debt incurred to finance TID‐eligible water system improvements
RefinancingGoal is restructure debt in a way that best matches anticipated TID revenue streamHowever, if current obligation is revenue‐backed, may require conversion to G.O. if coverage (revenues vs. debt service) is not adequate
Debt Restructuring
37
Four year extension
Available for blighted area and in need of rehabilitation or conservation TIDs created on or after October 1, 1995 but before October 1, 2004
Three year extension
Available for all TIDs created on or after October 1, 2004
Available for any TID eligible to collect increment as part of the 2014 levy (Wisconsin Act 258 – Tech College Adverse Impact)
• Extensions require Project Plan amendment, but JRB must approve if anindependent audit demonstrates requirement for additional years to recoverproject costs
• Extensions are not mutually exclusive, the Tech College extension can be combinedwith the 3 or 4 year extension if needed, achieving total extensions of 6 or 7 years
Maximum Life Extensions
38
Wis. Stats. 66.1105(6)(f)
A TID that is generating excess increment (surplus) may allocate that excess to:A blighted area TIDA rehabilitation/conservation TIDA distressed or severely distressed TID
Requires a project plan amendment and JRB approval for donor TID
Life of “sharing” relationship can last until earlier of end of either TID (see specifics relating to sharing with Distressed TID)
Increment Sharing (“Donor Status”)
39
Development agreements should (whenever possible) contain provisions to protect community if TID increments are not generatedLetters of creditValue guarantees/shortfall paymentsSpecial assessments
Ability to collect may be a factor
Enforce Security Provisions of Developer Agreements
40
Act 3 Part III: Success Stories
2/3/2019
41
TID No. 3 Boundaries surround the Highway 53 by‐passWhen TID No. 3 was created in 2001 the original debt was amortized very
aggressivelyCity advanced significant funds from General Fund to cover shortfallsEconomic Downturn in 2008‐2009 delayed development despite completion of the
by‐passCity Action
Debt RestructuringRevenue Sharing AmendmentConsidered Distressed Declaration
Current SituationOver $200 Million increment valuationVery Diverse Development along Highway Corridor Hospital, Woodman’s, Riverfront Improvements, New City CenterHalf Mile Amendments – Additional Redevelopment
Altoona’s TID No. 3
2/3/2019
42
Created in 2005 as Mixed Use DistrictRedevelop old Dog Track SitePromote additional tourism related development
Dog Track became the “Outlets at the Dells”
Wilderness Development and Expansion
Amendment has allowed revenue sharing with TID No. 4Funding from TID No. 3 has assisted in redevelopment initiativesWorkforce Housing Improvements
Current Increment is over $320 Million
Amendments targeting additional development and redevelopment
Lake Delton’s TID No. 3
2/3/2019
43
Despite all the changes since 1976 TIF is STILL the most important tool available to help stimulate growth.
TIF requires active management.
Plan ahead to position yourself to take advantage of opportunities.
While TIF has been in existence since 1976 you can expect to see continual tweaking to the program.
Curtain Call
44
2/3/2019
Sean LentzSenior Municipal Advisor
slentz@ehlers‐inc.com
45