Tax Increment Financing (TIF), once considered on the cutting edge of economic development incentives, now serves as a mainstream tool in most parts of the country. The connection between brownfield projects and TIF financing works in certain circumstances, but it could have more widespread application, even reaching some weak-market and upside-down sites, if state brownfield financing vehicles were specifically designed to complement local TIFs.

Several states have taken the lead in structuring such programs, notably Illinois, Michigan, Connecticut and Wisconsin. Other states should consider state-facilitated TIF financing as an effective and efficient means to improve their brownfield programs and obtain cleanup-redevelopment results.

Growth of TIF Financing
TIF has emerged as a dominant financing tool to close funding gaps for desirable economic and community development projects. With federal support in decline and other state and local funding options limited, localities have increasingly turned to TIFs as the only financing incentive that is both of sufficient size and within their control.

In the 1980s, California boosted the TIF phenomena when Proposition 13 forced localities to make the most out of their existing revenue sources. Massachusetts recently became the 49th state to adopt TIF-enabling legislation.

TIF use is now widespread, not only in major cities, but also in small towns. A recent survey in Minnesota found over 400 communities operating almost 2,000 total TIF districts. 

How TIFs Work
The basic principle behind TIF financing is that, in order to pay for upfront costs—usually infrastructure—the locality freezes the taxes at a site’s pre-development levels and then uses the expected post-development increases in taxes as a revenue stream to finance a bond or loan, which then pays for the upfront (infrastructure) costs. 

There are, however, numerous variations on the theme. At one end of the spectrum are cities and states that use TIF only for private development gap financing and the TIF district is small and well-defined, often coinciding with the project that will be financed. At the other end are communities that designate large areas of the city, or even the entire city, and then use the TIF revenue much like general obligation bonds in order to fund capital projects that can’t be financed through operating funds. 

While there are many exceptions,  the usual TIF approach involves going to the private bond market to convert incremental revenue stream into upfront cash for the project. 

Brownfield–TIF Mismatch
Financing a brownfield TIF project through the private bond market can be difficult. Investors want to minimize risk and uncertainty, two things that characterize every brownfield project. The brownfield–TIF mismatch might be further described as follows:

Cleanup expenditures are usually not eligible for TIF proceeds. This limitation sometimes has to do with statutory authority—many states restrict the use of TIF proceeds to public infrastructure. But even in states where this is not the case, cleanup of private property is interpreted as “private activity,” in which case the TIF bond becomes taxable, meaning the terms will be less favorable and the bond will be harder to sell.

TIF bonds, in many cases, can be sold only when the “vertical development” (the buildings, as opposed to site improvements) is 100 percent assured. This means that the funds may come into the project too late to assist with the upfront brownfield-related expenditures. This timing problem is particularly difficult for local governments that are acquiring and cleaning up brownfields without a committed end user. 

The tax increments often are less than they should be for brownfield sites because the base property tax value usually does not reflect the impact of the contamination on the property’s value.

These are not insurmountable problems. Brownfield development could get a real boost if states designed their TIF authority and financing programs to facilitate the brownfield-TIF connection. A number of states have done exactly that.

Michigan Brownfield Redevelopment Authorities 
TIF is the key element in Michigan’s brownfield program. The Brownfield Redevelopment Financing Act (1996 PA 381, as amended) allows local units of government to establish a TIF district and capture the property tax increments to provide reimbursement for the costs of the eligible cleanup and site preparation activities. Local Brownfields Redevelopment Authorities (BRAs, the entities that govern the TIF plans) also may establish a Local Site Remediation Revolving Fund from surplus captured taxes in order to cover cleanup and site preparation at other designated properties in the BRA’s jurisdiction.

Michigan’s TIF-Complementary Financing Programs.  Recognizing the mismatch between how the bond market works and how brownfield projects work, Michigan created three alternative financing vehicles, including Brownfields Redevelopment Grants (BRG) and two loan programs: Brownfields Redevelopment Loans (BRL) for cleanup, and Revitalization Revolving Loans (RRL) for demolition and site preparation.

The two loan programs are designed to work with TIFs, as they feature flexible repayment terms, such as no payments due for the first five years and 2 percent interest rates. These terms are an ideal match with front-loaded, long-lead-time brownfield projects.

