Tax Incremental Financing

Tax Increment Financing (TIF) is a financing and development tool that allows future real property taxes and other taxes generated by new development to pay for costs of construction of public infrastructure and other improvements. Basically, what happens is that the city tells a developer that if they develop a retail center on this old industrial park then the city will for a period of up to 23 years split the tax revenues into two groups. One group is the base tax, which is the tax amount from the previous use, and this tax goes to the proper taxing authority. The second group is a PILOT group (Payments-in-lieu-of-taxes)where the developer is taxed on the difference of the base amount and the current value of the property and that amount gets reimbursed to the developer for the costs of infrastructure (sewers, roads, etc...). In the end, the developer is still getting taxed on the current value of the property; however, the taxes due to the increase in property value come back to the developer as a subsidy. In a deal I am currently working on the tenants in the property which was developed using the TIF approach pass a tax on to the customers that shop at the stores and that small extra tax (0.5% or so) goes to the city for their TIF financing. I am unclear about how the majority of municipalities apply that extra tax, if it is reimbursed to the developer or is an extra tax that the city collects.