Tax Increment Financing - Learning from the Georgia Experience

Originally published 1st Quarter 2004

The gradual decline of federal involvement in economic redevelopment has led local governments to search for methods of funding commercial and residential projects with sources other than block grants or general revenue sharing. One such method that has become increasingly popular is tax increment financing (TIF). This mechanism is now one of a few tools that local governments can use to stimulate economic development in their communities.

TIF financing allows a local government to capture tax revenues attributable to increases in property values within a prescribed development area (the TIF District) and use those revenues for neighborhood renewal projects for a defined period of time. These new revenues - also called "increment" - arise from new development within the TIF District or from general increases in the value of existing properties, resulting in higher tax revenues.

In some situations, bonds are sold by the local government at the outset of the project so that funds are available for front-end costs such as land acquisition or initial infrastructure. The bonds are then fully or partially paid with tax increment revenues as they are collected. Alternatively, improvements may be financed on a "pay-as-you-go" basis under which, for example, the development costs initially may be paid from cash on hand or other sources and then reimbursed if and when tax increment revenues are generated. Because it helps the local government pay for part of a project without state or federal funds and without payments out of its general fund budget, TIF financing has been referred to as a "self-financing" development incentive.

The National Association of Counties (NACo) has noted a number of benefits from TIF financing. These benefits include the ability to expand the local government’s tax base without imposing new taxes or special assessments while helping to overcome obstacles that may prevent development by the private sector acting alone. TIF financing helps to close the gap between the costs of redeveloping an established urban area and the typically lower costs of developing an area with little pre-existing development.

TIF financing is now authorized in most states and in the District of Columbia, and its use is widespread. Among counties responding to NACo’s 1999 Operations Survey, 25 percent had used TIF to finance their economic development efforts. Eleven percent of the responding counties utilized TIF to finance capital projects. Of those counties that had helped finance the construction of sports facilities, ten percent had used TIF as part of the funding of such facilities.

As of 2001, the state of Minnesota reportedly had 2,166 different TIF districts that were maintained by 440 different authorities. As of that same year, the city of Chicago reportedly had 101 different TIF districts that, in the preceding ten years, had generated $473 million in tax increment revenues (although $308 million had come from a single TIF district for the Central Loop). Twenty-one of those districts had been the subject of a bond issue or some other form of financed front-funding.

Examples of relatively large TIF-funded projects include:

• the renovation of historic theaters in Chicago

• the construction of a rapid transit station in Fremont, California

• the financing of a shopping mall and aircraft maintenance center in Indianapolis

• the renovation of a library and convention center in Los Angeles

• the financing of a sports arena in Minneapolis

• the financing of a library and convention center in San Jose

• the financing of a museum, hotel and entertainment center in Washington, D.C.

In Georgia, TIF financing is governed by a 1985 amendment to the state constitution, along with an enabling act (commonly referred to as the Redevelopment Powers Law). In enacting this statute, the General Assembly noted that economically and socially depressed areas exist within counties and municipalities in Georgia; that these areas limit the tax resources of counties and municipalities while at the same time creating a greater demand for public services; that these areas have a deleterious effect upon the public health, safety, morals and welfare; and that the improvement of these areas is in the public interest. The stated purpose of the statute, therefore, is to confer additional powers upon counties and municipalities to enable them to partner more effectively with private enterprise in order to redevelop these areas.

The Georgia Redevelopment Powers Law is not self-executing. Instead, it creates a framework within which certain enumerated powers may separately be conferred upon an individual local government in two ways:

(1) the passage of a separately-adopted local act of the General Assembly

(2) the ratification of the local act by a majority of the qualified voters voting in a special election in each political subdivision directly affected

Even after a local act has been adopted authorizing a particular community (such as a city or county) to engage in TIF financing, the portion of the tax increment attributable to other entities with concurrent taxing authority (such as a school district) may only be utilized with the consent of those entities.

Since the passage of the Redevelopment Powers Law, local legislation has been adopted for eighteen cities and eight counties. Successful referenda were held to ratify these local acts in fifteen of these cities and six of these counties. Each of these cities and counties acquired the power to create TIF districts, which are referred to as tax allocation districts (TADs) under the Georgia law. This power has been used to create 13 TADs, including one in Macon and 12 in the metropolitan Atlanta area.

