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.
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