Understanding Tax Increment Financing (TIF)
On November 28, 2017, James Lehnhoff of Ehlers and Associates gave a TIF presentation to the Richfield City Council that provided a great explanation of TIF and how it applies to the city's Chamberlain project.
Frequently asked questions related to TIF include:
What does 'TIF' stand for?
'TIF' stands for Tax Increment Financing.
What is Tax Increment Financing?
It's a financial tool that cities use to attract new development, create jobs, redevelop declining areas, or clean up environmentally contaminated sites.
How does TIF work?
When a city creates a TIF district, the assessed property values in the TIF district are "frozen" at the current level. As development occurs and property values rise, the city 'captures' the increased property taxes to pay for any public improvements or to help finance development and redevelopment projects.
What is a TIF District?
A TIF District is a designated area in the city where the city is trying to attract development to increase the tax base and create jobs.
How is a TIF District formed?
A city first determines if the area qualifies under state law as a TIF District. The city then prepares a TIF Plan. The city then notifies the county and school district in the proposed TIF District. The city holds a public hearing before approving the creation of the district.
How does an area qualify to be a TIF District?
The area must meet specific legal criteria described in state legislation to qualify as a TIF District. The city must also determine that little or no investment has been made in the area in recent years, and that private investment will not occur without a TIF District.
What is a TIF Plan?
A TIF Plan is a legal document that describes why the area is eligible to be a TIF District and describes the proposed redevelopment projects and activities. The TIF Plan also lists the projected cost of the redevelopment activities and describes how they will be paid for.
Does a TIF District come with money?
No. A TIF District gets its money from increased property taxes generated by private development projects. If there are no private development or redevelopment projects, or new investment in the TIF District, there will be no money.
How long can a TIF District exist?
The length of a district depends on the type of district (See types below). An economic development district can last for 10 years; a redevelopment district can exist for up to 25 years.
Will a TIF District create development?
No, but it can help. A business must be able to make money if you want it to locate at a specific location. A TIF District can help by decreasing development costs.
What can TIF funds be used for?
TIF funds can only be used for physical improvements such as infrastructure, buying land, or demolishing buildings. TIF funds cannot be used for loans to businesses for working capital or machinery or equipment.
In Minnesota, there are different types of TIF Districts:
1. Redevelopment District and Renewal and Renovation Districts. Generally, for a city to create either of these districts, the are must be 'blighted' within the meaning of the state statutes. The area must be at least partially developed and a percentage of the buildings must be structurally substandard.
2. Housing Districts. For housing projects intended for occupancy in part by persons of families of low and moderate income.
3. Economic Development Districts. TIF can be used when 85% or more of the new buildings in the district will be used for manufacturing, storage, distribution (but not retail sales), certain research and development, telemarketing, and tourism.
Additional TIF resources
What is TIF, Source: City's Financial Consultant
Types of TIF Districts, Source: City's Financial Consultant