Ten Steps to Creating a TIF District

by Paul N. Keller

Tax increment financing ("TIF") is a method of raising money to pay for a redevelopment project, by capturing the increase in property value created by that redevelopment and channeling the increased tax revenue back into the project. The tax captured is not just the municipal portion of the tax bill, but the increased revenue from taxes levied by all the taxing districts in which the project is located, including school, park and library districts. By establishing a TIF district, the municipality can divert increased tax revenue to itself which would otherwise go to the other taxing bodies. However, the theory is that without the TIF district, the increased tax revenue would not be there in the first place, so the municipality is not depriving the other taxing bodies of anything.

Under tax increment financing, the increased property taxes generated by the redevelopment project that would otherwise go the various taxing bodies go instead to the municipality. The other taxing bodies do not benefit from the increased property values until the TIF expires, or unless accumulated TIF funds are declared by the municipality to be surplus, in which case the surplus funds are returned to the other taxing bodies in proportion to their respective portion of the total tax bill.

The tax revenue generated from a TIF district goes into a special municipal fund. This revenue can be used to pay eligible costs of redevelopment and can be pledged for the repayment of revenue bonds issued by the municipality.

A municipality initiates a TIF project when it identifies a vacant or deteriorated area of the community which will, if it is redeveloped, enhance the tax base and produce new tax revenue. The benefits of the redevelopment project may extend beyond the boundaries of the TIF district itself if new businesses and other enterprises are attracted to property near the revitalized area. By definition, tax increment financing is used when the area would otherwise not be improved solely with private funds.

Creating a TIF district is a complicated process. The TIF Act (65 ILCS 5/11- 74.4-1 et seq.) is complex, not well written, and difficult to understand. Following are ten essential steps taken in the creation of a TIF district.

1. Eligibility Analysis
The ordinances the municipality enacts to formally create a TIF district must include findings showing that tax increment financing is permissible. In order to establish a factual basis for these findings, the municipality must conduct an eligibility study, resulting in a written report documenting how the project meets the statutory tests of eligibility. It is best to have the study conducted by an independent consultant. In the

event of a legal challenge to eligibility, the consultant's report and the testimony of the expert witnesses will be critical to the success of the project. There are three separate tests of eligibility, all of which must be satisfied:

1) Project Eligibility. The law requires that to create a TIF district, the municipality must determine that redevelopment of the area would not take place without public financial assistance. This is the "but for" test: "But for" the use of incremental tax revenue the site would not be developed. The legislative body must find that the redevelopment project area as a whole has not grown and developed through private investment, and cannot be expected to grow and develop without public financial assistance.

2) Site Eligibility. The site of a TIF project must qualify as a "blighted area," a "conservation area" or "an industrial park conservation area." There are detailed criteria in the statute for defining these areas. Briefly, the factors characterizing a blighted area are buildings that are dilapidated, obsolete, deteriorated, violate building codes, have inadequate utilities, or are overcrowded; or the land is contaminated with hazardous material, is poorly planned, is in diverse ownership, is tax delinquent, has declining assessed value, contains quarries, mines, or railroad right-of-ways, is subject to chronic flooding, or is an illegal disposal site for construction, demolition or excavation material. Other criteria apply to vacant land.

A "conservation area" is one which is not yet blighted but is likely to become so. Most of the buildings are at least thirty-five years old and the area has many of the same characteristics as a blighted area though to a lesser extent.

An industrial park conservation area must be within a designated area of higher unemployment and is a site suitable for manufacturing, industrial research or transportation facilities as defined in the statute.

3) Cost Eligibility.
Only certain categories of development costs are eligible for reimbursement from incremental taxes. These are spelled out in the statute and include, among other things:
a. Cost of studies, plans and professional services for architectural, engineering, legal, marketing and other services;

b. Costs of marketing sites to prospective businesses, developers and investors;

c. Costs of land acquisitions, site preparation, rehabilitation of existing buildings, construction of public infrastructure;

d. Costs of financing; and

e. Costs mandated to be paid to school districts for their increased costs attributable to assisted housing units within the project up to 25% of the tax increment.
Specifically excluded from eligibility are costs of constructing new privately owned buildings, except for new housing units to be occupied by low income households as defined in the Affordable Housing Act.

2. Market Analysis
Before a municipality creates a TIF district, it should have some idea of what kind of redevelopment is possible. It would not make sense, for example, to create a TIF district with the expectation that the area will be redeveloped with a "big box" retailer if market conditions will not support such an operation. Municipal officials must be realistic about how the TIF district can be redeveloped. Sometimes a developer will come to the municipality with a proposal for a redevelopment project and ask for public financial support through the creation of a TIF district. In that situation, the municipality should demand that the developer submit its own market studies, showing that the proposed project will be commercially successful. In this business, the municipality should not assume that "If you build it, they will come." The municipality may at this time begin the process of negotiating with a developer for a development contract, which will determine exactly what will be constructed once the TIF district is established, and what development costs will be reimbursed from TIF funds.

3. Housing Impact Analysis
If the redevelopment project will result in the displacement of 10 or more inhabited residential units in the TIF district, or the district contains 75 or more housing units, the municipality must create a Housing Plan to address the needs of the residents who are displaced. This may require financial assistance to the displaced residents. In order to determine whether a Housing Plan is necessary, and how much it may cost, the municipality must conduct a housing impact analysis. If there are no residences in the proposed TIF district, the housing impact report may be only one sentence, but it must be stated.

