TIF Districts Can Be Useful Finance Tool (Commentary by Chad M. Avery)

Recent publicity has piqued interest in a form of financing known as “tax increment financing.” Tax increment financing involves the use of Tax Increment Financing Districts (“TIF districts”). Two of the more publicized ventures in which the parties involved considered tax increment financing are the development of the $80 million North Little Rock retail complex to be known as The Shoppes at North Hills and a development involving the Mountain Inn in Fayetteville.

While many are pleased with the potential development of these areas, there have also been questions raised regarding the use of the program. Below is a summary of tax increment financing that may provide answers to some of these questions, and offers valuable information to developers, cities and counties who are considering TIF districts for their own ventures.

When used properly, tax increment financing allows cities and counties to undertake a redevelopment project that encourages private enterprise and investment in an undeveloped, underdeveloped, deteriorating or ?blighted? area. A city or county may identify a blighted area, create a redevelopment project plan to counter that blight, and create a TIF district to implement that plan and complete the redevelopment project.

TIF districts are generally created as follows: (1) the city or county designates the boundaries of the proposed TIF district; (2) notice of the designation is provided to the public and the local taxing authorities, and a public hearing follows; (3) the city or county may then pass an ordinance creating the TIF district and authorizing a project plan; (4) when the project plan is completed, notice of its existence is provided to the public and the local taxing authorities, and a public hearing follows; and (5) the city or county passes an ordinance accepting the project plan, and the redevelopment project begins.

Tax increment financing does not appear unique at first glance ? until one considers that a TIF district, when properly evaluated and implemented, can be almost completely self-financing: (1) the TIF district undertakes the redevelopment project; (2) the redevelopment project increases the assessed value of the taxable property within the TIF district; (3) the increase in the taxable property value results in an increase in the amount of ad valorem taxes collected within the TIF district; and (4) this increase in ad valorem taxes, or ?tax increment,? is pledged to finance the redevelopment project.

Although there are many benefits in using tax increment financing, there are some challenges as well. Two primary challenges are the effect tax increment financing may have on taxing authorities and businesses. One should address these challenges early in the planning process by initiating communication with all potentially affected entities and parties. Arkansas law also allows cities and counties that use tax increment financing to share the tax revenue generated by the TIF district with other taxing authorities.

TIF districts may engage in a wide variety of redevelopment projects, and may finance many of the associated costs. This may include a portion of the costs involved in the formation of the TIF district itself. Redevelopment project costs are generally funded with the tax increment funds or with bond proceeds.

TIF district bonds have several attractive characteristics. Their interest and income are exempt from state, county, and municipal income taxes, and they may be exempt from certain federal taxes as well. The bonds are generally payable solely from the tax increment and are not deemed a pledge of the faith and credit of the issuing city or county. Finally, the bonds are generally secured by a pledge of all or a part of the funds from the tax increment and can be further secured by a pledge of the improvements completed in connection with the redevelopment project.

TIF districts are an exciting and useful financing tool available to developers, cities and counties in Arkansas. With proper evaluation and implementation, TIF districts may be used to increase the welfare, prosperity and living conditions of Arkansans, and to reduce the number of blighted areas in our state.

(Chad M. Avery is a lawyer with the Little Rock law firm of Gill Elrod Ragon Owen & Sherman. E-mail him at [email protected].)