Tax Increment Financing (TIF) is one of municipal government’s most popular tools for financing economic development. First introduced in California during the 1950s, TIF legislation has since been passed in every state in the nation as well as the District of Columbia.
Chicago, with 172 TIF Districts covering over 30% of the City’s geographic area (2011), is one of America’s most TIF-friendly cities. Used to fund projects from parks and transit stations to office towers and residential communities, TIF is a powerful and flexible funding mechanism that continues to grow in popularity both in Chicago and nationwide.
TIF is intended to spur investment in blighted areas where development would not otherwise occur. To use TIF, the City of Chicago begins by designating an area for (re)development, which is called a TIF district. Once a TIF district is created, the City diverts any increase in property tax revenues from that district into a TIF allocation fund, holding constant the amount of funding channeled to other taxing bodies with jurisdiction over that area. These incremental increases in property tax revenues arise when public and private investment takes place in the TIF district, thus increasing the value of the surrounding property. TIF districts in Chicago remain active for 23 years (and can be extended to 35 years) and the process of diverting incremental increases in property taxes to the TIF fund continues for the entire life of that TIF district. All revenues in the TIF fund must be reinvested in the TIF district from which they were collected, or a TIF district that is directly adjacent (see Portability). TIF funding can be allocated to many types of projects, including public works, private development, and land acquisition. When a TIF district expires, taxes on the increment revert back to the overlapping jurisdictions.
The City of Chicago uses TIF primarily to encourage development that will increase property values and expand the tax base. The incremental property tax revenues generated in the district provide subsidies for development costs such as land assembly, site clearance, financing, and infrastructure. These types of public expenditures are expected to make the TIF district more attractive to private investors and encourage additional development.
The Municipal TIF Designation and Distribution Process
In Illinois, two conditions must be present in an area before it can be designated a TIF district. The first of those requirements is that the area is blighted or at risk of becoming blighted (called a ‘conservation area’). The second requirement is that the area is not likely to improve without some kind of public intervention (i.e., “but for” public assistance, the blight will persist).
To document if an area meets the blight and ‘but-for’ clauses, the City of Chicago conducts an “eligibility study” of the proposed TIF district or, more commonly, hires a consultant to do so. If the area meets the standards laid out in the Illinois enabling legislation, the City (or its consultant) then drafts a redevelopment plan. This plan is an overview of development priorities for the area, and it outlines expectations for how TIF increments will be spent during the TIF district’s lifespan. While the redevelopment plan must be approved by the City Council at the time that an ordinance establishing the district is being considered, the TIF district’s project budget may change at any time.
The process for designating a TIF district is not always the same. However, there are some general steps that occur whenever a TIF district is created in Chicago:
- A TIF district will always have an eligibility study.
- A TIF district will always have a redevelopment plan clearly stating its goals, objectives and implementation strategies.
- A TIF district will always have a designation ordinance describing the legal property boundaries within the area.
- If a TIF district has a development project that will be completed by a private developer or firm, it will always create a redevelopment agreement.
- A TIF district may or may not have a market analysis to understand development possibilities and area strengths and weaknesses.
- A TIF district may or may not have a housing impact study to look at the possible effects of development on local residents and the issue of displacement.
The TIF District Designation Process Step-By-Step
The following steps outline in greater detail the process used by the City of Chicago to create a TIF district. Many of the steps are required by state law, but the City has considerable flexibility to implement the TIF program in the way it sees fit – especially with regard to the level of public participation.
- An alderman, developer, and/or community development organization enters into discussions with the Chicago Department of Housing and Economic Development (DHED) over the creation of a TIF district.
- After an internal staff evaluation at the DHED, a consultant is hired, either by the developer or by the City, to conduct an eligibility study and draft a redevelopment plan. The City must issue a public notice that an eligibility study is underway.
- In cases where the proposed TIF district encompasses more than 75 residential units, or when the TIF redevelopment plan includes the removal of 10 or more occupied residential units, the City must host a public hearing on the housing impact of the TIF proposal.
- The completed TIF eligibility study and redevelopment plan are presented at a meeting of the Chicago Community Development Commission (CDC). The CDC then orders a public hearing. An announcement of the hearing must be published in a local newspaper at least 14 days in advance. Property owners within the proposed TIF district must be notified by mail at least 14 days before the hearing.
