Tax increment financing (TIF) serves as a powerful tool for developers seeking to revitalize communities (TIF districts) and undertake ambitious economic development projects. However, the gradual disbursement of TIF incentives over an extended period can pose financial challenges. This is where TIF monetization comes into play, offering a strategic solution to convert future tax revenues into immediate capital.
What is TIF Monetization?
TIF monetization is a process to generate upfront value from a tax increment financing incentive received over time. Since TIF incentives are derived from incremental real estate taxes tied to a specific project, their disbursement can be paid out over 15 to 30 years, depending on the jurisdiction. TIF monetization methods enable the incentive holder to sell those cash flows to an investor in exchange for upfront capital.
If a developer receives TIF incentives, they have the option to securitize those cash flows through a TIF bond or a TIF note and subsequently sell them to an investor. The investor, in turn, pays the present value of those future incentive cash flows, and the bond/note grants them the right to capture those future payments.
Why Monetize Your TIF Incentive?
There are severaladvantages of TIF monetization. In short, monetizing TIF and selling TIF bonds at the start of construction allows a developer to contribute less equity into a project, borrow less debt from a lender, or a combination of both. In many cases, selling or monetizing a TIF bond can enhance the developer’s return on the project.
How Does TIF Monetization Differ From State to State?
TIF legislation varies between states, and depending on the jurisdiction, TIF monetization methods may differ. In Indiana, TIF monetization is typically executed through the sale of a developer-backed bond, where the developer is obligated to monetize the TIF incentives or retain the bonds and collect the cash flows over time. The advantage of utilizing a bond is that it is already packaged in a securable instrument, which isn’t always the case with a loan or a note.
Alternatively, in some other states, such as Illinois, TIF notes are more commonly used. The note (similar to a bond) allows the holder to capture incremental tax revenue generated from a project. In many cases, TIF notes and TIF bonds are used interchangeably. However, investors in a TIF note must ensure the instrument is transferable, necessitating additional due diligence and structuring expertise.
Ultimately, the key variable for any TIF monetization requires a securable instrument, either a TIF bond or a TIF note, which can be freely transferred to an investor.
The TIF Monetization Process
Most TIF monetization processes involve the developer engaging an investor for the purchase of their TIF bonds or TIF notes. Throughout that process, a developer will engage in the following.
Negotiate With the Investor
The developer negotiates with investors on acceptable terms and pricing levels. This is typically the time when an investor will bring up covenants specific to them and give a framework for pricing.
A Due Diligence Period
Investors will look to analyze the real estate project, the taxing authority, and tax history. Additionally, on new developments, investors are taking on development and construction risk.
Memorialize Bond/Note Documents
Attorneys work to memorialize transaction documents that may vary between states.
Close and Fund on a Specific Date
Typically, the bond/note funding date will be when the construction loan closes.
On a pre-construction completion TIF, the developer will typically work with the municipality or local governments in conjunction with the purchaser to issue the security directly to the purchaser.
In the dynamic world of real estate, where challenges and opportunities coexist, TIF monetization emerges as a strategic ally, offering a roadmap to transform visions into tangible, impactful realities. Hageman Capital can help empower your journey as you navigate the intricate landscape of TIF incentives, unlocking value and maximizing returns in the process.
Embarking on a real estate development journey often involves navigating a complex financial landscape, and tax increment financing (TIF) bonds emerge as a strategic tool within this realm. In this blog, we unravel the intricacies of a specific subset — Developer-Backed TIF Bonds — shedding light on their significance, mechanisms, and the pivotal role developers play in securing their success.
What is a Developer-Backed TIF Bond?
A tax increment financing (TIF) bond is a financial instrument used to fund certain portions of development projects within a designated area, often referred to as a TIF district. In a TIF district, the increase in property tax revenue generated by the development is earmarked to repay the bonds.
Developer-backed TIF bonds are a type of TIF financing mechanism where a real estate developer supports and guarantees the repayment of bonds issued by local governments for a specific development project. This means that the developer of the project takes an active role in supporting and securing the TIF bonds.
These types of TIF bonds typically involve the developer committing to contribute a portion of the project costs and taking on responsibilities to ensure the project’s success. By backing the TIF bonds, the developer aligns their interests with the successful execution of the project, adding a layer of assurance for investors and stakeholders.
What are the Requirements for a Developer to Receive TIF Incentives?
Requirements for a developer to receive TIF incentives can vary depending on the specific regulations and policies of the local government or municipality involved. However, there are some common elements and considerations that are often taken into account:
Does the developer’s project require the funds to be commercially viable? This means the current returns of the project are not high enough for investors, lenders, and the developer to start the development. This is more commonly known as the “but-for” test.
