Tax Increment Financing Process

Transcription

1 Tax Increment Financing Process 1. Discuss TIF with City Staff This is a preliminary review of plans and goals. TIF may or may not be suited to your project. TIF is heavy on paperwork, requires up-front payment, is conducted in a public forum and is subject to public scrutiny. And there are no guarantees of approval. Nevertheless, Cameron has enjoyed a number of successful TIF projects benefiting both the developer and the community. 2. How TIF Works TIF captures or re-directs usual sales and real property taxes toward development costs. Generally, the developer is responsible for initial costs and performs the work. The developer is reimbursed over time, as taxes are collected, for approved costs. No new taxes are required or levied. Only the normal sales and property taxes are paid the same as if there was no TIF but the developer gets some of it back. 3. Timeframe The TIF process generally requires 90 days or more primarily because 45-day notice must be given to the affected taxing jurisdictions, various meetings must be held, votes of public bodies and paperwork to be prepared. Construction work cannot begin until the project has been approved. 4. TIF District Before a TIF project (individual business) can be approved, a TIF District must be established. This is the geographic area in which TIF can be used. Often the District and Project(s) are approved together. Sometimes, however, the developer chooses to establish the TIF district in order to facilitate approval of future TIF projects within the district. If only the TIF District is approved, the developer must go through the TIF process again for each project within the district. This is reasonable if the developer does not know what kind or size of projects (Office? Retail?) will comprise the district. However, if the developer knows the probable composition of the entire development (shopping center), he/she may want to seek approval for the individual components such as utilities, streets, site preparation, etc. all at once. The downside is that substantial changes must be approved requiring the same, lengthy TIF process. 5. TIF Project A TIF Project is an individual component of a TIF District such as a store, office, building, or structure. In a stirp center, for example, the entire building housing several stores may comprise a single project. Free-standing development over a period of time might consider each business as a separate TIF Project. However, several free-standing stores, for which plans are known, might be considered together. Again, substantial changes will require approval if the developer seeks TIF reimbursement. 6. Project Funding TIF does not provide initial (construction) financing. The developer is expected to obtain his/her own financing from a bank or other funding source. Large projects by major companies sometimes issue bonds which may be purchased locally or nation-wide. The TIF Commission

2 will expect funding to be in place prior to consideration of the project. The City does not issue nor guarantee such bonds. 7. Visit with TIF attorney The City retains an experienced TIF counsel who knows Missouri TIF law and Cameron s TIF districts. We strongly suggest that we accompany you to visit with him/her for an evaluation of your project, expert explanation of the requirements and process, and familiarity with the steps involved. The City s TIF counsel is employed by the City and endeavors to serve all parties but should not be substituted for private counsel. 8. Retain private TIF attorney Most TIF applicants have retained their own private TIF counsel who represents only the applicant. This ensures that the applicant has a knowledgeable advocate and advisor. There is certainly cost, but it assures that the applicant has taken full advantage of all TIF opportunities, all documents have been reviewed and compliance with TIF regulations have been met. 9. Engineering and construction firmsthe applicant is expected to retain experienced engineering and construction firms which will prepare site plans, storm water plans, construction plans and be familiar with City regulations as well as State Statutes regarding all aspects of site preparation and construction. Some document detail can be prepared during the 45-day notice period, however the applicant should have a good idea of costs and plan layout at the outset. 10. Project Proposal The applicant submits a formal proposal which gives basic information about the project; location, size of building(s), general layout, financing, cost estimates, revenues, engineering and other essential information which shows the TIF Commission that sufficient preliminary work has been done to proceed. The applicant is encouraged to find out what others have successfully done and how they presented their projects. 11. Reimbursable Costs The Proposal also includes a list of project costs which can be reimbursed to the developer over time. Generally, 30-35% of total project cost is considered usual for reimbursement. Generally, public facilities such as streets & utilities receive higher favor. The City has also approved TIF for site grading, parking, storm water retention, entrances and other costs. While allowed by State law, Cameron has never approved TIF for buildings, equipment, real estate, inventory and other on-site improvements. Soft costs including engineering, surveying, legal and interest are also considered to be reimbursable. 12. Recovery Period The developer recovers a portion of sales taxes (if any) and real property taxes over time. As the taxes are generated over the years, the reimbursable portion is remitted to the developer. The developer makes payments in lieu of taxes (PILOTS), which is the same as regular tax payments, and the City or County pays the developer accordingly. The more taxes generated, the faster the developer is repaid. The maximum allowable recovery period is 23 years. In practice, the TIF Commission likes to see repayment in a substantially shorter time so that taxing jurisdictions can begin to realize income.

