Municipal Backed TIF vs. Developer Backed TIF: Making the Right Call for Tennessee

When Tennessee municipal leaders consider using Tax Increment Financing to support a development project, one of the most consequential decisions they face is how the TIF Bond will be structured. The two primary options — municipal-backed and developer-backed — carry fundamentally different risk profiles for your city. With the passage of SB 1760 and HB 1892, Tennessee has created a legal framework that makes developer-backed TIF Bonds not just viable, but preferable for most transactions. Here is why.

Municipal-Backed TIF: What It Means for Your City

In a municipal-backed TIF structure, the municipality or its TIF agency issues bonds that may be supported — in whole or in part — by the municipality’s credit, general revenues, or taxing power. If the tax increment generated by the development falls short of the required debt service, the municipality may bear some financial responsibility for covering the gap. The bonds may count against statutory debt limitations, and the municipality’s bond rating could be affected.

Municipal-backed bonds can offer lower interest rates because the lender has the security of the municipality’s credit behind the obligation. In some cases, this structure may be appropriate — particularly for large-scale public infrastructure projects where the municipality is the primary beneficiary and the increment is well-supported by existing development trends. But for individual commercial real estate projects driven by a private developer, pledging municipal credit introduces risk that is unnecessary under Tennessee’s updated TIF framework.

Developer-Backed TIF: Risk Where It Belongs

In a developer-backed TIF structure, the TIF agency issues the bond to the developer, who assigns it to a capital provider in exchange for upfront cash. The bond is repaid solely from the tax increment, and the developer — through a taxpayer agreement under SB 1760 — contractually guarantees any shortfall. The municipality serves as a conduit issuer with no obligation to advance funds, levy additional taxes, or pledge its general credit.

The taxpayer agreement lien runs with the land, carries the same priority as property tax liens, and takes precedence over any existing or subsequent mortgage. Delinquent taxpayer direct payments are enforceable as real property taxes. This means the developer’s guarantee is not just a contractual promise — it is backed by the strongest collection mechanism available under Tennessee law.

The Developer Gets the Same Proceeds Either Way

A common misconception is that developer-backed bonds reduce the capital a developer receives compared to a municipal-backed structure. This is not the case. The TIF Bond’s value is determined by the projected tax increment — the increase in property taxes generated by the completed development. Whether the bond is municipal-backed or developer-backed, the underlying revenue stream is the same. What changes is who bears the risk if that revenue stream falls short.

When a developer sells a developer-backed TIF Bond to Hageman Capital, they receive upfront cash based on the projected increment and the strength of the taxpayer agreement guarantee. The developer gets the capital they need for construction. The municipality gets a completed project that generates long-term tax base growth. And neither party has pledged anything they cannot afford to lose — the developer’s guarantee is tied to the property they are developing, and the municipality’s general fund remains untouched.

When to Choose Developer-Backed

For most individual commercial real estate projects in Tennessee — multifamily developments, mixed-use projects, retail centers, office buildings, and industrial facilities — developer-backed TIF Bonds are the appropriate structure. The developer is the party that benefits most directly from the TIF assistance, the developer has the financial incentive to complete the project and generate the increment, and the developer is best positioned to bear the risk of underperformance.

Municipal-backed structures may still make sense in limited circumstances — large public infrastructure projects, area-wide TIF districts supporting multiple developments, or situations where the municipality has strong budgetary reasons to issue general obligation bonds. But for the single-site, developer-driven projects that make up the majority of TIF transactions, developer-backed is the structure that protects the public interest while delivering the same economic development outcomes.

Hageman Capital Makes Developer-Backed TIF Work

The developer-backed structure works because there is a capital provider willing to purchase the bond. Hageman Capital is that capital provider. We purchase developer-backed TIF Bonds across multiple states, and we work with municipal leaders at no cost to help them understand the difference between these structures and evaluate which approach best fits their community’s needs. Connect with our team and let’s make the right call for your municipality.