The purpose of tax increment financing (TIF) is to spur economic development in a particular area by providing a mechanism to increase the tax base and revenue. TIFs are commonly used for affordable housing developments in “blighted” areas, which are neighborhoods with declining property values and higher concentrations of poverty. This is expected to lead to improved neighborhood quality and an increase in affordable housing supply.

For more information, check out this article from HUD Loans, as well as this article from County Health Rankings.

Tax Increment Financing (TIF) is a mechanism used by municipalities to spur economic development in a designated area. It works by allowing the municipality to capture the increased property tax revenue generated by the development and use it to fund the project. This increased revenue is known as the “tax increment”.

TIFs are commonly used for affordable housing developments in “blighted” areas. This means neighborhoods with declining property values and higher concentrations of poverty. Municipalities using TIFs for affordable housing expect the mechanisms to spur economic development in the area. This, then, should lead to improved neighborhood quality and affordable housing supply.

There are several advantages and disadvantages to designating a TIF district for development. While TIFs can make a planned project far more economically viable to developers, it requires approval from local government. Depending on the community, that may be a difficult ask.

While TIFs generally increase a district’s tax base and revenue, there can be many parts of government and the private sector seeking funds. An extreme example of this occurred in California, which discontinued tax increment financing practices in 2012 after property tax revenues appeared to be directed away from local public education.

Tax increment financing (TIF) is a mechanism used by municipalities to spur economic development in a designated area. TIFs are commonly used for affordable housing developments in “blighted” areas, which are neighborhoods with declining property values and higher concentrations of poverty. The advantages of TIFs include increased tax base and revenue, improved neighborhood quality, and increased affordable housing supply. However, TIFs require approval from local government, and in some cases, funds may be directed away from local public education.

In addition to TIFs, there are other tax benefits available to commercial real estate investors, such as the Low-Income Housing Tax Credit (LIHTC) program, which allows investors in qualified low-income properties to take a dollar-for-dollar deduction against their federal income taxes. Other widely used tax credit programs include the Historic Tax Credit (HTC) program, which offers a tax credit based on the percentage of eligible expenses used to rehabilitate a historic building for commercial use, and the New Markets Tax Credit Program, which provides a tax credit for commercial development in low-income areas.

It’s important that commercial real estate investors consult with an experienced tax professional in order to better understand how each of these tax benefits may be able to work for them. Real estate taxes can be incredibly complex, and the more effort you put into preparation and documentation, the more money you’ll save in the long run.

The drawbacks of tax increment financing include call protection (expensive prepayment penalties) and limited ability to recapitalize (with sale or refinance).

TIFs are commonly used for affordable housing developments in “blighted” areas. This means neighborhoods with declining property values and higher concentrations of poverty. Municipalities using TIFs for affordable housing expect the mechanisms to spur economic development in the area. This, then, should lead to improved neighborhood quality and affordable housing supply.

However, there can be many parts of government and the private sector seeking funds. An extreme example of this occurred in California, which discontinued tax increment financing practices in 2012 after property tax revenues appeared to be directed away from local public education.

In order to qualify for Tax Increment Financing (TIFs), a project must be located in a “blighted” area with declining property values and higher concentrations of poverty. The project must also comply with the Secretary of the Interior's Standards for Rehabilitation, which should help encourage an “efficient contemporary use” while retaining parts of the building “which are significant to its historic, architectural, and cultural values.” Additionally, rehab and improvement expenses must be more than either $5,000 or the owner's adjusted basis of the building and its structural improvements. A sponsor can calculate adjusted basis by taking the property’s purchase price and subtracting land costs, previous improvements, and previous depreciation. This expenditure needs to occur either over a 24-month period, or a 60-month period for “phased developments.” The project’s sponsor is allowed to determine when this period begins. Multifamily rental properties qualify for the program, but an apartment building or home cannot be solely the private residence of the owner— other tenants must also rent the property. A single-family home could be eligible for the TIFs, but it would generally need to be converted into multi-unit residential or commercial space, or be repurposed as a community center, educational center, or another type of income-producing property. Only traditional multifamily residential and commercial buildings are permitted— monuments, bridges, railroad cars, and other miscellaneous structures are not eligible.

Sources:

• www.hud.loans/hud-loans-blog/what-is-tax-increment-financing
• www.commercialrealestate.loans/commercial-real-estate-glossary/historic-tax-credits-htc
• https://www.usbank.com/commercial-business/tax-credit-financing/historic-tax-credits-basics.html
• https://www.nps.gov/tps/standards/rehabilitation/rehab/stand.htm

Tax increment financing (TIF) is a mechanism used by municipalities to fund development projects in a designated area. It involves the municipality issuing bonds to finance the project, and then using the increased property taxes generated by the project to pay off the bonds. The steps involved in obtaining TIF are as follows:

• The municipality must designate a TIF district and approve the project.
• The municipality must issue bonds to finance the project.
• The municipality must collect the increased property taxes generated by the project to pay off the bonds.
• The municipality must approve any additional funding sources, such as grants and/or loans, bond financing, and tax credits.
• The municipality must review the project for subsidy layering.
• The municipality must approve the final partnership and/or operating agreement.

For more information, please see What Is Tax Increment Financing? and Firm Application Checklist.