District Improvement Financing (DIF) and Tax Increment Financing (TIF) are economic tools that promote redevelopment by use of public/private partnerships. TIF offers tax breaks to developers, while DIF channels tax dollars into targeted redevelopment districts.
Many municipalities in Massachusetts are faced with blighted, distressed, or simply underutilized areas. Many of these sites contain abandoned or contaminated facilities, while others are characterized by broken-down infrastructure and commercial operations that simply are not economically viable. These areas often see a decrease in assessed property values with a corresponding decrease in municipal revenue. At the same time, they pose a drain upon municipal services. Often, it is difficult to attract private investment to these areas
Both DIF and TIF provide municipalities with innovative tools to target districts or specific projects for redevelopment. The use of tax increments is the centerpiece of both tools.
A tax increment is the difference between the beginning assessed value of the targeted property in its broken-down state and the assessed value going forward in time, as the planned improvements take shape. The tax increment, calculated by the local Assessor, is the tax on the added value of new construction, rehabilitation or new equipment or machinery.
Determining the value of the tax increment is essentially the same for both DIF and TIF, however, how the tax increment is used as an incentive is very different:
- Using DIF, municipalities can pledge all or a portion of tax increments to fund district improvements over time.
- With TIF, municipalities may grant property tax exemptions to landowners of up to 100% of the tax increment for a fixed period.
Introduction to DIF/TIF
DIF is authorized by M.G.L.c. 40Q and its implementing regulations 402 CMR 3.00 et seq.
- A city or town wishing to utilize DIF must first designate a development district and a corresponding development program.
- The district and program must then be certified by the State Economic Assistance Coordinating Council ("EACC").
- A development district may be as small as one parcel or may comprise up to 25% of a town or city's land.
- A district can be in effect for a maximum of 30 years.
- Each district must have a unique development program. The development program spells out the goals of the district and the means to achieve them. The program will identify the following:
- Existing uses and current zoning,
- Proposed uses and any needed zoning changes,
- Any planned construction or rennovations,
- Current and planned infrastructure,
- A financial plan.
Once a district and program have been certified, the city or town has the ability to use various tools to implement the program. These include:
- acquiring land
- constructing or reconstructing improvements (such as buildings, roads, schools and parks)
- incurring indebtedness
- pledging tax increments and other project revenues for repayment of these debts.
Initial funding for these activities is usually accessed through the posting of a bond by the city or town. DIF also allows for public/private development partnerships.
TIF is authorized by M.G.L.c. 40§59 and its implementing regulations 760 CMR 22.01. Under this legislation, landowners may be granted property tax exemptions of up to 100% of the tax increment. A municipality may enter into a TIF Agreement with a landowner for a maximum term of 20 years. M.G.L.c. 40§60 also authorizes TIFs for housing in urban centers. A city or town must initiate a TIF by a vote of its governing body approving the TIF Plan, which must include:
- Designation of the area that will be the TIF zone
- Description in detail, including plans and specifications where appropriate, of all construction and construction related activity
- Projection of public and private costs and a betterment schedule for the defrayal of public costs
- Authorization of a tax increment exemption from property taxes
- Establishment of a maximum percentage of costs of public construction that can be recovered through betterments or special assessments against any parcel in the TIF zone eligible for exemptions
- Identification of property owners in the TIF Zone
- Executed Agreements between the city or town and each owner of property within the TIF zone
- Delegation of authority to enter into development agreements to one municipal agency, board or officer
- Data demonstrating that the TIF Zone is located so as to maximize the likelihood of a net economic benefit to the municipality, such as land use information, proximity of mass transit services and tenants within the zone.
A TIF Zone must be in an area approved by the EACC as an Economic Opportunity Area (EOA) or found to be an area "presenting exceptional opportunities for economic development" by the Director of Economic Development. Certification of the TIF Plan is issued by the Economic Assistance Coordinating Council (EACC) after the plan is accepted by municipal vote.
- DIF and TIF provide opportunities to redevelop areas in ways which can lead to increased property values, increased tax revenue, improved infrastructure, enhanced transportation services, increased housing supply, new jobs and an overall improvement in quality of life for the inhabitants of the city or town.
- Success is tied to careful planning which identifies the needs of the district and combination of uses most likely to succeed. While TIF focuses on job creation, DIF allows significant flexibility in planning for the district's housing and commercial needs. The role of private partners can be crucial to achieving the desired effects. In both cases, public/ private agreements provide details and guidelines.
- DIF and TIF programs, depending on their design, will satisfy many of the Commonwealth's Sustainable Development Principles including:
- Concentrate Development and Mix Uses: Both DIF and TIF concentrate development in areas in or adjacent to existing downtowns. In doing they make use of existing infrastructure and mass transit. The use of DIF and TIF encourages redevelopment of existing dilapidated sites, urban infill and revitalization.
- Advance Equity: DIF and TIF provide economic incentives to developers and encourage true economic partnerships between developers and municipalities. By virtue of their focus on vacant and underutilized properties in urban centers DIF and TIF often create environmental justice benefits.
- Expand Housing Opportunities: DIF allows the use of tax increments to fund both affordable and market priced housing projects. TIF can be used as an incentive for housing development in urban centers.
- Increase Job and Business Opportunities: By virtue of their economic objectives, TIF and DIF Agreements are directly tied to the creation of new jobs.
- Plan Regionally: DIF and TIF can be used to satisfy regional needs for industry, consumer services, health care, and employment.
Considerable planning is required up front, but the payoff in both increased future revenues and benefits to the public can be great. Successful projects will result in increased tax revenue to the municipality.
TIF provides a direct upfront benefit to a Developer in the form of tax relief. The money saved on taxes helps pay the project's construction costs. Depending on the size and location of the project, Developers utilizing TIF benefits can also often access other state financial incentives such as Investment Tax Credits, Abandoned Building Tax Deductions and Research and Development Tax Credits.
DIF provides financial benefits to developers as well, by providing infrastructure and surrounding amenities to support their projects. Early public funding takes the initial burden off the developer and minimizes risk.