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Tax Increment Financing for the Real Estate Entrepreneur
If you are looking to develop property in a blighted area of your town, you should look into the possibilities for tax increment financing (TIF). Here we discuss some of the aspects of tax increment financing and how it can help get your next development off the ground.
If you are looking to take the plunge into developing a blighted area in your neck of the woods, you should do some research on tax increment financing, often called TIF.
This can help a project that would otherwise be questionable to pencil more comfortably.
What is TIF?
Tax increment financing is a creating set up by local governments to facilitate development of blighted areas. The basic concept is that the city offers the developer/owner the rights to the increase in tax revenues as an income stream that can be used to help finance the project.
In most cases the tax increment comes from increased property tax revenues, but it can also be from increased sales tax revenues as well.
How Can I Get TIF?
The key to getting tax increment financing is to work with your local municipality. In most cases the municipality has to designate a certain site as blighted. In other cases the city will actually set up a redevelopment authority or redevelopment agency (RDA) which can administer the tax increment financing.
It can politically trick to use tax increment financing, especially is the entire area designated to receive it is just one parcel of ground. In most cases it is best to work through issues relating to tax increment financing before you purchase a piece of ground in a blighted area for redevelopment.
How Does TIF Work?
Once it has agreed to use tax increment financing, the municipality will establish a tax baseline for your project. In the case where property tax increment is being used, the municipality will look at what the property tax is for a base-year prior to development. As the project is built, obviously the value of the property goes up. The increased property taxes are assessed as normal, but the increment (the amount over and above the base amount) will be re-bated to the owner.
This stream of revenues is usually memorialized with a written agreement between the owner/developer and the municipality. Once this is done, you can use this agreement to secure additional financing for your project. The revenue stream that results from tax increment is just like lease income in the sense that a financier can see that revenue stream and loan you money against it. This will help you get your project built.
TIF Revenues Can Be Earmarked
You should also be aware that TIF revenues can be earmarked as per your deal with the municipality. In other words, you may be required to use the tax increment revenue for certain purposes. In many cases, the blighted land you are developing will have very little infrastructure. It is common to have the tax increment earmarked for infrastructure improvements to the site. This could include water, sewer, storm drain, street lighting, new streets, and other infrastructure uses.
TIF Time Frame
One final consideration for tax increment financing is the time frame. In some instances the tax increment can be for as short as a few years. In other cases it could extend for up to 50 years. Be sure you understand the type of tax increment financing you are working on and budget accordingly for when that revenue stream dries up.
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