- Fourteen days after the TIF proposal is made to the CDC, the Joint Review Board (JRB) — which includes representatives from all the local taxing bodies affected by the TIF district — reviews and votes on the proposal. If the JRB votes to disapprove the proposal, at least 60 percent of the City Council must approve the proposal in order for it to become law. The JRB has never voted against a proposed TIF in Chicago.
- A public hearing takes place at a regular monthly meeting of the CDC. At the public hearing, the TIF proposal is presented and public comments are accepted. State law does not require the City to respond to public comments or act on public input regarding TIF proposals.
- The CDC reconvenes after the public hearing and votes on the TIF proposal.
- If approved, the proposal goes to the Chicago Plan Commission if it involves zoning and land use changes. The Plan Commission accepts public comments on the land use aspects of the TIF district though a public hearing that closely resembles that of the CDC.
- The Chicago City Council approves all TIF designations. The Finance Committee of the Council has a brief hearing on the proposal, at which public comments are accepted. The TIF proposal then goes to the full Council for a final vote and an ordinance is passed approving the designation.
There is also the question of who initiates a TIF district. Developers, major property owners, and private businesses can propose the designation of a TIF district to assist them with plans for a specific site. These private entities may have identified a vacant parcel, deteriorated building, or underutilized area that, if developed, would yield a significant increase in property tax revenues. Municipalities often prefer to initiate TIF districts based on a developer’s request because it reflects the developer’s willingness to invest in the area. However, the public sector may also initiate a TIF designation on its own, without any external pressure to do so. To learn more about these actors, click here.
When a TIF district is established, the Cook County Assessor adds up the value of all the properties in the district in that year. This is known as the “Base Equalized Assessed Value,” or Base EAV. As the City spends the TIF fund in the area (see Step 3), the EAV of the property in the district and the taxes on it are expected to rise. There are a number of factors that can cause property values to rise. These factors include new construction (such as commercial development and public infrastructure improvements), the effect of that new construction on surrounding properties, inflation affecting all goods and services including real estate, and development that would have naturally occurred in the area without TIF assistance. Illinois law does not differentiate between these different types of increments when it freezes the tax base in a TIF district. Any rise in property values as a result of the above conditions is reserved for TIF funding. The taxes on all the new value above the Base EAV are funneled into the TIF fund and available to be reinvested in the district.
This is how the process works:
|Base EAV||The total value of all property in the TIF district before it was established.||$10,000,000|
|Year One EAV||The total property value of the TIF district one year after it was established.||$11,000,000|
|Incremental EAV||The difference between the Base EAV and the current EAV.||$1,000,000|
|(Hypothetical) Tax Rate||The percentage of EAV that goes to taxes for the City and overlapping taxing entities.||10%|
|Incremental Revenue||The growth in property value multiplied by the tax rate – i.e., the new taxes that go to the TIF fund.||$100,000|
Once a TIF district is created, other taxing bodies (e.g., City of Chicago general fund, Chicago Park District, Chicago Public Schools, etc.) receive no revenue from additional property taxes coming from the property in the district. Their share of the property taxes is “frozen” at the amount they received when the TIF district is approved (i.e., the “Base EAV”). Although TIF district property is assessed and taxed at the same rate as property in the rest of Chicago, the district contributes less than its proportionate share to the City and other overlapping taxing jurisdictions because all incremental revenues generated in the TIF district stay in the district. After 23 years when the TIF district is dissolved, the incremental revenues revert back to all of the overlapping jurisdictions.
TIF revenues can be used for infrastructure and other public improvements (including improvements to schools, parks, and other public buildings), or the funds can also be used to subsidize private residential, commercial, industrial, and mixed-use development. These priorities are laid out in a redevelopment plan, which outlines the priorities for the TIF district, estimates a budget for the improvements, and is approved as part of the designation process.
