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Understanding Tax Increment Financing (TIF)

Updated: Apr 26, 2020

Tax Increment Financing, or TIF, is used as an incentive to spur economic development and helps developers finance new construction and redevelopment projects. TIF has been used in many projects throughout the United States, including Amazon’s HQ2 in Arlington, Virginia. Closer to home, TIF has been used to finance projects like Cabela’s in Rogers, and the historic Water Street Inn in downtown Stillwater, Minnesota.

While TIF has played an important role in both big-name and small projects, not many are familiar with what it is and how it works. To help you understand TIF, we’ve explained the basics and some common misconceptions below.

What is TIF?

TIF helps a company or developer finance new development in certain eligible “districts.” TIF funds come from the increase in property tax revenue generated by that new development, and are referred to as “tax increments.” The money captured by TIF is used to pay for costs associated with the project. Eligible expenses may vary from state to state, but often include:

  • Land acquisition

  • Demolition or renovation

  • Infrastructure improvements (sewers, streets, parking lots, etc.)

  • Planning expenses (studies, consulting, legal fees, engineering, etc.)

  • Cleaning up contaminated sites

  • Administrative costs

  • Funding training programs

How TIF Works

Before any funds can be distributed, a TIF district must be established. A TIF district is an area within a city that, after careful consideration from both the city and expert consultants, is determined to be in need of development or redevelopment. These districts can only be formed by local units of government, including but not limited to cities, economic development authorities (EDAs), housing and redevelopment authorities (HRAs), and port authorities.

For an area to be deemed a TIF district, certain criteria must be met. In addition, TIF districts can only be created for specific purposes. Each type of district has different restrictions in terms of how long tax increments can be collected, as well as expenses it can be used for. In Minnesota, TIF districts can be created for the following purposes:

  • Economic Development

  • Redevelopment

  • Housing

  • Renewal and Renovation

  • Soils

  • Compact Development

Though the final say comes down to the City Council, or, in some instances, the County Commission, the public also has an opportunity to weigh in on the creation of a TIF district. Before the TIF is approved or denied, a public hearing is held to allow community members to voice their opinions on the record.

If the TIF is approved, a developer’s agreement must be signed by the developer/business and the city. The detailed legal document outlines all of the conditions that must be met for the TIF to remain in place. If the business fails to meet any of these conditions, funds will not be distributed.

Misconceptions About TIF

Though it can seem complicated, TIF is an important economic development tool that has the power to revitalize a community. Below are some of the most common misconceptions about TIFs.

Any Area Can Be Deemed a TIF District

TIF is meant to be used in areas that are truly in need of development or redevelopment, and state statutes determine the eligibility of a TIF district. If an area doesn’t meet the criteria outlined in the statute, a TIF district cannot be created.

Likewise, TIF cannot be given to a project that does not need it. There is a rigorous application process, which is heavily regulated. Businesses are required to provide factual evidence that demonstrates their financial need, and generally pay a fee between $10k-$15k. This fee goes toward hiring a third party financial consultant to assess that need, cover any required professional inspections, and prepare required legal documents.

The City is “Giving Away” Money

One of the biggest misconceptions about TIF is that the city is giving existing taxpayer money to businesses to fund their project. In reality, the money used to fund these projects doesn’t yet exist, as it comes from the increased tax revenue that will result from the proposed project. These funds are only generated if the project moves forward.

Once the project moves forward, the TIF is financed by refunding a portion of the increased taxes from the project. It is important to note that any existing property taxes generated in a district, prior to the commencement of development/redevelopment, are still being paid to the applicable taxing jurisdictions. Additionally, Minnesota state statute allows cities to keep up to 10% of the increment for administrative purposes.

Fundamentals of Tax Increment Financing_Credit: Bakertilly Municipal Advisors
Credit: Baker Tilly Municipal Advisors

The Project Would Have Happened Without TIF

As mentioned above, TIF funding is not awarded to a business or developer that doesn’t need it. In many cases, if the creation of a TIF district is denied, the project will not move forward; land and lots will remain vacant and in redevelopment situations, buildings would remain dilapidated. This can have a negative impact not only on a community’s curb appeal, but it’s economy. When TIF for a development/redevelopment project is denied, it eliminates the creation of businesses as well as jobs.

To learn more about TIF, get in touch with the Greater Fergus Falls team.

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