Tax Increment Financing
Date: July 21, 2016
Tax Increment Financing (TIF) is a valuable economic development tool used to promote public and private investment in a specific area (TIF District) by allowing a public entity (a municipality, township or county) to expend the TIF District’s future real estate tax revenues on the costs of public infrastructure improvements that benefit the TIF District. TIFs can infuse real estate developments with much needed capital by paying for required public infrastructure improvements that would otherwise have to be paid for by the developer.
A TIF redirects the real estate taxes arising from the incremental increase in the value of the TIF District due to the construction of private improvements within the TIF District (i.e., the real property’s value prior to construction of the private improvements versus its value after construction) to pay for the costs of the public infrastructure improvements. Since the incremental increase in the value of the TIF District is exempted from real property taxes, the developer instead makes “service payments in lieu of taxes” (or Service Payments) to the county treasurer in an amount equal to the real property taxes that otherwise would have been due if the incremental increase in the value of the TIF District had not been exempted through the TIF. The Service Payments are then used to pay for the public infrastructure improvements. Service Payments may also be used to pay debt service on bonds issued by a public entity or port authority to finance the public infrastructure improvements.
The exemption from real property taxes can be up to 75 percent of the incremental increase in the value of the TIF District for a term of up to 10 years. A greater tax exemption may be obtained so long as either the public entity obtains the agreement of the school district (including any joint vocational school district) in which the TIF District is located, or the school district(s) will receive Service Payments in an amount equal to the real estate taxes that would have been paid to the school district(s) but for the exemption (or some lesser amount as may be mutually agreed upon). In such event, the exemption from real property taxes may be up to 100 percent of the incremental increase in the value of the TIF District for a term of up to 30 years.
Under Ohio law, most types of private improvements may be used to support a TIF. However, some forms of residential improvements are not eligible.
Creating a TIF
Ohio statutes permit a public entity to create a TIF by authorizing legislation that identifies the TIF District, declares that the improvements within the TIF District serve a public purpose, outlines the public infrastructure improvements to be made that will directly benefit the TIF District and specifies the percentage and term of the real property tax exemption. Prior to passing the TIF authorizing legislation, the public entity will be required to notify the affected school district(s) and receive their agreement as necessary.
Eligible Public Infrastructure Improvements
Public infrastructure improvements traditionally permitted to be financed by a TIF under Ohio Revised Code Section 5709.40 include:
- public roads and highways;
- water and sewer lines;
- environmental remediation;
- land acquisition, including acquisition in aid of industry, commerce, distribution or research;
- demolition, including demolition on private property when determined to be necessary for economic development purposes;
- stormwater and flood remediation projects, including such projects on private property when determined to be necessary for public health, safety and welfare;
- the provision of gas, electric and communications service facilities, including the provision of gas or electric service facilities owned by nongovernmental entities when such improvements are determined to be necessary for economic development purposes; and
- the enhancement of public waterways through improvements that allow for greater public access.
Expansion of Qualified Improvements
On June 28, 2016, Ohio Governor John Kasich signed Sub. H.B. 413, which expands the definition of “public infrastructure improvements” to include “the continued maintenance of … public roads and highways and water and sewer lines” as eligible expenditures of TIF proceeds. In other words, a public entity may now use TIF funds to maintain specific types of public infrastructure improvements, rather than only to construct them. This provides a source of revenue to pay for maintenance of those types of public improvements that would otherwise have to be paid for by the public entity (or, if required by the public entity, the owner of the private improvements).
TIFs are advantageous for private developers since the increased property taxes that they would otherwise have to pay are instead used to pay costs of required public infrastructure improvements. Public entities benefit from TIFs because the private improvements typically result in increases in other forms of taxation, such as income taxes and sales taxes.
Thompson Hine & PMC TIF Services
TIFs are complicated and there are variations on the form of TIF discussed in this article. Another type may be used by municipalities to finance the costs of privately owned urban redevelopment projects.
Several Thompson Hine attorneys and consultants in our wholly owned subsidiary Project Management Consultants (PMC) regularly assist our clients with obtaining TIFs for their development projects. This includes approaching the applicable public entity to explore whether a TIF is an option; preparing and negotiating the agreement between the developer and public entity pursuant to which a TIF is implemented; ensuring the project documents comply with the requirements of the TIF Agreement; and assisting developers with analyzing the pro forma to ensure the TIF fits well within the project’s capital stack.
FOR MORE INFORMATION
For more information, please contact:
Heather A. Bartzi
Alan S. Ritchie
Arik A. Sherk
Ryan P. Sommers, CPA*
*Ryan Sommers is the director of financial services for Project Management Consultants LLC, a wholly owned subsidiary of Thompson Hine LLP.
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