The developer also may apply for a Single Business Tax (SBT) Brownfield Redevelopment Credit, which boosts the state’s participation in a project. This credit can total 10 percent of any innocent party’s development costs (not cleanup) up to $1 million. 

With Michigan’s BRG grant program, its two TIF-oriented loan programs, and the SBT tax credit, Michigan has an impressive arsenal to close financing gaps on brownfield projects. Currently, there are 261 BRAs in Michigan. The state’s brownfield incentives have provided $120.7 million for 296 projects statewide since program inception in 1998. However, all but the SBT are now endangered as funding through the Clean Michigan Initiative has been exhausted and renewal is uncertain.  

Other State Programs That Work With TIF
Other states that have adopted measures designed to encourage the use of TIF mechanisms for brownfields include:

Wisconsin’s Environmental Remediation Tax Incremental Financing represents a new twist on previous Wisconsin TIF authority, which was already one of the more permissive. Wisconsin law allows TIF funds to flow back to the developer for a variety of allowable development costs not limited to public infrastructure. 

Connecticut’s Brownfields Redevelopment Authority (CBRA) offers financing for brownfield remediation through its parent organization, the Connecticut Development Authority (CDA). Grants up to $10 million (derived from the TIF) are available to investors, developers and business owners who undertake brownfield redevelopment projects. CDA has pre-existing bond funds that are used for this purpose. The grant proceeds can be used for any expense directly related to remediation. Municipal authorities must agree with CBRA as to the allocation of incremental tax revenues. The allocation is the key factor in determining the amount of the grant. 

Pennsylvania’s Tax Increment Financing Guarantee Program is designed to assist local TIFs that qualify under a strict definition of blight removal. The state’s guarantee, up to $5 million per project, can serve as an important credit enhancement that can make the difference between a feasible and an infeasible project. TIF proceeds may be used for infrastructure and environmental remediation costs. The state gives priority to brownfield sites as one of several program criteria. The program is funded to provide $100 million total in guarantees. 

Minnesota’s Hazardous Substance Subdistricts permit the frozen tax value—or “base” value—in a subdistrict to be reduced or “written-down” by the cost of cleanup, thus increasing the increment. This increased increment creates an interesting option for sites where development may be years off. A tax increment can be generated without any vertical development—the increment is the difference between the adjusted base (adjusted for cleanup costs) and the previous base. 

Creative Solutions in Mississippi: Bringing State Tax Revenues to the Table
Most TIF projects work with local property taxes as the revenue stream. But for some projects, that is not enough to cover a financing gap. Such was the case for a 540-acre, former chemical plant on the Mississippi River in Vicksburg, Mississippi. Through an agreement adopted under special legislation by the Mississippi state legislature, all state taxes (sales, income and franchise taxes) will be rebated to the developer for 10 years or 2.5 times the cleanup costs, whichever is less. With this financing in place, Silvertip Properties (the developer) is proceeding with an $8 million cleanup, which is paving the way for a planned resort and casino.

Conclusions: State-Supported TIF Financing
States that are looking to get more mileage from their brownfield programs would do well to consider financing mechanisms that work with TIFs. Comparing state-supported TIF financing to the more common state approach of doling out direct loans and grants for brownfield site assessments and cleanups, there are at least five advantages to the state-supported TIF approach:

More money into deals. TIF financing, with the potential to capture taxes for as long as 30 years, can put more dollars into a deal than is typical of cash-strapped loan and grant programs. The result is that more sites and tougher sites are being redeveloped.

The perfect marriage of state and local commitment. State funds can be viewed as leveraging local funds, as well as private investment. The state’s investment goes further—is more productive—under this arrangement. 

Greater use of loans and guarantees/less use of grants. State funds can be mostly, or even exclusively, loans and guarantees rather than grants. Once a loan program is capitalized, it will revolve and self-generate. 

Greater efficiency in use of limited funds. The state-supported TIF framework has automatic controls because localities are going to scrutinize a deal that involves foregoing taxes for many years. Lacking the TIF element, state loan and grant programs may encourage inefficiencies because local advocates will try to maximize state investment. 

More proactive action by local government. The availability of state TIF-linked loan funds under favorable terms allows local governments to proactively acquire, clean up and redevelop mothballed and other difficult sites that have failed to attract private investment.

Evans Paull is senior policy analyst for Northeast-Midwest Institute in Washington, D.C.