3 13. Project Example Retailer: Real estate investment: $1 million. Annual sales: $2 million. In our example, the $1 million project would pay about $19,000 a year in real estate taxes (PILOTS). We usually capture 1% of gross sales, so the project would generate $20,000 a year in economic activity taxes or EATS. Total TIF revenue (PILOTS + EATS) would be $39,000 per year over a maximum of 23 years or $897,000. It is from this revenue stream that the developer is reimbursed for approved costs. 14. Return Example As we noted earlier, a developer might expect TIF reimbursement of 30-35% of project cost. In our $1 million example, that means maximum reimbursement of $300,000-$350,000 or so might be expected. Our projected rate of TIF revenue is $39,000 per year, so it would take only 8-9 years or so to complete reimbursement less if sales and tax revenue grows. 15. No Sales Tax An office project which generates no sales tax and depends solely on PILOTS will take longer to pay back, and it s the developer s risk. TIF Commissioners have expressed reluctance to approve very long projects because the taxing jurisdictions do not receive taxes for a long time. 16. Non-TIF TIF projects depend on tax revenue to reimburse development costs. If the project does not generate taxes, there is no benefit to TIF. Not-for-profit institutions such as schools, churches or hospitals cannot benefit from TIF. 17. Funding Agreement When the developer decides to proceed with TIF, the City requires a Funding Agreement in which the developer pays $10,000 up front to pay for legal expenses incurred by the City. The developer may also be required to pay for any additional costs. Generally, these legal expenses are included among reimbursable costs. 18. Notice to Taxing Jurisdictions As soon as a decision to proceed is made, the City s TIF attorney will notify all the taxing jurisdictions (school, ambulance, county, etc.) of the public hearing at least 45 days in advance as required by Missouri Statutes. This might be done before the funding agreement in order to give the developer time to prepare plans, but the developer will be responsible for this cost in either event. 19. Workshop Meeting We have found it helpful to a developer who is not sure how the TIF Commission might respond and is wary about entering into a funding agreement, to hold a workshop or preliminary meeting with the TIF Commission in order to help understand their level of interest. They make take a straw poll or simply offer their comments. They may be unsure as well. This will give the developer as much information as possible, uncover some possible issues or objections, and help give direction.

4 20. Interim Actions During the 45-day notice period and after the Workshop, the TIF attorney(s) are preparing the detailed TIF Plan, projections and ancillary documents while the developer s engineer and builder are completing the site plan and construction drawings. The TIF Commission will want to see a financial commitment letter from a bank and land acquisition contract--proof that the Developer has the means to complete the deal. 21. Public Hearing The Developer presents his/her plan, with the help of attorneys and engineers, to the TIF Commission. Commissioners ask questions and comment. Each of the taxing jurisdictions, some of whom are commissioners, comments. Questions usually involve components for which the Developer seeks reimbursement. As we mentioned, public improvements fare best as do site preparation (grading) and stormwater management. Engineering, legal and other soft costs are also recognized as reimbursable. Keep within the 30-35% rule. Job creation and community investment are positives. The Commission votes to make a recommendation to the City Council. 22. Objections Although the Cameron TIF Commission has largely supported numerous successful TIF projects, their tax diversion concerns are legitimate. The Commission includes representatives from the various taxing jurisdictions whose future funding is affected by TIF. If, for example, a proposed TIF project would create 100 new jobs, the school district may get a number of new students. The district would be rightly concerned about how it would fund the education of these students if real estate taxes were captured for TIF. In this event, the City may choose to capture only a portion of such tax. 23. City Council Action After a 14-day comment period, the City Council will vote on the matter considering the TIF Commission s recommendation. The Council is not bound by the recommendation. Since the public hearing has already been held, the Council need not consider any further information, but it may. The Developer s engineer and attorney should be present at all meetings to answer questions and demonstrate interest. 24. Planning and Zoning Review The Planning and Zoning Commission reviews all commercial construction projects, whether TIF or not, for compliance with City building regulations. The Developer s engineer can prepare site plans which serve both TIF and zoning purposes. P&Z does not consider TIF Commission action. P&Z approval is final and it does not need to go before the City Council. 25. Building Permit All projects, commercial or residential, require a building permit. In this case, the Planning and Zoning Commission has already approved the plan, and the Developer need only obtain the permit from the City Inspector and build according to approved plans and the International Building Code. Cost for our $1 million building example is $2,400 plus system development (impact) fee. 26. Certificate of Substantial Completion

5 When construction is complete, the Developer submits a Certificate of Substantial Completion attesting that the work was completed as promised according to plans submitted and approved. Sometimes costs exceed projections and the Developer can amend his/her request. The City inspects the construction and formally accept the Certificate. 27. Reimbursement Final step beginning Developer reimbursement. The Developer submits a form certifying the reimbursable project costs and requests that payments begin. As taxes are paid to the State/County/City, the Developer will be reimbursed according to the schedule approved in the Plan. As sales increase and sales taxes are collected or as improvements/expansion is made to the real estate, the period necessary for reimbursement will shorten. The City keeps records of amounts owing, and when reimbursable costs are met, payments to the developer will cease and full taxes will flow directly to the taxing jurisdictions.