Tax Increment Reinvestment Zones/ Tax Increment Financing Best Practices for Cities

Transcription

1 Tax Increment Reinvestment Zones/ Tax Increment Financing Best Practices for Cities October 5, 2017 TXP, Inc. (512) phone

2 Austin Dallas El Paso Fort Worth Grapevine Irving Laredo McKinney Palestine San Antonio San Marcos Recent TXP TIRZs/PIDS/TRZs Project Experience z 2

3 Economic Context Economic growth more rapid in Texas and its major urban areas that elsewhere, although the oil recession has slowed the economy in the recent past. Strong population in-migration continues in the state s major urban areas, especially I-35 Corridor. Historically low interest rates, perceptions of a bright economic future, and uncertainty related to the prospects for alternative investment options led to a real estate boom in many Texas markets in the wake of the recession 3

4 Economic Context (cont.) For example, the average price of a home sold in the Austin MSA rose 52% from and San Antonio climbed 40.4% during the same period. Longview and El Paso, by contrast, rose 10.6% and 4.4%, respectively. Taxable values for non-residential uses have also risen sharply in many markets. Total market value of taxable property in Texas was $2.1 trillion in 2010 rose 28.6% to $2.7 trillion in

5 Fiscal/Econ. Dev./Political Context Cost of providing local public services has risen faster than other costs over the past ten years: Municipal Cost Index (MCI) rises 22.9%, CPI increases 17.4%, and PPI is up 11.5% from July Public continues to believe (facts to the contrary) that they are over-taxed and under-served, a view often exacerbated by political rhetoric. Net effect is that rates are effectively capped (either by statute or politically). Competition for relocations and expansions has accelerated both within and between regions. 5

6 Fiscal/Econ. Dev./Political Context (cont.) Economic development incentives are increasingly seen as corporate welfare. Developers remain aggressive about asking for public assistance, with tools such as Public Improvement Districts (PIDS) assuming greater popularity in many projects. Translation of all of the above is continued interest in special-purpose districts, including TIRZ/TIF. 6

7 What Are TIRZs/TIFs? A tool local governments use to finance public improvements and infrastructure within a defined area Future tax revenues from each participating taxing unit can be used to pay for improvements The additional tax revenue that is received from the properties is referred to as the tax increment Each taxing unit can choose to dedicate all, a portion of, or none of the tax increment Cities or counties initiate tax increment financing 7

8 What Are TIRZs/TIFs? Taxable Value Tax Increment Captured Appraised Value General Fund Revenue Tax Increment Base Creation of TIRZ Time Termination of TIRZ 8

9 Is it a TIRZ or a TIF? Chapter 311 of the Tax Code Tax Increment Financing (TIF) Act Tax Increment Reinvestment Zone (TIRZ) Refers to the geographic area created under Chapter 311 of Tax Code Cities can have multiple TIRZs The terms are often used interchangeably to describe value capture 9

10 No increase in tax rate dedication of the incremental tax revenues Creation initiated by governing body or property owner petition Cities can allocate sales tax increment Provide additional funds for identified projects Aligns benefits and resources Keeps pace with rising construction costs Reduce need for other tax borrowings Off-balance sheet funding TIRZ/TIF Characteristics 10

11 What Conditions Enable a TIRZ/TIF? The area s present condition must substantially impair the city or county s growth, retard the provision of housing, or constitute an economic or social liability to the public health, safety, morals or welfare. The area is predominantly open or undeveloped and, because of obsolete platting, deteriorating structures or other factors, it substantially impairs the growth of the city or county; 11

12 What Conditions Enable a TIRZ/TIF? (cont.) The area is in or adjacent to a Federally assisted new community as defined under Tax Code Section (b); or The area is described in a petition requesting that the area be designated as a reinvestment zone. The petition must be submitted by the owners of property constituting at least 50 percent of the appraised property value within the proposed zone. 12

