Tax Increment Financing Explained

Darren Critchlow is a development associate with Ryan Companies US, Inc., where he works in the senior living and multifamily department in the Midwest region. Darren Critchlow handles the entire real estate cycle on development projects, such as financing, demographic feasibility study, financial modeling, site selection, and TIF analysis.

Tax increment financing (TIF) takes a portion of the company’s taxes to help in financing infrastructural developments and improvements in a selected area. With authorization from the state, the administration of TIF is done by local governments that choose an area (TIF district) targeted for development.

After a TIF district has been created, the county auditor takes note of the entire district’s current tax capacity designated as the “original tax capacity.” As property values in the district appreciate, the extra taxes above the original tax capacity are captured (captured tax capacity) and money channeled for development purposes.

TIF is used to finance various projects which include demolishing or restoring buildings and payment for planning expenses such as legal fees. Other projects include building parking lots, streets and sewers, cleanup of contaminated areas, and in some states, financing the land acquisition. State laws often provide guidelines on how a TIF district should be identified. For instance, eligibility is granted to areas whose properties are old or have been abandoned, places with building code violations, conservation areas under risk, and economic potential areas.

TIF funding aims to open up more areas to encourage economic development through the creation of jobs and increasing the tax base. When creating a TIF district, feasibility studies should be conducted alongside having a sustainable development plan. In addition, local authorities may be required to conduct public hearings and form stakeholder partnerships to strengthen the initiative. Public support is also crucial for the success of TIF districts.