The following are “eligible expenses” for TIF funds in Illinois:
- Planning expenses, such as studies and surveys, legal and consulting fees, accounting, and engineering
- Property acquisition, demolition, site preparation and environmental site improvements
- Rehabilitation, construction, repair and remodeling of existing buildings
- Construction of public works and improvements
- Job training implemented by businesses located in the redevelopment project area
- Project financing
- Tenant relocation
- Payments in lieu of taxes
- Reimbursements to school districts for increased costs caused by TIF assisted housing projects
- Construction of new housing units for low income households
When TIF funds are allocated to a private developer or firm for a specific project (as opposed to general infrastructure expenses), the terms of the arrangement are outlined in a Redevelopment Agreement (RDA). The DHED is responsible for disbursing and monitoring payments for infrastructure projects and RDAs out of individual TIF accounts
How does the City of Chicago decide who is a worthy recipient for TIF funds? How does it decide how much to give? Such questions comprise a crucial part of planning within the TIF district and yet are typically the least regulated and formalized aspect of the entire process. The City of Chicago retains a tremendous amount of autonomy and flexibility in TIF fund allocation decisions. TIF monies can be used for most kinds of projects that demonstrate financial feasibility, promise increases in property value, and reflect the City’s current planning priorities.
Redevelopment Agreements (RDAs)
The establishment of a TIF district merely creates the mechanism through which TIF funds can be collected. For TIF funds to be allocated to a private or non-profit developer and spent on a specific project, however, the City must sign an RDA. A signed RDA signals that TIF money is being given to a project that will further the goals of the TIF district. This website maps the approximate address of every redevelopment agreement that the City of Chicago has signed. (insert link here to the maps) RDAs must be approved by the CDC and the City Council (including the Council’s Finance Committee). Members of the community have the opportunity to make public comments on RDAs.
Although developers require TIF funds to get projects off the ground, it is the future stream of expected increments that are allocated to subsidize projects. How does the City commit TIF increments before they are generated?
The City relies on two primary methods of “front funding” expenditures from the expected future increments. Under the first method, the City issues debt (bonds or shorter term notes) for the total amount of the redevelopment, dedicating the expected tax increments to pay the debt service. The second method of front funding – commonly known as “pay-as-you-go” – requires the private developer to pay for the project up front. The City then reimburses the developer annually as it receives the incremental property taxes.
While the Chicago City Council votes to authorize the establishment of a TIF district, many actors are involved in the process.
Aldermen are the points of contact for end-users (e.g., private developers, non-profits) to request TIF funding from the City. Aldermen are often actively involved in shaping the objectives of TIF districts as well as the individual projects pursued with TIF funds.
Consultants work on behalf of the City to draft the TIF district plans and required studies (e.g., eligibility study, redevelopment plan, housing impact study). They may also review requests from developers to ensure that projects are financially feasible, yet would not go forward without TIF assistance (i.e., meet the “but-for” clause).
Developers initiate new construction and rehabilitation projects in TIF districts. They request TIF money to subsidize their projects and the can provide benefits like new jobs, affordable housing, and green space. Developers may also initiate the TIF designation process.
The Chicago Department of Housing and Economic Development (DHED) directs the planning of TIF districts and projects, manages the TIF district budget, negotiates with developers, and controls information available regarding TIF districts and projects.
The Chicago Community Development Commission (CDC) is composed of 15 members appointed by the mayor and confirmed by the Chicago City Council. The CDC reviews and makes recommendations to the City Council regarding TIF district proposals and RDAs.
The Chicago City Council comprises aldermen from the City’s 50 wards and votes on every TIF redevelopment plan, redevelopment agreement, and all amendments to TIF districts.
Community Organizations organize around TIF issues on behalf of community concerns and needs and occasionally propose projects seeking TIF assistance (e.g., affordable housing, parks, schools).
Elected representative of each Ward of the City of Chicago. Aldermen serve four-year terms during which they direct the use of funds within their respective wards. Aldermen may serve on special committees within the City Council.
The total EAV (equalized assessed value) of all property in the TIF at the time the TIF district is created. This value can be found on the Cook County Clerk’s website.