The city of Atlanta has created five TADs. The first of these, Techwood Park, began in 1992 as an effort by the city to create an economic development legacy from the Centennial Olympic Games in the area immediately west of the central business district. The initial district failed to generate much in the way of incremental tax revenues, largely because anticipated new investment was slow to materialize and because the state established a large park in the middle of the district which effectively removed approximately 25 percent of the tax district. After expanding the initial district, however, the city was able in 2002 to issue $14,995,000 in tax allocation bonds to finance public improvements to support a number of private redevelopment projects within the district.

Atlanta’s second TAD was designed to transform the 138-acre Atlantic Steel Brownfields site just north of Georgia Tech into a mixed use development featuring 2,000 to 3,000 residential units, 4 to 6 million square feet of commercial office space, 1,000 to 2,000 hotel rooms, and 1 to 2 million square feet of retail space. In 2002, the city of Atlanta issued $76,505,000 in tax allocation bonds to finance development costs related to the initial phase of the project.

In 2002, the city of Atlanta created two TADs: one for the Perry/Bolton area of Northwest Atlanta and another for the Princeton Lakes community in Southwest Atlanta. The Perry/Bolton TAD supports the Atlanta Housing Authority’s partnership with private developers to transform 343 barren acres – including the former site of a large housing project – into a $340 million golf course community intended to draw residents and businesses into an underdeveloped corner of the city. The Princeton Lakes TAD is a developer-driven effort to finance infrastructure improvements supporting a projected $366 million mixed-use development, and it is the first TAD to be supported solely from city and county tax revenues but without school tax revenues. In 2003, Atlanta created the Eastside TAD, which – in a manner similar to the Westside TAD before it – is a city-driven effort to unlock an estimated $1.51 billion in private and public/private developments on more than a dozen projects in an area immediately east of the central business district.

Outside of Atlanta’s corporate limits, TADs have begun to proliferate in nearby communities, despite an initial abortive effort in the city of Macon – where subsequent property tax reassessments invalidated the initial assumptions about the amount of the anticipated tax increment. In 2001, the city of East Point, located just south of Atlanta, created the Camp Creek TAD in an area that had long remained undeveloped, largely because of its difficult topography and its lack of infrastructure. In 2002, East Point issued $22 million in tax allocation bonds to finance the construction of infrastructure in the area. Lured by the prospect of this infrastructure financing, one developer has broken ground on a major business park, and another developer has opened the first major retail center to open in South Fulton in the last 50 years.

In 2003, TADs were created just north of Atlanta in the unincorporated community of Sandy Springs; just south of Atlanta in the community of Ellenwood; and just west of Atlanta in the cities of Marietta, Acworth and Smyrna. These TADs were created with the following purposes in mind:

• The Sandy Springs TAD is designed to finance infrastructure for the purpose of attracting large-tract developers who have previously shunned the area.

• Proponents of the Ellenwood TAD seek to finance infrastructure to support residential and retail development in an area of rocky terrain that would otherwise not be developed.

• The Marietta TAD includes a former public housing development and a city-owned hotel, and it is designed to finance public improvements supporting a mix of retail stores, condominiums and lofts.

• The Acworth TAD is intended to pay the cost of stabilizing and recapping a landfill site so that it can be redeveloped into a shopping center.

• The Smyrna TAD is intended to pay for curb and street improvements and landscaping, all in hopes of stimulating the expansion of Smyrna’s village concept and the creation of a mixed income community.

Although TIF financing has been used by some jurisdictions for half a century, its use in Georgia is a relatively recent phenomenon. The statute enabling this type of financing in Georgia has been on the books for less than 20 years, and TADs have only been used in Georgia for just over a decade. Nevertheless, there is much to be learned from this limited experience.

The initial experience with Atlanta’s first TAD at Techwood Park illustrates the importance of securing projects that will cause an increase in property tax revenues and avoiding projects that will cause a reduction in such revenues. Obviously, a TAD is more likely to generate quick revenue in a situation such as Camp Creek or Atlantic Steel, where capable developers are willing to place significant assets at risk in advance of the actual creation of the district. Because school districts frequently levy the largest share of property taxes in a given community, the Princeton Lakes experience illustrates the importance of maximizing the financial benefit of a TAD by designing a project that includes sufficient educational benefit to elicit the school board support.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

Specific Questions relating to this article should be addressed directly to the author. For more information on the Redevelopment Powers Law as it existed as of the time this article was written, click here.