TIF is a mechanism for financing development from taxes that are generated from a tax incremental district (TID.) TIDs, governed by state law, have been in existence for decades. In simple terms, a TID is a geographic area that is created to advance development within the district for a limited time. The tax revenue generated on property within the TID at the time of creation will continue to be shared with overlying tax entities. However, tax revenue generated from new development within the TID will be retained entirely by the TID to finance further development during its life.
Financing can come in many forms. Cash grants to new and expanding businesses to incentivize development may be one such form. Pay-as-you-go incentives, which involve developers retaining tax revenue generated by their own specific development, may be another form. Hybrid arrangements of these two financing tools are another potential.
For new businesses especially, TIF can serve as added security for a lender. Moreover, TIF may often work in combination with private financing, other state incentives and gap financing to make a new business venture a reality and a win-win for business and local taxpayers in the long run.
However, a win-win situation starts with understanding the options available, the typical municipal processes to go through and ultimately structuring a strong development agreement. Poorly drafted development agreements can lead to litigation from both sides. Securing TIF advice from municipal counsel early in the process can pay dividends and avoid problems on either side down the line.