Real Estate Advisory

TIF vs. Tax Abatement


What’s the Difference Between a TIF and a Tax Abatement? A compare and contrast of the two subsidies.


Now that you have been introduced to both TIF and Tax Abatements, let’s take it a step further by comparing these two public subsidies. First, tax increment financing (TIF) is the ability to capture and use the most of the increased local property tax revenues from new development within a defined geographic area for a defined period of time without approval of the other taxing jurisdictions. On the other hand, Tax Abatement is the ability of one or more taxing jurisdictions to capture and use all or a portion of their share of local property tax revenues within a defined geographic area. It is in a sense a rebate rather than an exemption from paying taxes. A city approves a TIF while in a tax abatement, cities, counties, school districts, and townships can approve. If a developer is wanting to redo substandard or obsolete buildings then they could use a Redevelopment TIF, Renewal and Renovation TIF or an Abatement. If the developer is looking at purely affordable housing, then they could use a Housing TIF or Abatement. Both an Economic Development TIF and Abatement are tied to job and tax base creation.

If looking at a redevelopment project, TIF can be used to redo substandard/obsolete buildings, 15% of each parcel must be improved, 70% of the district area must consist of improved parcels, more than 50% of the buildings must be substandard and reasonable distribution of conditions. An abatement has no coverage or inspection requirements in a redevelopment scenarios. What about renewal and renovation projects? For these types of projects, a TIF can be used when redoing substandard/obsolete buildings. It has the same coverage requirements as a redevelopment TIF, 20% of the buildings must be substandard and 30% obsolete, and have reasonable distribution of conditions. With Abatements there are no  coverage or inspection requirements.

For housing, a TIF is more liberal on the rules for pooling, the income test is the main qualification, and it can include market rate housing to help contribute TIF to affordable housing. If using Abatement, there are no income requirements. For economic development projects, a TIF has job creation goals attached to the project, a majority of new space must be manufacturing, warehouse, distribution, telemarketing, and/or research and development, small city retail, border city retail, tourism, or bedrock. With Abatement there are no use requirements. In a TIF, the TIF district must be in a project area, which sets boundaries for TIF expenditures. The project area may contain multiple TIF districts, and the FIF district defines parcels for capture of value. With Abatements, parcels with taxes being abated must be identified. Project areas for TIF district are established by the City, EDA, or HRA. Some increment can be spent outside the TIF district, but in the project area pooling. For terms in an Economic Development project a TIF is 9 years while an Abatement is 15 years if all three political subdivisions are participating. A Renewal and Renovation TIF project is 16 years.  A Redevelopment project for a TIF is 26 years and a Housing TIF term is 26 years. In an Abatement, participation by one or two political subdivisions is 20 years and if the resolution is silent as to the term of the Abatement, then it is an 8 years term.

Concerning the approval process, a TIF requires notification to the County and School District, but does not require approval from other jurisdictions while an Abatement requires a public hearing by each participating political subdivision. In a TIF the City hold a public hearing and adopts a resolution with findings while in an Abatement, each political subdivision adopts a resolution with a statement of public benefit and term of abatement. A TIF captures only the increase in value while an Abatement may capture existing values. TIF requires annual reports that are filed with the Office of the State Auditor by August 1 while an Abatement has not reporting requirements other than what the political subdivision requires and the Department of Employment and Economic Development. Both a TIF and Abatement require business subsidy reports. 

There is no maximum on the annual increment generated or number of TIF districts, while an Abatement requires that the maximum cannot exceed the greater of $200,000 or 10% of the net tax capacity. In a pay-as-you-go note both a TIF and Abatement  requires that the developer assumes the risk and is paid back over time with interest. In a General Obligation Tax Increment Bond, the issuer assumes the risk and at least 20% of the debt must be supported with tax increment. While, when using a Tax Abatement the issuer assumes the risk and the Abatement must support 100% of the principal. In TIF Revenue Bonds, the investor in bonds takes the risk. TIF must be used on activities including acquisition, demolition, site improvements, public utilities, streets and sidewalks, and administration, general government use is prohibited as well as recreational use. While an Abatement has very few restrictions on use and one cannot abate taxes on a parcel located in a TIF district. Tax Abatements are special levies and outside levy limits, the amount of abatement must be added to the total levy for the current year, and the proposed levy and certified levy must include the current levy abatement amounts, while a TIF has geographic restrictions and pooling. Other factors affecting future funds are local tax rates, state law changes in class rates, interest rate of borrowing, timing of the project, and inflation/deflation of the market value. If you are considering the use of public subsidies for your next project please contact Brian Beeman, Senior Advisor, IAG Commercial.

