The skinny on TIF: It might be just right for local projects

By Josh Spilker

As Wilmington expands, new infrastructure will need to serve new areas, placing a burden on cities and counties in the region. One way to make that happen is a relatively new finance incentive called tax increment financing (TIF), or project development financing.

“We have land in the Castle Hayne area, and we think that’s a great area for a TIF. It meets the criteria,” said Lumina Station developer Joel Tomaselli. “It’s an underserved area, with a lot of undeveloped land because there is no water and sewer out there. If there was, the area would grow.”

Here’s how a TIF works. Typically used to extend infrastructure such as roads or sewer into an underserved area, a TIF district is set up to borrow against the future tax revenue of the area to help pay for the improvements.

The base tax rate of the area will stay the same, meaning that those taxes collected from the base will go into normal budget considerations. However, taxes will be collected for the actual value of the property that will then go back to paying off the loan or bond. Because of the infrastructure improvements made, it is more enticing for developers or businesses to invest in the area.

“When you don’t have any developers coming to your area, then that’s when you would do a TIF, to encourage them to come in. TIF financing was originally derived to help blighted areas,” said Debra Mack, the finance director for the city of Wilmington.

“This is another incentive vehicle to bring private investment to an area that would likely not see it otherwise,” said Michael Lee, a commercial real estate lawyer with Smith Moore Leatherwood in Wilmington. “I think this is just going to be another one of the tools local government has in its toolbox to help the area grow.”

In 2004, North Carolina became the 49th state to allow TIFs. Since its approval, only three municipalities, Woodfin, Kannapolis and Roanoke Rapids, have tried TIF.

“It takes a while to figure out how the TIF works, and why it’s beneficial for (a municipality),” said Brenton Jeffcoat, a public finance lawyer with McGuire Woods in Charlotte. “The big problem in North Carolina [is] living down the problems [at] Roanoke Rapids. It’s got a lot of people spooked.”

Roanoke Rapids opted to use a TIF to finance a theater to be run by Randy Parton, the brother of country music singer Dolly Parton. The theater has not been as successful as first thought, and development around the theater has not met expectations.
“North Carolina was one of the last states to have the ability to do this,” Lee said.

“Whenever you’re the first to do anything like this there is more uncertainty in the process. Also, a true TIF is more cumbersome and time consuming than traditional bonds, and the transaction costs are significantly higher in this type of finance transaction as opposed to traditional financing.”

Cities that consider TIF must also have approval from the county, and then the TIF must be approved by the Local Government Commission (LGC), headed by the State Treasurer. The LGC evaluates the city’s ability to pay the debt using the TIF. Jeffcoat said TIFs provide a way for municipalities to manage their growth.

“What you can do by using this tool, is to provide a little bit of sweetening to get the developer to get what you want done, not just what the developer wants,” Jeffcoat said.
New Hanover County has had conversations about a project using a TIF, according to Avril Pinder, the New Hanover County finance director.

“The advantage would be that I would not go to anyone in the public to pay the taxes, only the people in the TIF zone to pay the taxes. The hard part of probably why, the assumption would be is getting that private person to come in,” said Pinder.

The City of Wilmington looks at a developer’s history, the financial status of the developer, and the project plans before agreeing to finance options.