Has the municipality determined whether the project contributes to public well-being through increasing economic development in a specific area or increasing the existing tax base?
Is the type of project (whether apartments, office, retail, or industrial) additive to the municipality?
Essentially, for the city or other municipality to determine whether to grant developers TIF incentives, they may weigh both the “but-for” test, and whether the project contributes to the public well-being. Depending on the jurisdiction, some municipalities may even use a scorecard for each project to determine whether there will be incentives provided.
When is a TIF Bond Required?
A TIF bond or a TIF note is a financial instrument used to memorialize a developer’s TIF incentive. While TIF bonds and the TIF incentive are sometimes used interchangeably, they are not the same.
Typically, a bond is required when a developer needs to monetize the bonds (i.e. sell the bonds), which allows those proceeds to be used in their project. While some developers may choose to hold the bonds and collect the incentive cash flows over time, many developers opt to sell the bonds upfront. The bond is the easiest way to sell that interest.
– Xiao’s background, how he and Kent met.
– What are TIF Bonds and how they work.
– How TIF Bonds work with deals and what developers need to know.
– The positive tax benefits associated with TIF Bonds.
– Why investors should not rely on bonds to make their underwriting work.
– How investors can get started with TIF Bonds.
Throughout any transaction, Hageman Capital provides tremendous value through our structuring expertise, or what we call, “Value Add Propositions.” This is heavily emphasized throughout our Proven Process and continues to be the core of how we maximize value for the developer.
Contact our team to learn how we can work together on your next solution.
Xiao Ou Yuan, our Managing Director at Hageman Capital, was recently on the Wealth Matters Podcast with Alpesh Parmar and talked about the ins and outs of tax increment financing and how it works. If you want to learn more about why real estate investors and developers care about TIF, be sure to check it out
Old Town is a master developer who has successfully partnered with Hageman Capital to maximize TIF proceeds.
Hageman Capital Managing Director Xiao Ou Yuan recently joined the Peer 2 Peer Real Estate podcast with William Morales to discuss TIF bonds. Click on the link below to learn more about how Hageman Capital was formed, the benefits of TIF bonds and how they can help spur economic development in communities across the country.
During the heart of COVID-19, Tegethoff Development, an Indianapolis-based real estate and luxury lifestyle developer, and Hageman Group were partnered on three properties that were in operation. Despite the global pandemic, the two partners successfully navigated through the challenging times to forge successful outcomes. All three multi-family living complexes – one in Cincinnati and two in St. Louis – have since been completed and sold.
Prior to these three projects being sold, Tegethoff partnered with Hageman Capital, a subsidiary of Hageman Group, for the first time to use tax increment financing (TIF) bonds for a project called The Signature Carmel. The Signature Carmel is a 295-unit, urban-designed, market-rate apartment community in Carmel, Indiana, an affluent suburb of Indianapolis.
“That’s the first time we’ve ever looked at a different strategy with our incentives, and we worked with Hageman to be able to pull it together,” said Matt Cremer, chief operating officer at Tegethoff Development. “We decided to switch to a leveraged buyout of our future TIF cash flows after learning about the investment vehicle Hageman Capital had created. This reduced our over capital raise on the front end of the deal and simplified the future cash flows that will be looked at for valuation purposes ongoing as we own this asset.”
Keep reading to learn more about the relationship between Tegethoff Development and Hageman Capital and how TIF bonds have proven to be one of the most impactful tools for economic development across the country.
How Do TIF Bonds Work?
Historically, developers such as Tegethoff Development have elected to finance their TIF through their construction lender instead of selling them. The primary market for these bonds has also lacked the liquidity that traditional bond markets have had in the past. This means that developers had difficulty selling developer-backed bonds on single-site projects, and many have elected to keep their bonds until after project stabilization.
Hageman Capital provides upfront capital to real estate development projects through the purchase of single-site, developer-backed TIF bonds. By purchasing TIF Bonds, Hageman Capital provides real value for real estate developers and communities. Hageman partners with developers to purchase TIF bonds and maximize cash proceeds available for investment into the projects.
How Did Tegethoff Benefit from Partnering with Hageman Capital
Cremer said it was refreshing to work with Hageman Capital because they care about the projects and the communities they work in, adding: “The Hageman Capital team is there to provide capital, but just as important, they assist in strategic decision-making that creates wins on the investment side and helps further our mission to build communities that are more desirable for people to live in.”
