Tax Increment Financing

Can one create something from nothing? Can an underdeveloped area "pull itself up by its bootstraps"? Perhaps, with tax increment financing (TIF), an increasingly popular method for funding economic development and redevelopment, also known as tax allocation bond financing.

Can one create something from nothing? Can an underdeveloped area “pull itself up by its bootstraps”? Perhaps, with tax increment financing (TIF), an increasingly popular method for funding economic development and redevelopment, also known as tax allocation bond financing. TIF is a local government financing technique that can be utilized to finance projects designed to stimulate private sector investments which otherwise may not have been feasible. TIF utilizes future incremental increases in the property tax revenues that will be created by development to finance improvements associated with the project. In the proper circumstances, the potential future increases in property tax revenues can almost magically be brought to the present to create or spur the development that will create those increases. TIF can be used to pay for the public and sometimes the private improvements related to development.

How TIF Works

Although certain forms of TIF have existed since the early 1940s, TIF did not come into widespread use until the 1970s. While originally used for urban renewal projects, in the 1980s and 1990s states began to allow the use of TIF for other types of development and redevelopment projects. Following recent revisions in Georgia’s statutes, TIF has been utilized or planned in DeKalb County and the cities of Atlanta, Macon, College Park, East Point, Marietta, Acworth and Smyrna. Recently, TIF financing was used to finance infrastructure improvements and environmental remediation in connection with the Atlantic Steel redevelopment project at 17th Street in Atlanta (Atlantic Station), and to finance infrastructure improvements in connection with a mixed-use development at Camp Creek Parkway in south Atlanta.

Georgia’s Redevelopment Powers Law, which allows TIF to be used, must first be made applicable to a particular city or county by the passage of a local law by the Georgia General Assembly and its approval by a special election in the city or county to be affected. The city or county will then designate an area or areas for redevelopment, not to exceed 10 percent of the tax digest, as a Tax Allocation District (TAD). Certain procedures must be followed in order to establish such a district, including a public hearing, the adoption of a redevelopment plan and the approval of the plan by the city council or county commission. Once a tax allocation district is in place, the city or county may issue tax allocation bonds for the purpose of paying redevelopment costs related to projects located within the TAD. These tax allocation bonds are payable from the incremental increase in tax revenues and can be qualified to pay interest exempt from federal and Georgia income taxes. Tax allocation bonds are not considered general obligations of the city or county but may be secured by a lien on the improvements financed by the bonds. Supplemental credit enhancement may facilitate the sale of TIF bonds. For example, in the Atlantic Station project, the developer arranged for a $7 million third-party payment guaranty to cover debt service in the first few years following the bond issue as, during those years, there would be insufficient incremental increases in tax revenues.

A TAD can affect other political bodies. For example, when a city undertakes a TAD, it can affect taxes for the county and the school board. Accordingly, if county and school board taxes are also to be frozen and the incremental increases allocated for the project, the county or school board must formally consent at the outset.

TIF allows a local government to reinvest all new incremental property tax dollars in the neighborhood from which they came for a prescribed period of time. These new revenues will arise if new development takes place in the TIF or if the value of existing properties rises. In some situations, tax allocation bonds are sold by the local government at the outset of the project so that funds are available for front-end costs such as land acquisition or initial infrastructure costs. The bonds are then fully or partially paid with tax increment revenues as they are collected. Alternatively, improvements may be financed on a “pay-as-you-go” basis under which, for example, the development costs initially may be paid from cash on hand or other sources and then reimbursed if and when tax increment revenues are generated.

In Georgia, not all areas can qualify to be included in a TAD. Rather, there must be a finding that the “redevelopment area” meets the criteria set forth in the Redevelopment Powers Law. In a nutshell, in order to qualify as a redevelopment area, the property must be characterized as one in need of redevelopment, which includes areas where there is inadequate or deteriorating development (or open areas within such development) that arrests the sound growth of a community, substantially underutilized areas within an urbanized or developed area, or previously developed areas where the current condition is less desirable than redevelopment for new uses.

Examples — the Camp Creek TAD and Atlantic Station Project

Key to the success of any TIF bond issuance are the prospects for imminent commercial development of the redevelopment area. For example, in the Camp Creek bond issue, two developers entered into development agreements with the Development Authority whereby, subject to force majeure and market conditions, the developers agreed to use commercially reasonable efforts to undertake certain levels of commercial development within the district within a specified period of time. Based upon these levels of development, an independent advisor provided projections as to the level of increased tax revenues which would result from such projected development. When the sole source of debt service is the incremental increase in tax revenues resulting from such development, a convincing case must be made that such development will occur and that property values and taxes will increase as projected.

The Camp Creek TAD was created by the City of East Point in 2002, and the City of East Point issued $22,000,000 of bonds to finance the construction by two developers (one retail and one office/industrial) of infrastructure in the vicinity of Camp Creek Parkway. The proceeds of the Camp Creek bonds were to be utilized to reimburse the private developers for their development costs related to the development of infrastructure improvements (roads, sidewalks, clearing and grading, fire station and utilities) identified in the applicable redevelopment plan and located within the applicable redevelopment area. These infrastructure improvements were identified in a development agreement between the City of East Point and the two developers. Pursuant to the development agreement, the developers also identified certain privately owned improvements which would take place in the TAD (office/warehouse and retail) and the projected tax revenue increments resulting from these proposed private developments in the TAD were identified. Additional annual tax revenue in the amount of $3,924,000 was projected to be created as a result of the private development and it was this cash flow that would be utilized to pay annual debt service on the 2002 bonds. This estimated tax allocation increment provided a debt service coverage ratio of 1:41 for purposes of servicing the bonds. The developers agreed to dedicate the infrastructure improvements to the city upon completion. The business park portion of the development plan consisted of 374 acres, allowing for construction of up to 5 million square feet of office space, and the retail portion consisted of 98 acres, allowing for construction of up to 750,000 square feet of retail development. The proceeds of the bonds pay costs of issuance and capitalized interest, the balance being utilized to fund infrastructure costs to be incurred by the developers. In this case, one of the developers purchased the bonds to finance the improvements, and this avoided the need for additional guaranties and credit enhancements.

In 2001, the City of Atlanta issued its $67,505,000 tax allocation bonds for the purpose of financing a portion of the infrastructure work to be undertaken in connection with the Atlantic Station project. The total budget for the infrastructure development costs was $187,000,000. Specifically, bond proceeds were to be used for clearing and grading, environmental remediation, utilities, streets and sidewalks, parking facilities, construction period interest and costs of issuance. The redevelopment area contained approximately 119 acres, and tax revenues were projected based on development of 1,239 residential units and 1,780,000 square feet of retail/office space. For the Atlantic Station project, the estimated incremental increase in tax revenues for the year 2006 (over the 2001 base year) was $8,347,722 which would generate a 1:15 debt service coverage ratio for the year 2006.

Betting on the Future

TIF is not magic. A great deal of foresight, planning and hard work, and detailed compliance with legal requirements (which space does not allow to be fully described here) is required to successfully utilize tax increment financing. Nevertheless, the ability to tap the future increases in property tax revenues to arise from development to promote and assist that development is as good an example of “bootstrapping” as one will find in the development arena. We see it every day as we watch Atlantic Station rise outside the windows of our Peachtree Street offices. The ability of developers to utilize and benefit from tax increment financing is an outstanding example of how enlightened local government and private parties can work together to produce a more successful and vibrant community.

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