What Is Tax Increment Financing for Real Estate Projects?

Use these links to jump to different sections:

• How Does Tax Increment Financing Work?
• The Potential Benefits and Risks of TIF
• Resolving Conflicts on a TIF Project
• Why Get a Lawyer for Your TIF Project?
• Find an Experienced Attorney

Every state has used tax increment financing (TIF) to fund economic development at one time or another. In Louisiana, for example, a TIF district is what brought the World Trade Center to New Orleans. The idea behind the economic development tool is simple—public subsidies to stimulate economic growth—but the execution can sometimes be difficult and even controversial. That makes it all the more important for business owners interested in the real estate incentive program to know about it.

“Some projects just don’t work without all the various incentives—be they tax credits, tax increment, or financing. The deal, economically, might not have a return that can support an investment,” says Steven I. Klein, a New Orleans attorney who advises businesses on the tax side of real estate matters. “On the other hand, a developer has to weigh those against other things: It’s more a complex process, it’s lengthier. Like anything, it’s a balancing act.”

How Does Tax Increment Financing Work?

A local government gives an incentive for a redevelopment project and, when it’s done, has a higher real estate tax base. That’s the idea, anyway. Often this is done in areas that are economically challenged and/or are an eyesore, so development may not happen without the use of TIF. “Across the country, you see it most commonly used with what’s considered a blighted area,” Klein says.

When a municipality draws lines for a TIF district, and approves a redevelopment plan within the boundaries, the developer often reaps a tax dollars benefit as part of the deal. Property taxes, for example, may be reduced for a period of time (a decade or two is not unusual). If it’s in a blighted area, the municipality often takes out bond monies to fund public improvements to the area, as well.

The Potential Benefits and Risks of TIF

“The advantages can be all over the place,” Klein says. “A lot of times it involves the buildout of infrastructure for the project—what would be considered public facilities like streets—that can relieve a lot of burden for the developer. In certain projects, it will even pay for improvements or renovations to an old building. It’s a wide array of things they can use the TIF for.”

But public financing is a double-edged sword: On the one hand, you get a solid investor for development costs. On the other, that investor has a lot of viewpoints, and some are extremely skeptical.

“When a project receives the benefits of a TIF, the competitive businesses may feel they have been disadvantaged,” says Leopold Z. Sher, an attorney who advises businesses on real estate and finance matters. “If there’s a new hotel in a TIF district, for example, what about the others that had to do all the financing and everything else required on their own? For the competitively disadvantaged, it feels like government support or subsidies for certain projects, and not others.”

Sher and Klein have worked with development projects that, “due to TIF problems,” as Sher puts it, “didn’t ever come to fruition.” Sometimes, the municipalities don’t agree to a development proposal; sometimes, developers don’t like the specifics of the TIF area; sometimes, public outcry from taxpayers takes over. “It’s all of the above,” Sher says.

“It’s a very complex process, and there can be lengthy time period,” Klein adds. “For example, there was a development in New Orleans where, as they were going through the TIF process, it ultimately got derailed because of economic shifts. Sometimes it leads to a lengthy public debate and, during that period, you’re at risk of changes in the economy. A lot of things can happen.”

Quite simply: “Time kills deals,” says Sher. “We had one on track, and then 9/11 occurred, and the bottom sort of fell out on the hotel market. It was temporary but long enough to kill the financing. Then you have things like hurricanes, earthquakes—something intervenes and derails everything. All those things that affect normal transactions are even more important on a TIF because it has that public component.”

Resolving Conflicts on a TIF Project

It’s hard to be specific with TIF projects because each is so circumstantial, but a big part of the work is mediating between all the parties involved.

“In Louisiana, the collection of the tax can be very segmented among political entities,” Klein says. “So you’re dealing with different constituencies. You’re going to have opposition from some corner, and generally, you know where, but not always.”

It’s not unusual to set up meetings with business associations, property owners and competitors, Sher notes. But other, less-than-obvious groups may need to be addressed, too.

“What happens is, for example, you have a column of sales tax—2 percent goes to the local school board, 4 percent goes to the state, 3 percent goes for the retirement of bonds—and if you take that money away for a TIF, you have to get them all on board,” Sher says.

“TIF can be a powerful incentive,” Klein adds. “And because of that, it tends to draw more scrutiny.”

Why Get a Lawyer for Your TIF Project?

If you’ve successfully dealt with TIF in a specific redevelopment area before, you may be able to navigate it on your own. But, Klein says, “when we deal with people who haven’t done this before, or aren’t local, it’s a must that they have attorneys and other advisors who understand the various constituencies and how to deal with them.”

“We like to be in the preventive business,” Sher adds, “because it’s always much harder and more expensive to fix something done incorrectly.”

Whenever a client comes to Sher, he gives them a list of all the available incentives for the new development project they’re proposing. “A lot of incentives aren’t available once you start a project, once you turn the first spade in the ground,” he says. “It’s really to their benefit to invest money in a local counsel, even if it’s just to get that list of incentives and get a lay of the land and what they’re going to be up against.”

Since TIF is fairly ubiquitous, developers need to be able to navigate everything from Wall Street to Main Street. “You’re talking about fairly sophisticated constituencies that go to the legislature to get the TIF created or established, and developments that could be in the tens of millions of dollars; then, there’s the small towns and villages, where an immediate impact will be felt,” Sher says. “A lawyer who knows and understands all of those dynamics should be on the team from the get-go.”

Find an Experienced Attorney

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