“One thing I enjoyed the most about working with Hageman is they wear different hats,” Cremer added. “We were able to have a conversation with them about a specific challenge or an opportunity. They have been there on other investments, so their team has experience in various things we’re working on, so I feel it’s a value for them as a partner, however you’re partnering with them.”
Why Work With Hageman Capital?
Cremer hopes to partner with Hageman Capital again on future projects and recommends their services to other developers or municipalities that may be struggling to finance development projects that can help to spark economic growth in cities across Indiana.
“They’re good people who are driven by the right reasons in a partnership,” Cremer said. “Being able to trust that is something I would 100% vouch for in my feelings for them, and I think that is something hard to find. We had a successful round trip from start to finish with Hageman.”
“The partnership and the communication back and forth between both organizations were phenomenal, and they were able to help us rise through challenges that led to success,” he added.
If you would like to learn more about Hageman Capital’s TIF purchase process, please contact us today to set up an appointment.
See how Hageman Capital developed a solution to lock-in interest rates on TIF bonds bought prior to the closing process.
Tax increment financing (TIF) has proven to be a powerful tool for municipalities across America to pay for public infrastructure that promotes economic development and growth. Without TIF bonds, many of these projects would not come to fruition.
At Hageman Capital, we see TIF bonds as the engine that sparks economic growth. Tax Increment Financing allows municipalities to pledge future taxes on new projects to pay off debt service on bonds issued today. The bonds issued today generate proceeds that directly benefit the project at the start of construction, with the funds being used to offset development costs and make a project more commercially viable.
Developer-backed TIFs are TIF bonds supported only by a specific real-estate project. Unlike TIF bonds backed by the municipality through property taxes on all parcels within a TIF district (municipal-backed bonds), developer-backed TIFs are supported only by the future tax revenue generated from a single project without any backstop.
In our most recent blog, the professionals at Hageman Capital discuss how tax incremental financing can help local communities revitalize their neighborhoods through TIF districts by providing the funding needed to improve or build needed infrastructure such as roads, water and sewer systems, buildings, and amenities.
An Example of How TIF Bonds Work
TIF bonds have sparked an economic rebirth in many blighted areas in neighborhoods across the country. By working with companies such as Hageman Capital, local governments have the resources available to redevelop devastated areas, restore older, historical buildings, and attract development where it might never occur without the use of developer-backed TIF bonds used for TIF projects.
Historically, developers have elected to finance their TIF through their construction lender instead of selling it. The primary market for these bonds has also lacked the liquidity that traditional bond markets have had. This means, that developers had difficulty selling developer-backed bonds on single-site projects, and many have elected to keep their bonds until after project stabilization.
A municipality will use TIF financing to help bridge the gap between what the development costs to build, compared to what the development needs to cost to make it commercially viable to the developer and the investor.
In 2021, Hageman Capital purchased the bonds related to a mixed-use project in a northern suburb of Indianapolis.
The bonds were supported by the tax increments generated from multi-family apartments, a parking garage, multiple for-sale condominium units, and a small retail user in the space. The variety of different uses makes bond financing unique, given the array of potential taxpayers and ownership groups having an interest in the project’s success.
The master developer of this project elected to sell the bonds prior to the start of construction to utilize our cost of capital, which is significantly lower than their cost of equity.
Hageman Capital purchased the TIF bonds associated with all the different components of the project, which, specifically the condo and the retail piece, have different owners separate from the master developer. The overall TIF bonds were over $8 million, all of which were financed on the closing day. The developer used that capital as equity with their construction lender, reducing the amount of additional equity needed in the project on day one.
This is just one example of how Hageman Capital helped develop a project that otherwise would not have come to fruition without TIF bonds. Aside from partnering with local municipalities, Hageman Capital works with developers, real estate investors, and banks.
How Did the City Benefit from This Development?
Through this development north of Indianapolis, the city could continue developing high-quality real assets in its downtown core to attract new residents and businesses. These ancillary benefits continue to make the city a more vibrant community to live in, increase property values, and create a critical mass where development can continue.
Additionally, with additional tax revenue, the project directly adds to the city’s tax base, which is a benefit for future generations. Once the TIF falls off, taxes are captured directly by the municipality, which can contribute to lower overall taxes for individual taxpayers and residents, while enjoying a high level of amenities and services provided by the City.
Maximizing Value for Developers and Communities
Hageman Capital can provide real value to municipalities and real estate developers by purchasing TIF bonds and maximizing cash proceeds available for investment into real estate projects. If you would like to learn more about our TIF purchase process, please contact us today to set up an appointment.