4. Define Boundaries
The TIF district must be at least 1.5 acres and must be contiguous. There must be a written legal description of the boundaries as well as a depiction on a plat. The legal description must be in a form acceptable to the county clerk, so that the clerk can identify exactly what property is within the TIF district, for tax purposes. (Municipal officials are prohibited from acquiring real estate in a proposed TIF district. If they already own property in an area being considered for inclusion in a TIF district, they must disclose that ownership and must not participate in any discussion of the matter.)

5. Develop a Plan
Every TIF district requires a redevelopment plan. This describes the comprehensive program of the municipality for development or redevelopment projects intended to reduce or eliminate the "blighting" conditions that exist in the proposed TIF district. The TIF Act states that no redevelopment plan may include the development of vacant land for a golf course, camping or hunting facilities or for nature preserves. The plan must include, among other things:
  • An itemized list of estimated redevelopment project costs;
  • An assessment of any financial impact of the redevelopment project on other taxing districts;
  • The sources of funds to pay costs;
  • The nature and term of any bonds or other debt to be issued;
  • The most recent equalized assessed valuation (EAV) of the redevelopment project area; and
  • An estimate of the EAV of the TIF district following completion of the redevelopment project.
6. Issue Notices of Public Hearing and Joint Review Board Meeting
When the eligibility analysis, market analysis, housing analysis, redevelopment plan and boundary description are completed, the time has come for the municipality to present the proposed TIF district to the residents of the community and other interested parties. The municipality must create and publicize the existence of an "interested parties registry" on which anyone can register to receive public information about the TIF creation process. A public hearing must be scheduled at a meeting of the corporate authorities, to allow public discussion of the TIF process. Notice must be mailed, on a precise schedule, to residents within 750 feet outside the boundary of the proposed TIF district, to property owners within the proposed TIF district, and to people who have registered to receive information. Notice of the public hearing must be published in a local newspaper. A meeting of the Joint Review Board, which consists of a representative of every affected taxing body, must be scheduled, and notice sent to those taxing bodies, as well as to the Illinois Department of Commerce and Economic Development.

7. Hold the Joint Review Board Meeting
Every taxing body that receives tax revenue from the property within the proposed TIF district is entitled to send a representative to the Joint Review Board. The meeting of the JRB must be scheduled within a specified time after issuance of the notice of the meeting. The JRB actually consists only of those representatives who show up for the meeting. The JRB reviews the TIF plan, and makes a recommendation to the corporate authorities whether the TIF district should be created. The JRB cannot veto the plan; it only makes a recommendation. However, if the JRB disapproves the plan, approval by the corporate authorities requires a 3/5 majority vote.

8. Hold the Public Hearing
A public hearing must be held within a specified time after issuance of the notices described above, at which the redevelopment plan and TIF boundaries are described. Any member of the public may comment on the proposed TIF district. No action is required by the corporate authorities at this public hearing; it is only for the purpose of providing an opportunity for public comment.

9. Adopt the TIF Ordinances
After the public hearing and the JRB meeting, the corporate authorities must decide whether to go ahead with creation of the TIF district. The creation requires adoption of three separate ordinances:
  • An ordinance approving and adopting the TIF redevelopment plan;
  • An ordinance fixing the boundaries of the TIF district; and
  • An ordinance adopting tax increment financing within the TIF district.
10. File with the County Clerk
The final step in creation of the TIF district is filing the TIF ordinances with the county clerk. This causes the clerk to determine the EAV in the new TIF district as of the date of creation. This EAV becomes the base property value on which all tax levies will be calculated for all taxing bodies in the TIF district for the life of the TIF (usually 23 years.)

Once the TIF district is established, the municipality will probably negotiate contracts with one or more developers for construction of the projects to be financed with TIF revenue. The municipality may issue bonds, backed by the TIF revenue (and possibly other revenues), to pay for capital improvements.

For additional information, we suggest that you download a pamphlet from the Ancel Glink Library: Economic Development Toolbox for Municipal Officials. The pamphlet can be downloaded for no charge at www.ancelglink.com.

All chapters:
Ten Steps to Help Keep Your Employees From Suing You (Or To Help Defend You If They Do), by Margaret Kostopulos

Ten Lessons Learned by a Former Elected Official, by Gregory S. Mathews

Ten Rules to Live by for Public Management Labor Negotiators , by Gregory S. Mathews Donald W. Anderson

Moving Ten (Giga) Steps to the Digital Future , by Adam B. Simon

Ten Things Governmental Officials Should Know About The Illinois Governmental Tort Immunity Act , by Darcy L. Proctor

How Governments Can Win in Cases Before Appellate Courts – 10 Examples , by Ellen K. Emery

Ten Rules About Running for Local Government Office, by Keri-Lyn J. Krafthefer

Top Ten Tools for Your Construction Project, by Derke J. Price

Ten Steps to Creating a TIF District, by Paul N. Keller

Ten Things Governmental Officials Don't Know About Workers' Compensation, by Gerald A. Granada and W. Britt Isaly

Ten Things Municipal Officials Should Know About Local Prosecution and Ordinance Enforcement, by Scott Puma and John Christensen

The Zoning Game in Ten Easy Lessons , by David S. Silverman

Ten Ways Municipalities and Park Districts Can Intergovernmentally Cooperate, by Scott A. Puma

Ten Steps to a Closer Relationship Between Municipalities and School Districts, by Margaret Kostopulos







Website designed by Shannon Burch