We occasionally field questions about the use of “Synthetic TIF” to finance economic development projects so we thought we’d pen a quick post to explain how a local government can use a “Synthetic TIF” for economic development.
First, What is TIF?
Tax Increment Financing (Project Development Financing in North Carolina) is, in a nutshell, a tool where a local government issues debt to develop an infrastructure project with hopes of spurring development around the infrastructure in a defined region. The pledged security for the TIF debt is the incremental gain in property tax revenues realized after the infrastructure is developed. Sometimes there may be additional security pledged as well, but the key is the expected increase in property tax revenues.
What is Synthetic TIF?
Generally the phrase “synthetic TIF” is used to describe the use of another financing technique (besides a TIF) to achieve the ends of a TIF. The type of financing used is typically an installment financing under N.C. Gen. Stat. § 160A-20 or a general obligation bond. There is no formal recognition of synthetic TIF in North Carolina law or any reference to a synthetic TIF in the North Carolina statutes.
In a synthetic TIF, a local government borrows funds to create a public improvement. The local government then plans to repay the borrowed funds from funds derived from taxes on increased property values in the vicinity of the public improvements, or from revenues otherwise derived from increased private sector economic activity in the vicinity. Although the expected increase in property tax revenues may be the key point in the repayment plan, in a synthetic TIF there is always different security pledged to the bondholders.
Which is better?
Synthetic TIF has some advantages to the formal version of TIF in North Carolina.
- A synthetic TIF has fewer procedural steps.
- There are not size restrictions on the area that would be considered part of the TIF district under a traditional TIF.
- There are not the same restrictions on the percentage of the TIF district that are retail or office space.
- Payback can be made from the general revenues of a local government, rather than specifically from the increments produced in a formal TIF district.
- There is no “but-for” test for synthetic TIF or formal TIF. Some cities (like Charlotte) adopt a but-for requirement as a policy for synthetic TIF, but there is no requirement for but-for in any of the debt financing techniques a local government would use to enact a TIF.
- A “but-for” test requires a local government to demonstrate that “but-for” the financing of the public improvement, the anticipated development would not occur.
- Traditional TIFs have been used twice (in Roanoke Rapids and the Town of Woodfin) and the first use has become a politically sensitive project. Perhaps because of the political nature of one of those projects, the LGC has a strong inclination to look for another route.
- Perhaps most importantly, when the debt is marketed or approved, a synthetic TIF is done as an installment financing or general obligation bond. These are common financing tools that make the debt more marketable (and which may be reflected in likely lower costs of issuance that a local government can obtain).
This is a typical lawyer answer, but determining which is better is specific to each project. However, because of the political issues surrounding TIF, the extensive procedural requirements, and the availability of alternative flexible financing mechanisms, synthetic TIF is usually a better choice. You should talk with your friendly neighbor bond attorney and the parties who provide your local government with financial advice of course before making any decisions on your local government’s course of action.
How Does it work?
- The first step is to identify public improvements that may spark the desired activity.
- The next step is to devise a financing plan to obtain financing for the public improvements.
- During the planning phase, the local government should identify specific private development that it expects occur to make a synthetic TIF successful.
- We want to make sure to emphasize that synthetic TIF is simply using a financing technique to achieve an end. Synthetic TIFs do not, in and of themselves, provide new funds to a local government. Without accompanying development or increases in property taxes, there may be impacts to a local government’s property tax rate.
- The local government identifies a repayment plan to repay the debt service associated with the financed public improvement.
- The repayment plan can take several forms, but can also be coupled with other projects that are necessary in the local government. If an installment financing is used, then the local government will need to produce collateral for the improvements (for an example of this technique, click here).
- The local government monitors the increases in revenues around the public improvement and repays the debt over time.
So How to Use Synthetic TIF for Economic Development?
A synthetic TIF can be used for just about any public improvement. This can include downtown improvements, stormwater improvements, parking decks, parks, or other activities that will spur economic development. Sometimes it’s helpful to break things down a little further, so here are a few categories:
- Public Art
- Parking Decks
- Land Acquisition (sometimes called site control)
- Building Demolition/Acquisition
- Bike Trails
- Water/Sewer Extensions
Public Asset Purchasing
- Stadium / Recreational Asset
- Business Incubator
- Shell Buildings
Economic Development Grants
- Providing “gap” funding for development in business corridors that add value to a corridor. These can take the form of direct cash grants to bridge a gap in funding for a business. Economic development agreements can be entered into with the business to obtain repayment.
A Hypothetical Example
The Wolfpack Historic District is a struggling downtown area in Deaconville, NC. Many of the downtown shops have been fighting to stay open, and Deaconville’s residents are clamoring for a farmers’ market downtown. Deaconville also sees that there is a need for parking for its shops and this potential farmers’ market and wants to finance the project. Deaconville is considering building both the farmers’ market and an accompanying parking garage in the Wolfpack Historic District to spur economic development.
Deaconville’s projects are ripe for a synthetic TIF. Deaconville will need to conduct an analysis of the economic impacts of adding both a parking deck and a farmers’ market and apprise itself of the risks and opportunities of this development. Deaconville should start the conversation with its residents about the need for these structures, should work to attract tenants for surrounding business locations, should think carefully about residential components and should generally engage its planning department to project the future after these public improvements are made.
After gaining a vision of the project, Deaconville could finance the parking deck and the farmers’ market via an installment financing by pledging the collateral in those two structures. Working with its financial advisors, Deaconville would also determine whether any additional collateral needed to be brought into the project. After constructing the parking deck and farmers’ market, Deaconville would then monitor the growth in tax revenues resulting from the improvements and use that revenue stream to repay the installment debt.
We could spend a lot longer on explaining the pros and cons of every TIF/Synthetic TIF strategy, but we won’t. The purpose of this post is to lay out how these structures can be useful in an economic development context.
If you’d like a more holistic definition and discussion of TIF, there is a lot of literature out there. For starters, you can check the following out (coupled with some shameless self-promotion of work we’ve already done on the subject):
- Read Adam’s article in the North Carolina Bar Association Land Use and Planning Section December 2014 Newsletter here.
- Read Adam’s longer-form North Carolina Law Review Article here.
- Read a UNC School of Government Local Government Finance Bulletin here.
- Read a UNC School of Government CED Bulletin here.
- Read through Charlotte’s projects here.
There have been many more examples of synthetic TIF here in North Carolina. If you’d like to talk through a few of them, contact us. As always, please read the disclaimer.