See also: EAV, increment
According to Illinois regulations, Properties in the TIF district must meet five of the following criteria to be considered a blighted area:
age; dilapidation; obsolescence; deterioration; illegal use of individual structures; presence of structures below minimum code standards; excessive vacancies; overcrowding of structures and community facilities; lack of ventilation, light or sanitary facilities; inadequate utilities; or excessive land coverage; deleterious land use or layout; depreciation or lack of physical maintenance; lack of community planning, are detrimental to the public safety, health, morals or welfare, or if vacant, the sound growth of the area is impaired by, (1) a combination of 2 or more of the following factors: obsolete platting of the vacant land; diversity of ownership of such land; tax and special assessment delinquencies on such land; deterioration of structures or site improvements in neighboring areas to the vacant land, or (2) the area immediately prior to becoming vacant qualified as a blighted improved area (65 ILCS 5/11-74.4-3(a)).
"But For" Provision
One of two stipulating conditions that legally allow a TIF district to be created (the other being ‘blight’). A municipality may create a TIF by providing evidence that ‘but for’ the TIF (i.e., "without the specific application of tax increment financing"), the project area will continue to experience blight.
Classes of TIF Districts
Industrial, Commercial, Residential, and Mixed-Use TIF Districts are classified by the predominant existing land uses within the district boundaries.
Chicago City Council
The assembly of elected Aldermen of all Chicago's wards, plus the Mayor. The City Council includes committees (e.g., Finance) and sub-committees composed of Aldermen.
Community Development Commission (CDC)
This body of elected officials reviews and makes recommendations to the City Council for TIF proposals.
One of two types of areas eligible to become a TIF district. Used to define an area that if not developed might become blighted. To qualify as a conservation area, half of the buildings in the area must be at least 35 years old and the area must meet 3 out of 13 criteria used to define blight.
See also: Blighted Area
Department of Housing and Economic Development
This department directs the planning, manages the budget, negotiates with developers, and control the information available.
Requests TIF money for development costs and can provide community benefits like jobs, affordable housing, and green space.
A reimbursement is when the developer gets paid back a portion of development costs through the TIF. Each TIF has a list of project costs which can be reimbursed to the developer over time.
Equalized Assessed Value (EAV)
The result of a complicated formula set by the Cook County Assessor that values a piece of property for purposes of collecting certain kinds of taxes on it. The value of property in a TIF district is usually referred to by its equalized assessed value.
See also: Base EAV, Increment
An examination conducted by a third party hired by the City to determine if each parcel within a proposed TIF district meets TIF eligibility requirements.
Finance Committee of the City Council
This is the specific committee where TIF proposals are reviewed and recommendations are made.
The amount of money remaining in a TIF fund after expenditures. The fund balance reflects the district's cumulative annual increment revenues, plus interest or ported funds, less funds applied toward any projects or expenses.
The property tax revenue that is put into the TIF district fund. The increment amount is determined by the amount of tax revenue generated in a particular year. The increment put into a TIF district each year can be found on the Cook County Clerk’s website.
The technical term for the City’s power to transfer funds between TIF districts. TIF funds can be transferred between TIF districts that are directly adjacent each other (or “contiguous”). The City cannot take funds from the Central Loop TIF, for example, and transfer them to a neighborhood TIF, nor can it take funds from a neighborhood TIF and use them downtown.
Redevelopment Agreement (RDA)
A contract between the City of Chicago and a private developer that describes a specific project to be completed within a TIF district. RDAs detail the relevant project and disclose any public subsidy to the project developer. When applicable, the RDA also states any related public benefits promised by the developer to the City in return for the subsidy.
A general roadmap for development within a TIF district over its 23-year lifespan. Every redevelopment plan includes: (1) redevelopment goals, (2) recommended land uses within the district, and (3) a budget of estimated project costs. Redevelopment Plans created with the assistance of hired consultants define the geographic area that meets the eligibility requirements set by the state’s TIF-enabling legislation.
A TIF district functions by holding constant the annual tax revenues paid to each parcel's taxing entities during the TIF district's lifetime, and instead funneling all incremental tax revenues to a TIF fund. Usually, the end goal of a TIF district is to encourage private investment within the district so as to increase property tax revenues, eliminate blight, and strengthen local economies with employment opportunities.
See also: Classes of TIF Districts
A pool of tax revenues that may be used by the City of Chicago for a variety of purposes, including assisting with development finance costs or investing in capital improvements, in order to raise property tax values within the TIF district.