Understanding Tax Increment Finance
What is a TIF?
Tax Increment Financing (TIF) is a public financing tool, available to local governments in Ohio, to finance improvements that support development. A TIF allows the increase in assessed value (increment) of an improvement to real property to be exempt from real property taxation (the “exempted taxes”) and instead have those funds assist with costs necessary for a project to move forward. The general authority for municipal TIFs in Ohio was established by HB1328 in 1976. There are approximately 1,850 active TIFs statewide.
How does a TIF work?
TIFs are established through legislation passed by City Council that designates the parcel(s) to be exempted from taxation, declares improvements to private property within the specified area as serving a public good, delineates improvements to be made that will directly benefit the parcel, and specifies the funds to be created for those monies redirected under the TIF. The exempted taxes under a TIF are converted to and paid in the form of Payments In Lieu Of Taxes (PILOTs) in an amount equal to only the increase in property taxes generated by the improvement. The pre-development value and associated taxes are considered the “baseline” and are excluded from the TIF and PILOTs. Those “baseline” taxes continue to go to the normal taxing authorities as they would have before the TIF was enacted. In other words, a TIF never results in lesser taxes being paid than pre-development.
The maximum term of a TIF exemption is 30 years and the maximum percentage of a TIF exemption is 100%. TIF exemptions that exceed 75% of the increase in assessed value and/or exceed 10 years require the impacted local school district’s approval.
The PILOTs are directed to the local government and deposited into a TIF fund to be used to pay for the construction of the improvements defined within the TIF legislation. Disbursements from the TIF fund reimburse the entity (the City and/or private developer) that made the improvements over time, as revenues become available.
What are the different types of TIFs?
Ohio authorizes local communities to institute several types of TIFs. The most common of which are what is called a .40 TIF and a .41 TIF (the .40 and .41 refer to the authorizing portions of the Ohio Revised Code). A .40 TIF is typically used to pay for public infrastructure improvements such as public roads and highways, water and sewer lines, sidewalks, public parks, and parking structures. A .41 TIF, also known as Municipal Redevelopment TIFs, can be used to pay for both public infrastructure improvements eligible under the .40 TIFs, as well as private improvements. In order to create a .41 TIF, the City or municipality must be (or have been) in the chain of title of the property prior to adoption of the TIF legislation. .41 TIFs are the most common utilized by municipalities.
Why use a TIF, and what are the benefits?
TIFs are a beneficial tool available to help spur desired development projects that would not be financially feasible otherwise. Often times, the costs of major urban redevelopment/infill projects exceed the revenues that the project will generate. This gap is a major hinderance for many older urban/inner-ring communities like Cleveland Heights that are already built-out. TIFs help pay for development costs/improvements needed to spur private development while having the property owners share in the cost of the improvements. The community as a whole benefits from the new development that will add activity, residents and jobs.
How do TIFs impact the Schools?
The local school district benefits from additional revenues above the “baseline” current tax levels. through what’s called a “School Compensation Agreement,” where the city, school district, and developer agree to provide an agreed upon level of compensation to the schools. This is new revenue for the schools and would not be generated without the TIF to fill the financing gap. This is what’s called the “but-for” test where a project will not move forward but for the TIF funding. The local school district always retains the current “baseline” tax revenues under a TIF in addition to new revenues resulting from the project utilizing a TIF exemption.
How has Cleveland Heights used TIFs?
TIFs have been utilized by the City, including assisting Zagara’s Marketplace in remaining in Cleveland Heights. More recently, the Top of the Hill and Cedar Lee Meadowbrook projects utilized a .41 TIF to help support the development of these long vacant city-owned pieces of property. Without the use of the TIF, the sites would continue to remain an underutilized vacant spaces. In its place, over $140 million in new development is now complete or under construction.
What a TIF is Not
A TIF is not a Community Reinvestment Area (CRA) tax savings plan, which is another financing tool available in Ohio and Cleveland Heights. See https://www.clevelandheights.gov/1075/Grow-Tax-Savings-Plan. Unlike the CRA, TIFs are not a forgiveness of the normal real estate tax payment obligation. When an abatement is granted some or all of the property taxes are abated, meaning the property owners pay a reduced amount of property taxes for a specified time period.