City of Elizabethton, Tennessee

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1 City of Elizabethton, Tennessee Tax Increment Financing November 10, 2015 G. Mark Mamantov Bass, Berry & Sims PLC 900 South Gay Street, Suite 1700 Knoxville, TN

2 What is tax increment financing? Application of incremental property taxes derived from specified parcels for a specified purpose Usually coupled with a borrowing but not required in all cases When borrowing is involved, monetizes the present value of incremental property tax revenues to assist with project costs

3 TIF versus PILOTs TIF requires approval of both City and County to capture both increments TIF does not require transfer of property to IDB TIF is much easier to use to monetize value of incentive up front to pay project costs PILOTs do not necessarily require base taxes to be paid to local governments

4 What entities are allowed to undertake tax increment financing? Industrial development boards Housing authorities

5 Typical TIF Projects Retail development Blighted properties Office, mixed-use and industrial development

6 When should a TIF be used? There is no legal but for test. But property taxes are a scarce resource and should only be used as an incentive judiciously Policies and procedures may be helpful in identifying the types of projects that are eligible for tax increment financing

7 IDB TIF versus Housing Authority TIF IDB TIF requires identifiable project; Housing Authority TIF does not Housing Authority TIF requires finding of blight; IDB TIF does not Housing Authority TIF can have longer maturity without Comptroller approval Housing Authority TIF can be used to finance certain costs more easily, like land write downs while IDB TIF can be used to finance certain other costs, such as building construction, more easily Housing Authority has eminent domain; IDB does not

8 Basic TIF Math Tax Parcels Base Taxes Completion Taxes Tax Increment Parcel 1 $5,000 $50,000 $45,000 Parcel 2 $10,000 $65,000 $55,000 In this simple example, the incremental taxes each year are $100,000. Note that assessment is irrelevant; only taxes are relevant for purposes of this calculation. This simple calculation does not exclude the debt service component of the increment as is required by state law. If an allocation was permitted for 20 years in this case, the total amount of increment allocated in this simple sample would be $2,000,000. The present value of the allocated increment would be less, depending on the interest rate applied.

9 Tax Increment Financing- The Authorization Process for both IDBs and Housing Authorities Plan preparation Public Hearing Government Approvals

10 Drafting an IDB Economic Impact Plan - Requirements Plan area boundary Project identification Expected benefits to County and/or City including tax receipts and jobs created Authorization of allocation of incremental property tax revenues

11 Drafting an IDB Economic Impact Plan - Considerations Establishing the plan area Inclusion of personal property taxes Percentage of increment allocated Term of allocation Parcel-by-parcel or total area calculations Phase in of parcels/multiple TIFs in plan area Withholding of debt service component Administrative costs Payment dates Permitted costs

12 Drafting an Housing Authority Redevelopment Plan - Requirements Plan area boundary Relation of plan to local objectives Proposed land uses and building requirements Address any relocation of residents Allocation of incremental tax revenues Cost of redevelopment project Estimate of debt to be incurred Impact of tax increment financing on local governments

13 Drafting a Housing Authority Redevelopment Plan - Considerations Establishing the plan area No inclusion of personal property taxes Percentage of increment allocated Term of allocation Parcel-by-parcel or total area calculations Phase in of parcels/multiple TIFs in plan area Withholding of debt service component Administrative costs Payment dates Permitted costs

14 The Tax Increment Financing- Typical Basic Documents Note (Tax Increment / Limited Recourse) Loan Agreement (TIF Lender / IDB) Assignment of TIF Revenues (IDB to TIF Lender) Development Agreement (IDB and Developer; Collaterally Assigned to TIF Lender)

15 Financing Considerations Term Amortization Tax-Exempt versus Taxable Interest Rate Puts Debt service coverage Fluctuations in taxes

16 Administration of TIFs Annual Calculation of Increment Payments to TIF lenders