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.
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