What is a Tax Abatement, Part II


For each property, the annual abatement granted by a political subdivision cannot be greater than the subdivision’s total net tax capacity tax on the property. Abatements may reduce all or part of the qualifying property tax amounts on a property. The total abatements granted by a political subdivision in any one year may not exceed the greater of: 10% of the net tax capacity of the subdivision for the taxes payable year which the abatement applies or $200,000. The limit on the total abatement for a political subdivision does not apply to uncollected abatements from prior years or abatements for utility property.

 Abatements cannot be longer than 15 years but they can be shorter and the duration period begins in the year which the abatement is paid of retained. A second abatement cannot be granted to a property for at least 8 years after the first abatement expires. If a political subdivision proposes abatement participation from  another political subdivision and that subdivision declines or fails to respond, the duration limit for abatements on the parcel is increased to 20 years. Property that was previously in a TIF district can qualify for an abatement after TIF expires.

The taxes on a parcel of property receiving a tax abatement must be paid by the taxpayer when due in the same manner as other property taxes, as if there were no abatement. After the taxes have been paid, the political subdivision must, in accordance with the abatement resolution, do one of the following: Pay the abatement amount back to the property owner, pay the bondholders, retain the abatement to pay public infrastructure costs, or keep a record of deferments and eventually collect them, according to the repayment schedule.

One thing for companies to remember is that since they are receiving a public subsidy, they are subject to annual reports until the established goals are met. Normally, the deadline for submission of information is early spring each year. The political subdivision then submits the information to the State of Minnesota’s Department of Employment and Economic Development.

It’s a good idea to hire a professional consultant when attempting to seek a public subsidy rather than trying to navigate the tangled government process alone. For more information please contact Brian Beeman, Senior Advisor, IAG

What is a Tax Abatement, Part I


You may have heard developers talk about tax abatement for some of their development projects, but what is tax abatement and how can it be used? A tax abatement used for economic development purposes is a deferral of taxes and/or penalties and can be used as a rebate of property taxes to the property owner, a reallocation of taxes to pay bondholders, a reallocation of taxes to pay for public infrastructure costs, or a deferment of property taxes. A single political subdivision (city, county, town, or school district) may grant only one type of abatement per parcel. More than one political subdivision may grant an abatement to the same parcel at the same time. The benefits of the abatement must be at least equal to the cost or intend for the abatement to phase in a property tax increase and the abatement must be in the public interest. Consent of the owner is not required when a political subdivision grants an abatement on a property. A public hearing is required as well as an adoption of a resolution.

What constitutes a public interest? According toMinnesota State Statutes, 

  • Increasing or preserving the tax base

  • Providing employment opportunities in the political subdivision

  • Providing or helping the acquisition or construction of public facilities

  • Helping provide access to services for residents of the political subdivision

  • Financing or providing public infrastructure

  • Phasing in a property tax increase as a result of an increase of 50% or more of the EMV in one year not attributable to improvements on the parcel

  • Stabilizing the tax base through equalization of property tax revenues with respect to utility property valued under Minnesota Rules, Chapter 8100

What is TIF, Part II


TIF's can only be used in conjunction with other financing; it doesn't work by itself. For example, TIF is only used when the development project meets the “But For” test or analysis. State Statues specify that Cities, Counties, or other governmental organizations cannot award a TIF to a project unless the project is not feasible on its own without financial assistance. In other words, the development project would not occur “But For” the financial subsidy and the project must be located within a TIF district. The market value of the TIF development must be higher than what would occur on the site, if TIF were not used. 

 So, why is the "but-for test" used? It is used to prevent excessive or unnecessary use of TIF. If a development would have been done anyway, why should TIF be used to assist it? The test is also used to protect the interests of other, overlapping governmental unite (like the County or School district), which would lose tax revenue unnecessarily if TIF funds supported developments that would be built anyway.

For more information on the use of TIF and other gap financing programs please contact Brian Beeman, Senior Advisor at IAG Commercial, your commercial real estate advisors.  

Disclosure: Nothing in this blog is meant to be legal advice. Please consult with your attorney and be sure you fully understand TIF before considering using this type of financial tool.