13 A municipality may not create a TIRZ under at least one of the following conditions: More than 30% of the property in the proposed reinvestment zone (excluding publicly-owned property) is used for residential purposes, or Total appraised value of taxable real property in the proposed reinvestment zone and in the existing reinvestment zones exceed either: For cities with a population of 100,000 or more : 25% of the total appraised value of taxable real property within the city and industrial districts, or For cities with a population of less than 100,000: 50% of the total appraised value of taxable real property within the city and its industrial districts. TIRZ Characteristics 13

14 Existing TIRZs in Texas 14

15 Eligible Capital Costs Acquisition and construction of public works, public improvements new buildings, structures, and fixtures Acquisition, demolition, alteration, remodeling, repair or reconstruction of existing buildings, structures, and fixtures Remediation of conditions that contaminate public or private land or building; Preservation of the façade of a public or private building Demolition of public or private buildings Acquisition of land and equipment and the clearing and grading of land 15

16 Other Eligible Project Costs Financing cost Real property assembly cost Professional service cost Imputed administrative cost Relocation cost Organizational cost Interest before and during construction and for one year after completion of construction, whether or not capitalized Cost of operating the reinvestment zone and project facilities 16

17 1. Prepare a preliminary reinvestment zone financing plan 2. Publish the hearing notice at least 7 days before hearing 3. Hold a public hearing 4. Governing body designates zone by ordinance or order Create Board of Directors Participating taxing entities are represented on Board 5. Prepare project plan and financing plan 6. Collect the tax increment Steps to Creating a TIRZ/TIF 7. Board of Directors makes recommendations to the governing body 17

18 Typical Project Team for Value Capture Projects Legal Public hearings, Ordinance and orders Agreements with other jurisdictions Engineers Infrastructure costs Public improvements Economists/Market Analysts Tax revenue forecast Market demand scenarios % of M&O and I&S (one or both) to allocate to TIRZ Reality check to protect public sector 18

19 Order or Ordinance Creating TIRZ Should Include Description of TIRZ boundaries Designation of Board of Directors Statement that TIRZ starts immediately Termination date of TIRZ TIRZ name Creation of tax increment fund Findings that the improvements within the zone will significantly enhance the value of the taxable property within the zone and will be of general benefit to the city or county, and zone meets designation requirements 19

20 Project Plan Should Include A description and map showing existing uses and condition of real property within the zone and proposed uses of that property Proposed changes to zoning ordinances, the master plan of the city, building codes or other municipal ordinances or subdivision rules and regulations of the county A list of estimated non-project costs A statement of the method for relocating persons who will be displaced, if any, as a result of implementation of the plan 20

21 Finance Plan Should Include Detailed list of the estimated project costs of the zone All public works or public improvements to be financed Finding that the plan is economically feasible Estimated amount of bonded indebtedness to be incurred (if applicable) Estimated time when related costs are to be incurred Description of the methods for financing all estimated project costs and the expected sources of revenue Current total appraised value of taxable real property Captured appraised value of the zone during each year Duration of the zone 21

22 Common Issues The boundaries of an existing TIRZ may be reduced or enlarged by ordinance or resolution of the governing body that created the zone The governing body that designated a the TIRZ may extend the term of all or a portion of the zone A taxing unit other than the municipality or county that designated the TIRZ is not required to participate for the extended term Can alter the percentage or amount of increment Can amend project and finance plan 22

23 Termination of a Reinvestment Zone The termination date designated in the original ordinance or order designating the zone The earlier or later termination date designated by a subsequent ordinance or order adopted under Section (c) of the Tax Code The date on which all project costs, tax increment bonds and interest on those bonds are paid in full 23

24 TIRZ/TIF Projects & Financing Typical Expense Categories Infrastructure Improvements Streetscape Enhancements Economic Development Grants Administration & Implementation Common Financing Strategies Pay as you go Reimburse developers and landowners Chapter 380 grants or loans Debt financing (city initiated TIRZ) 24

