Feasibility studies are an essential component of the commercial real estate development process. These studies systematically evaluate a project’s potential for success, considering various factors such as market conditions, financial viability, site selection, and infrastructure requirements. One financial tool that often plays a significant role in this analysis is Tax Increment Financing (TIF). Understanding the relationship between feasibility studies and TIF can provide valuable insights for developers, investors, and local governments.
What is a Feasibility Study?
A feasibility study is a comprehensive assessment that helps stakeholders determine the practicality and potential success of a proposed real estate project. The study typically addresses several critical questions, including:
- Market Analysis: Is there adequate demand for the proposed development? Analyzing market trends, target demographics, and competition is crucial in assessing this aspect.
- Financial Analysis: Will the projected revenues cover the initial investment, operational costs, and financing expenses? This evaluation often involves creating financial models that project cash flow and return on investment.
- Site Evaluation: Is the selected location appropriate for the type of development planned? Factors such as accessibility, visibility, and zoning regulations are analyzed to assess the site’s suitability.
- Infrastructure Requirements: What infrastructure improvements are necessary to support the project? This includes evaluating existing utilities, transportation networks, and public amenities.
The insights gained from a feasibility study assist stakeholders in making informed decisions regarding project development.
The Role of Tax Increment Financing (TIF)
Tax Increment Financing is a funding mechanism designed to encourage economic development in designated areas. TIF allows local governments to capture future tax revenues generated from increased property values resulting from new developments. This captured revenue is then allocated to finance essential infrastructure improvements needed to support the project.
Exploring TIF’s Relevance
Through the Lens of a Developer
- Infrastructure Funding: A significant component of feasibility studies is evaluating the infrastructure requirements for the proposed project. TIF can provide a means to fund these improvements, such as roads, utilities, and public spaces. Understanding these needs helps determine if TIF is a suitable financing option.
- “But For” Test: A key requirement for establishing a TIF district is demonstrating that the proposed development would not occur without the TIF financing. This “but for” test is an essential consideration in feasibility studies, as it assesses the likelihood of the project proceeding without TIF support. If a project can be justified as needing TIF funding to move forward, it strengthens the case for utilizing this financial tool.
- Market Dynamics: Feasibility studies analyze market conditions and demand for the proposed type of development. TIF’s effectiveness in enhancing property values and attracting investment relies on these market dynamics. Conducting a thorough market analysis within the feasibility study helps gauge whether the TIF district can effectively stimulate growth and support the development.
Through the Lens of a Municipality
- Cost-Benefit Analysis: Both TIF assessments and feasibility studies typically include a cost-benefit analysis. This analysis evaluates the projected economic benefits—such as increased tax revenues and enhanced property values—against the costs associated with financing infrastructure and potential risks. This comparative evaluation assists stakeholders in understanding the financial implications of using TIF and its impact on overall project feasibility.
- Long-Term Considerations: Feasibility studies often take into account the long-term effects of TIF. Once the TIF bonds are repaid, the incremental property value is released for general taxation, potentially increasing revenues for local governments. This aspect is vital for assessing the overall fiscal impact of the project on the community and for determining whether the TIF mechanism aligns with long-term economic goals.
As the commercial real estate landscape continues to evolve, understanding the interplay between feasibility studies and financing mechanisms like TIF will remain important for developers, investors, and local governments. By carefully considering the implications of TIF in their feasibility studies and potentially partnering with Hageman Capital, stakeholders can make informed decisions that contribute to sustainable development and economic vitality within their communities.
The integration of TIF in feasibility studies not only enhances the analytical framework but also aligns financial resources with community development objectives, fostering a more comprehensive understanding of the potential impacts of proposed projects. Contact us today to learn more about our services and how we can support your real estate projects.
Hageman Capital was created in 2021 by Hageman Group to help real estate developers maximize their tax increment financing (TIF) incentives by buying and monetizing TIF Bonds.
We aim to “Create Shared Successes” for developers, municipalities providing the TIF incentives, and us, by investing in community development projects that generate value for years to come. With an understanding of both public financing incentives and real estate, Hageman Capital finds creative ways to structure and monetize TIF bonds that maximize value for everyone involved.
How Does Tax Increment Financing Work?
Tax increment financing is a public financing tool used by local governments to fund improvements and redevelopment projects within specific areas, or specific sites, known as TIF districts.
TIF districts aim to capture the incremental increase in property tax revenues that results from the new development or redevelopment of a designated area or site. These revenue increases can be used as an incentive to a developer and monetized to provide upfront financing.
How Does Hageman Capital Help Developers Monetize TIF Bonds?
Hageman Capital purchases developer-backed TIF bonds in a real estate development deal, providing capital for the project without contributing additional equity. In turn, by selling the TIF, developers can achieve a higher rate of return on their real estate projects.
Additionally, construction lenders are more inclined to loan on a deal where the TIF is sold, rather than being monetized through a construction loan. This allows more deals to close, especially in a higher interest rate environment.
Hageman Capital helps developers monetize TIF bonds at the beginning of each project. This is because we’ve found that municipalities are much more reluctant to support a developer’s project through their own credit. However, we’ve seen an uptick in developer-backed TIFs bonds, which require developers to support the debt service of the bonds, and ultimately find ways to monetize their TIF incentives with their own resources.
Hageman’s experience in real estate and TIF created an avenue to build Hageman Capital as a solution for developers who have had challenges in monetizing their TIF incentives.
Where Does Hageman Focus Its Investments?
Many of Hageman’s investments focus on assets built from the ground up. From our agricultural investments to our commercial real estate holdings, Hageman believes in “investing in tomorrow, from the ground up,” and has focused our investment strategies on agriculture, real estate, and entrepreneurship.
Our investments have spanned over multiple generations, with Gene Hageman buying his first 80 acres of farmland in 1952. The Hageman family then went on to create Remington Seeds in 1984, which reshaped the U.S. seed corn and seed soybean industry.
The success of Remington Seeds allowed for the creation of the Hageman Group, which allows us to create shared successes for our partners by investing in their projects. Our history of enriching the communities we invest in led the way to the creation of Hageman Capital in 2021, which helps solve problems for developers looking to invest in their own communities.
Partner with Us Today
Hageman Capital looks to create lasting relationships with groups that share our values. By investing in developers like Old Town Companies actively developing in their communities, Hageman can create shared successes with our partners.
Interested in partnering with Hageman Capital? Contact us today to learn more.
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 several advantages 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.
