TIFs: What you need to know

By Beverly Fortune - bfortune@herald-leader.com

In five years, if you come downtown on a Saturday morning you might be able to park in an underground parking structure in Phoenix Park, then pass public art as you walk to the permanent facility for the Farmers Market.

These and other public improvements might come to pass if Lexington succeeds in getting tax increment financing in a partnership with developers of the $250 million downtown CentrePointe hotel complex.

How a TIF works

City officials identify an economically depressed area, and plan public improvements like parking garages or new sidewalks.

Tax-increment financing gives cities incentives to redevelop blighted urban areas by borrowing against the new tax revenues that will be generated by the project to pay for public infrastructure improvements.

After identifying the project and developing a plan, the city pledges future tax revenues from the project to pay off bonds used for the upfront costs. The city also approaches the state and asks it to pledge its tax revenues.

An investment company sells bonds to raise the funds for the public improvements.

The bond money is used to pay for the improvements.

A portion of new tax revenue generated by the project's success pays off the bonds. New taxes are not levied on residents.

How much money the city will get isn't known at this point, but it announced a wish list last week of six projects with a total price tag of $32 million. Any money available depends on the sale of the TIF bonds. With the city's prospects hinging on the tax increment financing plan, here are a few main points of just how TIF works:

Question: What's a TIF?

Answer: Tax increment financing is an economic tool that cities use to jump-start improvements in blighted urban areas. The city pledges to take a portion of new tax money generated by a successfully redeveloped site and use it to pay off bonds issued for the upfront costs of the public improvements in that area. The increased tax revenues are referred to as the ”tax increment.“

Both the city and state can pledge the new tax revenue to support the public improvements. A city can go ahead with a TIF project without state participation.

Large projects called Signature TIFs require a capital investment of at least $200 million. The proposed $250 million CentrePointe hotel development in downtown Lexington would qualify as a Signature TIF.

Q: Who usually starts a TIF?

A: The city initiates the TIF application. It then sets up a development authority or designates a city office to be responsible for all parts of the project.

The city submits the TIF application to the state.

Q: Which tax revenues pay for TIF projects?

A: Locally, only new property and new occupational taxes generated by the redevelopment project pays off TIF bonds. For the state's part, it contributes new state property and new sales taxes.

Neither local nor state government actually pays anything out of pocket. It is taken from money the city and state wouldn't have had, but for the project.

Q: How does the city know how much new tax revenue a project will generate, so it can realistically know how much the improvements can cost?

A: Based on figures from a financial consultant, a developer estimates the amount of tax revenue the project will generate over a certain number of years. The investment bank selling the bonds then decides how much to sell them for based on that projected stream of revenue.

For example, if a developer says a project will generate $70 million in new tax revenue over 30 years, the bond sellers might decide that stream of revenue is actually worth $35 million today.

Whether people purchase the bonds at those rates depends on their appetite for the project's risk.

Q: If a project fails, will the city or state be losing money? Would a failed project affect their bond ratings?

A: The bond purchasers assume the risk for payment of the bonds, not the city, unless the city agrees to a more direct pledge of support. So unless the city backs the bonds, a failure would not affect its ratings.

Bonds for public improvements for Lexington's CentrePointe project are not proposed to be backed by the city.

Q: What kind of investigation must the city and state do to determine if the project will be successful?

A: The city has to do a thorough review of the financial feasibility of the project. If the city wants state revenues for the TIF project, the state also evaluates the project to make sure it's financially viable.

Q: Does a developer have to be transparent about the source of financing?

A: Only if the city or state requires it. If they don't think they're getting enough necessary information, they can withdraw from the project.

Sources: Brad Thomas of the state Cabinet for Economic Development; Jim Parsons, Lexington's newly hired TIF consultant; Nancy Yelton, counsel with Kentucky League of Cities; and John Farris, former state secretary of finance.