A Case Study in How TIF Bonds Work

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.