25 An Additional Structure: Transportation Reinvestment Zone (TRZs) A range of factors contribute to local government challenges in transportation funding: Little or no direct funding from the State; Projects which cannot sustain tolls; Continued growth in demand for overall local services; Political pressure to not raise taxes, which has contributed to relatively high levels of debt; and, Legal constraints (such as counties being unable to issue TRZ debt) 25

26 Transportation Reinvestment Zone (TRZs) What are Transportation Reinvestment Zones? Innovative tool for generating value capture funding Initially created and authorized by Senate Bill 1266 in Modified in 2011 by State Legislature which significantly improved the use of TRZs Allows a city or county to designate an area around a transportation project and capture the increase in property tax revenues for use in connection with the construction financing A city or county may contract with a public or private entity to develop, redevelop, or improve a transportation project in a TRZ and can pledge and assign all or a portion of the TRZ revenues to that entity. Term of TRZ is equal to term of outstanding obligation(s). Maximum term for debt obligations is 40 years. Transportation projects include roads, bridges, rail, etc. 26

27 Transportation Reinvestment Zone (TRZs) Need for new transportation capacity exceeds funding capacity from traditional sources State gas tax politically can t be increased; Local municipalities have limited debt capacity and little appetite to raise taxes; Many roads not toll viable; Existing TXDOT programs have hit their funding capacity. Result has been a push to use local sources that don t require general obligation debt: Value capture is a key element that has been used in several projects Politically, value capture impacts fewer people than broad-based taxes like sales and gas taxes, and those who are affected stand to benefit directly from the investment, making it an easier sell. 27

28 Example TIRZs Large Master Planned Development Significant greenfield acreage Multiple land owners More than one taxing entity participating Complex infrastructure needs Ex. Las Colinas (Irving) Corridor Development/Redevelopment Multiple landowners Focused on redevelopment and underutilized parcels Typically just city or county participating Ex. Broadway Corridor (San Antonio) 28

29 Example TIRZs Site Specific Land owned by one developer Large catalytic tenant (ex. destination big box retailer) Heavy retail focus (often to fill local gaps) Better upfront idea of TIRZ costs Common in suburban cities Infrastructure Focused Older and inadequate infrastructure big impediment Multiple landowners Focused on redevelopment and underutilized parcels Ex. Waller Creek (Austin) 29

30 TXP s Top Ten TIRZ Questions 1. Does the plan clearly articulate its goals and explain how development will occur? 2. Are the infrastructure improvements prioritized? How do they fit with the CIP? 3. Is the plan flexible so that it can adapt to changing market conditions? 4. Will the participating public sector entities provide some initial funding or seed capital while the TIRZ builds up tax revenue increment in the early years? 5. How will the participating public sector entities respond to requests for tax abatements or incentives that would take money away from the TIRZ? 30

31 TXP s Top Ten TIRZ Questions 6. Should the TIRZ be pay as you go or contemplate debt? 7. What percent of the tax increment should be allocated to the TIRZ? 8. Will the city consider allocating both property tax and sales tax to the TIRZ? 9. How long do the participating public sector entities want to keep the TIRZ in place? 10. Does the TIRZ project plan reflect community priorities and have community support? 31

32 Emerging TIRZ Trends & Issues Many older TIRZs are coming to an end cities trying to determine if zone should be extended or ended How to manage TIRZ ending impact on the effective tax rate? How to phase out increment over a few years? Combining TIRZs and Public Improvement Districts (PID) PIDs can create positive short-term cash flow Mixing traditional economic development goals with community development priorities Eg. affordable housing as part of a new development 32

33 About TXP TXP, Inc. is an economic analysis and public policy consulting firm founded in 1987 in Austin, Texas. TXP offers a full-range of economic analysis and forecasting services to public and private clients. TXP, Inc South 1st Street, Suite 105 Austin, Texas (512) phone 33

34 Tax Increment Reinvestment Zones/ Tax Increment Financing Best Practices for Cities October 5, 2017 TXP, Inc. (512) phone