Tax Increment Financing Example of TIF Use
Tax Increment Financing
An Example of How TIF is Used:
A developer is considering building an office building. The city would like to redevelop a site that consists of three parcels of property (parcels A, B, and C in the figure below. Parcel A is vacant and parcels B and C contain substandard commercial buildings. Parcel D contains a building in good shape. Construction of the office building will require demolition of the two buildings, new utilities (sewer and water), and closing an alley. The cost of acquiring the property, demolishing the substandard buildings, and putting in the utility and alley improvements is $1.5 million. However, the developer could obtain a comparable site elsewhere in the area for $500,000, including special assessments for utilities. The three parcels have a tax capacity of $24,000 and pay $33,600 a year in property taxes (at a 140.000% tax rate). But if developer builds the planned $5 million office building, the tax will rise to $304,000 per year (an increase of $280,000).

To encourage the developer to build on the site, the city designates a project area and creates a TIF district that includes the development site. The district consists of parcels A, B, C, and D (the shaded area). (Parcel D must be included to permit the site to qualify as a redevelopment district under state law.) The district is illustrated in Figure13.01 – 4 (below). The city agrees with developer to acquire the site, demolish the substandard buildings, and put in the utility improvements and vacate the alley. The city, in turn, sells the site to developer for its market value of $500,000. This is commonly called "writing down" the cost of the land. The city's $1.5 million cost is "written down" to $500,000. (The city could write it down to zero--in effect, giving the land to developer.) The computation of the increment is shown in the table. The "project area" is the area in which increment may be spent (e.g., if some of the sewer and water improvements may actually be outside of the district). The extent to which this may be done is restricted by the rules on "pooling." 
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