Appendix 5: Financing
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Appendix 5: Financing For more information, contact Jacob.Sesker at [email protected] Staff presented the following four documents to the Planning Board as part of their worksessions following the public hearing: • • • •
February 19, 2009 Memorandum February 19, 2009 Staff Report May 7, 2009 Memorandum June 4, 2009 Amendment to May 7, 2009 Memorandum, per Planning Board (Attachment D)
White Flint Sector Plan Appendix
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February 19, 2009 Memorandum
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February 19, 2009 Staff Report
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May 7, 2009 Memorandum
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June 4 Amendment to May 7, 2009 Memorandum, per Planning Board
ATTACHMENT D: TAX INCREMENT FINANCING (TIF) Introduction In a TIF, property tax revenues derived from the increase in assessed val¬ues due to appreciation and/or new development are used to pay off bonds issued for improvements in the TIF District. At the time the TIF District is created, a baseline of revenues is established. Some or all of the revenue above that baseline accrues to the TIF District and is applied to the debt payments.
Purpose of TIF In the absence of government participation in the development or redevelopment of urban areas, real estate developers and investors are more willing to invest in simpler, “Green field” sites. In “Green field” sites land costs are generally lower, redevelopment requires less land assemblage, public facility capacity is less encumbered by existing development, and infrastructure investments are less likely to involve expensive retrofits. Under certain circumstances, TIF can serve as an effective tool for jurisdic¬tions seeking to fund redevelopment of targeted geographic areas, espe¬cially those that contain “Brownfield” or “Grayfield” sites. As such, state and local officials in jurisdictions around the nation recognize that TIF can be a valuable tool in suburban transit-oriented development (TOD) projects as a way of meeting the high costs of retrofitting aging or obsolete suburban infrastructure.
TIF in Maryland The Maryland Tax Increment Financing Act authorizes most Maryland coun¬ties and municipalities to use TIF for the purposes of financing certain develop¬ment/redevelopment projects. See Title 12, Subtitle 2 of the Economic Development Article of the Maryland Code, Sections 12-201 through 12-213. In Maryland, authorized local governments may issue TIF bonds for the purpose of financing development or infrastructure to support development. The first step in that process requires the government to create a TIF District and a special fund. The TIF bonds issued are then payable from the special fund which holds the incre¬mental tax payments associated with the TIF District.
TIF Financing Terms TIF bonds are unsecured, revenue bonds. In their purest form, they are backed by a projection of the District’s tax revenues. The full faith and credit of a jurisdiction is not necessarily at risk when a TIF bond is issued. As such, TIF bonds are riskier than general obligation bonds. When underwriters feel that the risk associated with using TIF is too high, then any of a number of conceptually similar financing tools may be more appropriate. Recent TIF Districts in Maryland have been “backed” by Special Assessment districts. In these cases, a Special Assessment District is created that has the same boundaries as the TIF District. In the event that the TIF District does not meet projected revenues, property owners within the TIF District are assessed a share of the shortfall. In order to reduce risk, bond placement agencies often prefer to see TIF Districts that are large and diverse, thereby reducing the risk of default. Larger districts raise questions as to why the TIF District is so large as to include areas that receive little benefit from the new development. Smaller and more narrowly drawn TIF Districts usually require higher debt coverage ratios (i.e. a lower percentage of net operating income can be used for debt payment because the small TIF district is perceived to be riskier). For example, a project that will generate an annual tax increment of $1 million might have a large TIF District boundary and a debt coverage ratio of 1.25 (i.e. $800,000 available each year for principal and interest); the same project with a more narrowly drawn TIF District boundary might have a debt coverage ratio of 1.67 (i.e. $600,000 available each year for principal and interest). 124
White Flint Sector Plan Appendix
Appendix 5
February 19, 2009 Memorandum February 19, 2009 Staff Report May 7, 2009 Memorandum June 4, 2009 Amendment to May 7, 2009 Memorandum, per Planning Board (Attachment D)
White Flint Sector Plan Appendix
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February 19, 2009 Memorandum
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February 19, 2009 Staff Report
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June 4 Amendment to May 7, 2009 Memorandum, per Planning Board
ATTACHMENT D: TAX INCREMENT FINANCING (TIF) Introduction In a TIF, property tax revenues derived from the increase in assessed val¬ues due to appreciation and/or new development are used to pay off bonds issued for improvements in the TIF District. At the time the TIF District is created, a baseline of revenues is established. Some or all of the revenue above that baseline accrues to the TIF District and is applied to the debt payments.
Purpose of TIF In the absence of government participation in the development or redevelopment of urban areas, real estate developers and investors are more willing to invest in simpler, “Green field” sites. In “Green field” sites land costs are generally lower, redevelopment requires less land assemblage, public facility capacity is less encumbered by existing development, and infrastructure investments are less likely to involve expensive retrofits. Under certain circumstances, TIF can serve as an effective tool for jurisdic¬tions seeking to fund redevelopment of targeted geographic areas, espe¬cially those that contain “Brownfield” or “Grayfield” sites. As such, state and local officials in jurisdictions around the nation recognize that TIF can be a valuable tool in suburban transit-oriented development (TOD) projects as a way of meeting the high costs of retrofitting aging or obsolete suburban infrastructure.
TIF in Maryland The Maryland Tax Increment Financing Act authorizes most Maryland coun¬ties and municipalities to use TIF for the purposes of financing certain develop¬ment/redevelopment projects. See Title 12, Subtitle 2 of the Economic Development Article of the Maryland Code, Sections 12-201 through 12-213. In Maryland, authorized local governments may issue TIF bonds for the purpose of financing development or infrastructure to support development. The first step in that process requires the government to create a TIF District and a special fund. The TIF bonds issued are then payable from the special fund which holds the incre¬mental tax payments associated with the TIF District.
TIF Financing Terms TIF bonds are unsecured, revenue bonds. In their purest form, they are backed by a projection of the District’s tax revenues. The full faith and credit of a jurisdiction is not necessarily at risk when a TIF bond is issued. As such, TIF bonds are riskier than general obligation bonds. When underwriters feel that the risk associated with using TIF is too high, then any of a number of conceptually similar financing tools may be more appropriate. Recent TIF Districts in Maryland have been “backed” by Special Assessment districts. In these cases, a Special Assessment District is created that has the same boundaries as the TIF District. In the event that the TIF District does not meet projected revenues, property owners within the TIF District are assessed a share of the shortfall. In order to reduce risk, bond placement agencies often prefer to see TIF Districts that are large and diverse, thereby reducing the risk of default. Larger districts raise questions as to why the TIF District is so large as to include areas that receive little benefit from the new development. Smaller and more narrowly drawn TIF Districts usually require higher debt coverage ratios (i.e. a lower percentage of net operating income can be used for debt payment because the small TIF district is perceived to be riskier). For example, a project that will generate an annual tax increment of $1 million might have a large TIF District boundary and a debt coverage ratio of 1.25 (i.e. $800,000 available each year for principal and interest); the same project with a more narrowly drawn TIF District boundary might have a debt coverage ratio of 1.67 (i.e. $600,000 available each year for principal and interest). 124
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Appendix 5
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