Macro Benefits of Tax Increment Financing for Developers and Municipalities

With almost every new development project, natural synergies and alignment of interests exist between real estate developers and the municipalities where the projects are developed. Both developers and the municipalities want new projects to be successful and well received by the community.

It’s in the best interests of both parties that projects fit in with the existing characteristics of the town and complement the surrounding properties and uses. They generally want to see the momentum and pace of high-quality new developments be faster rather than slower. 

However, while synergies exist between both parties, there are certain instances where the interests of developers and municipalities don’t always align. In this blog, the financial experts at Hageman Capital discuss how tax increment financing (TIF) can help both developers and local governments come together and align more evenly on development projects.

Bridging the Gap Between Developers and Municipalities

A developer, for example, who is taking the financial risk to invest in a project, will care more about the project’s profitability than the municipality. Likewise, municipalities may care more about a project’s design than the developer, which may be expensive to implement.

In essence, although many developers appreciate the value of unique and beautiful architectural features, they aren’t in favor of fancy architecture when it reduces the project’s profitability. In fact, there’s a quip amongst developers that projects that win architectural awards often are financial losers.

Parking and density considerations are often points of division between developers and municipalities. A municipality may have a longer-term view of what constitutes a successful community atmosphere and thus has a master plan for an area that envisions structured parking that can facilitate a more walkable and dynamic community environment. However, from the developer’s perspective, building a parking garage could be cost-prohibitive, so they might prefer surface parking. While surface parking may help the project be financially feasible, it may not be the best long-term solution for the community.

TIF Helps Developers and Municipalities Align More Closely

So how can the needs of the developer and municipality come together to create better alignment for a new project that can both benefit the community and be financially viable? One key solution is the use of tax increment financing, which is a mechanism where a municipality can direct a portion of the incremental property taxes from a project back to the project for a period of up to 25 years.

In Indiana, for example, TIF has been an effective tool to help new economic development projects become feasible. Its use has grown from almost nothing in the early 1990s to 6.8% of the net assessed value in the early 2010s. Since then, the use of TIF funds has continued to increase.

TIF has allowed projects – that would otherwise not be economically viable – to come to life, sparking economic growth in communities. In fact, the use of TIF is predicated on a “but for” test that requires that a project would not have been built if not for the issuance of a TIF bond. In the current post-Covid environment, TIF incentive for projects is even more critical because operating expenses, land costs, interest rates, and construction costs are increasing faster than rental rates.

Examples of How TIF Bonds Have Spurred Economic Development

A shining example of how the use of TIF has transformed a city is Fishers, Indiana, a thriving suburb northeast of Indianapolis. For years, Fishers was on the path of growth but had not enjoyed nearly as much new commercial development as Carmel, it’s neighbor to the west.

In 2015, Fishers’ rapid growth helped advance it from a town to a city, and Scott Fadness was elected as its first mayor. Since then, with the selective use of TIF to create walkability in the city’s core and through incentivizing other key projects, more than $2 billion of new non-single-family developments have commenced in Fishers, which have created approximately 8,000 jobs and retained an additional 1,200 jobs.

One key success is the creation of the Nickel Plate District which is home to an outdoor downtown amphitheater, luxury apartments, a brewery, numerous restaurants, and several new headquarters including the recently completed corporate headquarters for First Internet Bank.

Nearby, directly east of Interstate 69, another successful project where TIF was utilized is Fishers District. This project transformed an older neighborhood into a significant destination that includes a hotel, new luxury apartments, more than 15 restaurants, Sun King Brewery, and a new test kitchen that helps local entrepreneurial restaurants get started. Developments like these have truly transformed the Fishers’ community and have resulted in Fishers being consistently named as one of the best places to live in the United States as reported by Money Magazine and other publications.

With the remarkable growth in new economic development projects in Fishers, it’s important to note that TIF was not used for every new project. Once momentum is created, the use of TIF can often be reduced, both in the number of projects where TIF is employed and the amount of the tax increment that is awarded to each project.

Once there’s enough critical mass, a city can also choose to eliminate or reduce using the City’s own credit to support TIF bonds on a project. For example, in the early years of a city’s development master plan, a city may financially back the TIF bonds with their credit so the bonds can be sold, with the sale proceeds used to fill the “gap” in the project’s capital stack to allow it to be financially feasible. As development momentum increases, a city may be able to avoid using its credit standing to back TIF bonds, which places the burden on the project’s developer to monetize the up to 25-year property tax increment provided to the project. 

Trust Hageman Capital as Your Capital Provider for TIF

This is often referred to as “developer-backed TIF bonds” and has become more common in recent years. This trend was a key driver in the 2020 creation of Hageman Capital, which was formed to help developers monetize TIF bonds to create funds that can be used to help build projects rather than just to supplement operational revenues down once the projects are built and pay full property taxes years down the road.

By being able to sell the TIF bond to Hageman Capital, a developer can contribute less equity capital to the project, guarantee less debt, and achieve higher returns on its invested equity while eliminating the future valuation and interest rate risk associated with the TIF bond. To learn more about how TIF bonds can help a development project come to life, contact Hageman Capital to schedule an appointment.