What is Tax Increment Financing?

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What is TIF?


Municipalities in Illinois and across the nation are faced with numerous challenges, not the least of which is encouraging economic growth in blighted, decaying, and underperforming areas in need of development or redevelopment.

Most often improving these areas requires a public investment to reduce the extra cost and risk that private development faces in such areas. The public wishes to see this development occur, but without increased taxes or the reduction of other necessary services and projects that would be required to pay for the public investments that development and redevelopment usually require.

One tool successfully in use in Illinois and 48 other states to meet this economic development challenge is Tax Increment Financing: or TIF. With this development tool, financially strapped local governments can make the improvements they need, like new roads or sewers, and provide incentives to attract new businesses or help existing businesses stay and expand. And TIF does this without tapping into general municipal revenues or raising taxes.

Since the Federal and State governments have greatly reduced their support for local economic development, Tax Increment Financing helps local governments attract private development and new businesses using local resources that do not depend upon an increase in taxes or the reduction of other services. New development and businesses mean more jobs, more customers, and, in turn, more private investment for areas most in need. TIF projects also help retain existing businesses that might consider relocating away from declining areas. These jobs and investment — public and private — mean more revenue to help a community meet its other needs. As a result, the community as a whole, not just the area targeted for TIF revenues, improves.

How is a TIF district created?


Illinois TIF law specifies a number of requirements that must be satisfied for an area to qualify as a TIF district, beginning with identifying the district and the physical and economic deficiencies that need to be cured. Then municipal officials and a joint review board made up of representatives from local taxing bodies must review a plan for the redevelopment of the TIF area. Then a public hearing is held where residents and other interested parties can express their thoughts on the subject.  The proposal then must pass through the same process any other ordinance passes through for approval by the municipal governing board. Then the mayor or village president will sign the ordinance into law. No state or federal approval is required.

What kind of planning goes into the development of a TIF district?


A Redevelopment Plan is an assessment of an area in need of economic assistance. The Plan demonstrates why the area needs to be redeveloped and how the municipality plans to revitalize the area.

Illinois law requires review by the major overlapping local governments and a public hearing on the Redevelopment Plan prior to TIF designation. The Plan must be made available for public review and inspection at least 45 days prior to the public hearing and must include:

  • a description of the boundaries of the district recommended for redevelopment
  • a discussion of why the area needs to be redeveloped
  • documentation of how the area satisfies the “but for” requirement
  • the redevelopment goals and objectives for the area
  • an explanation of how the land in the TIF district will be used
  • a budget for the life of the TIF district, including the TIF-eligible costs of the plan
  • an evaluation of impact on the overlapping taxing bodies
  • a description of the process to amend the plan
  • a statement of conformance with the municipality’s comprehensive plan


What major redevelopment costs are eligible for TIF funding?


TIF funds may be used for costs that will permit previously developed properties to compete with vacant land at the edge of the urban area.   State legislation authorizes that TIF funds may be used for:

  • Property acquisition
  • Rehabilitation or renovation of existing public or private buildings
  • Construction of public works or improvements
  • Relocation
  • Financing costs, including interest assistance
  • Professional services, such as architectural, engineering, legal, property marketing and financial planning
  • Demolition and site preparation

 

What is the "but for" test?


When considering an area for TIF designation, municipal officials must ask the question “Will the same kind of private investment occur here without an incentive?’

In order to designate that area as a TIF district, the answer to this question must be “No.” But for the incentive provided by Tax Increment Financing, development would not occur in the designated area.” Evidence that the district satisfies the “but for” test is provided in the Redevelopment Plan.

What conditions must exist for the area to be designated as a TIF district?


There are two types of TIFs primarily utilized under Illinois law;

  • Blighted Areas;
  • Conservation Areas.


To be designated as a blighted area:

Improved property (land that is not vacant) must contain at least 5 of 14 factors that make it detrimental to the public safety, health or welfare of the community. These factors must be present, with that presence documented, to a meaningful extent so that a municipality may reasonably find that each factor is clearly present and reasonably distributed throughout the improved part of the area.  These factors are:

  • Dilapidation, Obsolescence, Deterioration, Illegal use of individual structures, Structures below minimum code standards, Excessive land coverage and overcrowding of structures and community facilities, Lack of ventilation, light or sanitary facilities, Inadequate utilities, Excessive vacancies, Deleterious land use or layout, Environmental clean-up, Declining equalized assessed value, and Lack of community planning.


Vacant land must have at least two of the following six factors that impair sound growth of the area, using comparable standards of evidence as for improved areas:

  • Obsolete platting, Diversity of ownership, Tax and special assessment delinquencies, Environmental contamination, Declining equalized assessed value, Deterioration of structures or site improvements on adjacent land.


In addition, there are six other factors which can qualify vacant land for TIF; they include land that was blighted before becoming vacant; unused quarries, mines, or strip mine ponds; unused rail yards, rail tracks or railroad right-of-way; chronic flooding; unused or illegal disposal sites; large areas that have been previously designated as a town center and meet other requirements.

To be designated as a conservation area:

  • At least 50% of the structures in the improved area must be 35 years old; and
  • Three of the 14 factors for designation of a blighted area must be present.


What are the opportunities for public input?


Before a TIF district is created, the Redevelopment Plan must be available for public review at least 45 days prior to the public hearing. The public hearing offers the community an opportunity to raise questions and voice their concerns about the proposed redevelopment.
A member from the community, representing the public, serves on the Joint Review Board along with representatives of the major taxing bodies overlapping the TIF.  

A registry of interested residents and organizations must be created for each TIF and notice of important TIF activities shall be sent to those registered.

Committee meetings of the city council or village trustees afford the public another opportunity to voice support or opposition of the TIF district.  

Who controls TIF funds?


Municipal officials control the allocation and disbursement of funds within the TIF district.

Can TIFs be changed?


Yes, TIFs can be changed.  In the case of minor changes to the Redevelopment Plan notice must be given to all taxing bodies and to the public through publication in a newspaper of general circulation within the area prior to the TIF being established.

However, major changes to the Redevelopment Plan adding parcels of property to the TIF district, changing land use, changing the nature of or extending the life of a TIF, increasing the number of low income households to be displaced, add new redevelopment costs to the budget, or increasing the budget by more than 5% after adjustments for inflation, require another public hearing, and all the opportunities for public input that were available during the initial establishment of the TIF district.

Who monitors the TIF process?


Local governments monitor the progress of the TIF district. By law, all the school districts and major taxing bodies meet with the TIF municipality annually to review the effectiveness and status of the TIF district.

Please contact us for more information regarding these economic development tools.