TIF Abatement: What is it and How Does it Work?

TIF abatements are a powerful tool for property investors to assist with financing for undeveloped areas. Though mostly referred to as TIF, or tax increment financing. An abatement is a reduction of something and TIF doesn’t fall into this category. This makes TIF and tax abatements two entirely different property financing  vehicles.

Both TIFs and tax abatements can provide significant financing options for property investors who need assistance with financing a proposed project.. To utilize them, it’s key to understand the main differences and benefits of each.

What is TIF (Tax Increment Financing)?

TIF is special financing vehicle offered to municipal governments that allows them to use future revenue from completion of the project as collateral to obtain financing. This future revenue usually comes in the form of increased property value or rental income.

The main purpose of using TIF is to target underdeveloped areas and provide economic development through property improvement. Not only does the project  help revitalize or improve the area but it also prevents the municipal from having to raise taxes to fund the project. This helps keep more money in the resident’s pockets, which can help stimulate the economy.

Municipals that wish to offer low income housing often use TIF as the financing vehicle to be able to serve the community and improve conditions without the burden of the financial load. Often these projects wouldn’t be possible if the TIF wasn’t utilized.  

The TIF will generally last around 10+ years for the property to grow the needed equity through increased property values and repay the initial cost.

How Does TIF Work?

If a municipal government wants to utilize TIF for a project, the first step is to get state level government permission for a designated area. Each state has laws and regulations as to what projects and properties qualify for TIF. Many have specific criteria that must be met to qualify. Once this state level permission is granted the municipal can continue with the project.

The second step is to assess the current value of the property. This base value of the property will continue to pay taxes that support city services. As the property value increases the difference between this increase and the base amount is taxed but the money goes directly to paying the investors back or considered additional government revenue.

After the approval is obtained and the base value is assessed, the project can begin to gather its financing for the TIF. Usually this is done through bonds which investors can buy. The bonds are backed with the collateral on the future revenue of the property. Once the money is raised, the project can begin.

The municipal can choose to raise all the funds at once by selling enough bonds to cover the full cost or they can sell bonds as needed each year to cover the cost of that year.

As mentioned, the bonds are paid back once the property starts generating revenue through increased property value or rental income. After the property pays taxes on the base amount the remaining tax revenue goes to repay the bonds.

How Do You Calculate TIF?

Determining  the acceptable TIF value requires projections on future values in relation to current value.  The first number to determine is the Fair Market Value of the project at the time of completion. The municipality and the developer typically use historical comparisons to determine the fair market value. For future value, comparable property and project property value data is utilized to determine the “incremental” impact.  This value is the estimated value the property would appraisal for after completion. An “assessed” value is then agreed upon to calculate the potential tax impact of the project.  

Since property values change over time and the general length of a TIF is 10+years, inflation rates are also included in the calculation of the TIF impact.

How Does TIF Affect Underdeveloped Areas?

When a municipal government uses TIF to improve an area there are many ways the surrounding businesses and the community at large see improvements. One of the ways is for the property value of the proposed project to increase over time, offering more tax revenue for the municipal and state governments, which help fund projects for the citizens.  In addition, the increased property value also will help increase the value of the surrounding properties, bringing in more tax revenue for the government and more profit for area property owners.

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Last, but not exclusive, new  development projects often lead to an increase in job availability for the area which can provide more opportunity for the  residents. (mentioned earlier)  

What is Tax Abatement?

A tax abatement is a reduction in taxes owed for a property owner if their property qualifies for the program criteria. Most often tax abatements are used to revitalize areas that are blighted.  The designated neighborhood can be a defined area within a town, county or state. The main purpose of a tax abatement is to encourage buyers to purchase property in the designated area and revitalize it with additional funds created by the temporary tax abatement.  

Tax abatements typically target low income residential development to help families with lower rent options that   might not otherwise be able to afford. Tax abatements aim to help revitalize the look, value and integrity of a neighborhood.

Eligibility is determined by the  tax abatement program. Some tax abatement programs are short, but others can span 10+ years.. The individual tax abatement program might require the buyer to re-qualify over specific terms through the program length. If a buyer no longer qualifies for a tax abatement in the middle of a program, they typically no longer earn the tax benefit.  

What is the Main Difference Between TIF and Tax Abatement?

While both TIF and tax abatements aim to help blighted or undeveloped areas there are significant differences. The main difference between the two is the type of buyer the financing tools help. Generally, only municipals and developers will obtain TIF, while most often it’s the developer and low-income homeowner that benefits from a tax abatement program.

TIF provides a financing tool for development  while a tax abatement provides tax breaks to finance revitalizing a run-down area. Generally, one area will never qualify for both as the property  is either not developed or has been developed but run down.


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