Author: Financial Management Resource Bureau
District improvement financing (DIF) is a program authorized under M.G.L. Ch. 40Q to promote increased residential, commercial, and industrial activity by enabling cities and towns to set aside the additional, new-growth-related taxes generated by properties within a specified development district for public improvements and economic development in the district. Cities and towns can leverage DIF as a part of their economic development strategy to contribute to targeted infrastructure upgrades.
Fundamentally, DIF is grounded in the idea that if a city or town invests in a targeted area to encourage private development, the resulting incremental tax revenue will help fund the infrastructure improvements that supported the new development instead of exclusively funding it with other available funds or a debt exclusion. For municipal finance officials, however, the key is to establish a legitimate and feasible connection between infrastructure investment and the anticipated development outcome. There should be a reasonable basis for believing that certain infrastructure upgrades will directly contribute to the development identified in the DIF plan. When considering DIF, local officials must do their due diligence in evaluating timing and risk associated with the plan. With limited exceptions, projects that are to be funded with DIF revenues must be implemented within the DIF district.
One way to reduce risk is by delaying infrastructure investments until development occurs and DIF revenue is generated. Similarly, projected incremental revenues should be estimated conservatively and a community should determine infrastructure investments based on all sources of funding, including potential state and federal grants, private investment, or other municipal appropriations.
DIF can be incorporated into a broader economic development strategy for cities and towns. Through DIF, a municipality can:
- Signal that an area is targeted for growth and communicate the community’s development goals.
- Increase local control by identifying the location and type of development the community wants to encourage.
- Support planning and outreach, including funding "soft" costs and planning or outreach efforts that may not be suitable for borrowing.
- Create and analyze a documented plan for connecting planned public improvements with anticipated economic outcomes.
To generate and capture DIF revenue, a defined development district must be established with an identified development program that describes the anticipated private development, public improvements, expected costs and economic outcomes. After this district is established, the community then establishes the baseline in the assessed values of all property located in the district. The community will continue to collect the property tax revenue associated with the baseline values to support the general fund revenues. Once tax revenues are generated from the increased assessed value because of private investment, the community can then capture the incremental tax revenue and direct the funds toward infrastructure improvement. M.G.L. Ch. 40Q requires revenues to go into a development program fund, a development sinking fund account and/or project cost account, depending on if DIF-backed debt is issued or not. Any DIF revenues more than the amount estimated to be required to satisfy the obligations of the development program fund and its accounts should be returned to the general fund.
There is also some flexibility in structuring financing supported by anticipated DIF revenues. A municipality may structure its debt to match debt service payments with projected cash flows. For example, rather than using a level debt service schedule, a municipality could issue bonds that defer principal, capitalize interest, or mirror the forecasted revenue stream with an ascending debt schedule, something that is not allowed when issuing a traditional general obligation bond.
In addition, the associated debt from a DIF-supported financing may be structured to not count towards a municipality’s debt limit. Bonds issued under Chapter 40Q are not included when determining a community’s debt limit. It is critical for a municipality to consult with an independent municipal advisor or bond counsel about issuing DIF-supported debt so the pros and cons can be weighed, including potential impacts to credit rating and short/long-term fiscal impact.
One key point to understanding DIF is if the anticipated development is delayed, is scaled back or does not occur and the revenue from new growth does not materialize and the anticipated DIF revenue is not available when expected. As a part of this program, cities and towns have to keep in mind that general obligation bonds must be repaid, regardless of if the DIF performs as expected or not, which places the risk back onto the community and its financial resources. Alternatively, a special obligation bond can be issued and secured by the expected DIF revenues. This debt structure comes with a different set of risks and requires careful evaluation of the anticipated revenue stream as well as the terms of the debt.
DIF can be a valuable addition to a community’s overall economic development strategy, but should not be viewed as a guarantee for future development that will pay for infrastructure investments.
For more resources on DIF visit MassDevelopment.
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Editor: Dan Bertrand
Editorial Board: Sean Cronin, Scott Ditto, Janie Dretler, Jessica Ferry, Christopher Ketchen, Paula King, Jen McAllister, Brianna Ortiz, and Tony Rassias
| Date published: | September 17, 2026 |
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