Tax Increment Financing For Housing Programs

IACT Presentation

September 25, 2006

4531572 Barbara A. Lawrence, Executive Director The Indianapolis Local Public Improvement Bond Bank Jim Treat, Partner O.W. Krohn & Associates Tom Pitman, Partner Baker & Daniels LLP

Similarities and Differences Between "Regular" TIF and HoTIF

2

Similarities

• Both types of areas are created by, and governed by, a Redevelopment Commission • Both types of areas are created by a process that includes: – A Redevelopment Commission declaratory resolution and approval of a Plan – Plan Commission approval? (statute unclear) – Legislative body approval – Tax Impact Statement 3

Similarities

(continued) – Notice of Public hearing by Redevelopment Commission – Redevelopment Commission public hearing and adoption of confirmatory resolution – Notice to DLGF

Notice

– Notice to County Auditor – Recording of Resolutions with County Recorder 4

Similarities

(continued)

Exception:

For HoTIF, before submitting a housing program to the Redevelopment Commission, the Department of Redevelopment is required to: • Consult with persons interested in or affected by the housing program; • Provide affected neighborhood associations, residents, and township assessors with an adequate opportunity to participate in an advisory role in planning, implementing, and evaluating the housing program; and • Hold public meetings in the affected neighborhood to obtain the views of neighborhood associations and residents!

5

Similarities

(continued) • How TIF is Measured – Both types of areas measure TIF by multiplying the Incremental AV by the rate • Effect on Other Taxing Units – Both types of areas capture only incremental AV 6

Differences

•

Required Features of Area

–

"Regular" TIF:

After the redevelopment plan or economic development plan is completed, the Redevelopment Commission passes a Declaratory Resolution which describes the "area needing redevelopment" (a new term in the statute that replaces the prior term "blighted area") or economic development area, makes this area an allocation area, adopts a plan of redevelopment or economic development and makes required statutory findings 7

Differences – "Regular" TIF

(cont'd) An "area needing redevelopment" is defined in IC 36-7-1-3 as an area in which normal development and occupancy are undesirable or impossible because of: • • • • • • • • Lack of development; Cessation of growth; Deteriorated or deteriorating improvements; Character of occupancy; Age; Obsolescence; Substandard buildings; or Other factors that impair values or prevent a normal use or development of property 8

Differences – HoTIF The Redevelopment Commission must make the following findings:

• Not more than twenty-five (25) acres of the area included in the allocation area has been annexed during the preceding five (5) years and no area within the allocation area has been annexed within the preceding five (5) years over a remonstrance of a majority of the owners of land within the annexed area 9

Differences – HoTIF

(cont'd) • The program cannot be accomplished by regulatory processes or by the ordinary operation of private enterprise because of: – the lack of public improvements; – the existence of improvements or conditions that lower the value of the land below that of nearby land; or – other similar conditions • The public health and welfare will be benefited by accomplishment of the program 10

Differences – "Regular" TIF

(cont'd) • The accomplishment of the program will be of public utility and benefit as measured by: – the provision of adequate housing for low and moderate income persons; – an increase in the property tax base; or – other similar public benefits • At least one-third (1/3) of the parcels in the allocation area established by the program are vacant 11

Differences – "Regular" TIF

(cont'd) • At least seventy-five percent (75%) of the allocation area is used for residential purposes or is planned to be used for residential purposes • At least one-third (1/3) of the residential units in the allocation area were constructed before 1941 12

Differences – "Regular" TIF

(cont'd) • At least one-third (1/3) of the parcels in the allocation area have at least one (1) of the following characteristics: – The dwelling unit on the parcel is not permanently occupied – The parcel is the subject of a governmental order, issued under a statute or an ordinance, requiring the correction of a housing code violation or unsafe building condition – Two (2) or more property tax payments on the parcel are delinquent 13

Differences – "Regular" TIF

(cont'd) • The total area within the county or municipality that is included in any allocation area established for a housing program does not exceed one hundred fifty (150) acres 14

Differences

•

Components of Plan

–

"Regular" TIF:

The Redevelopment Commission, utilizing city or county personnel and/or outside consultants, must prepare a redevelopment plan or economic development plan that will provide evidence to support the findings that the Redevelopment Commission must make by statute, describe the redevelopment or economic development activities to be undertaken, and provide other information required by statute or the Department of Local Government Finance TIF regulations. The preparation of the redevelopment plan or economic development plan will probably take several weeks.

15

Differences

(cont'd) –

HoTIF:

Same as for “Regular” TIF, but Plan must include a housing program •

What Property is TIF-able

–

"Regular" TIF:

Incremental, non-residential real property (except for certain older TIF areas, which permit residential); in some cases, incremental personal property –

HoTIF:

Incremental real property (including both commercial and residential). (Note: HoTIF area can overlap with regular TIF area.) 16

Differences

(cont'd) •

Permissible Number of TIF Districts

– –

"Regular" TIF:

No limit.

HoTIF:

No limit, but only one bond financing may be used to pay the cost of a particular “housing program” (except for refunding or "completion" bonds) 17

Differences

(cont'd) •

Uses of TIF Revenues

–

"Regular" TIF:

Must be used for redevelopment (or economic development purposes) –

HoTIF:

This may be used only for purposes related to the accomplishment of the program, including the following: • The construction, rehabilitation, or repair of residential units within the allocation area 18

Differences

(cont'd) • The construction, reconstruction, or repair of infrastructure (such as streets, sidewalks, and sewers) within or serving the allocation area • The acquisition of real property and interests in real property within the allocation area • The demolition of real property within the allocation area 19

Differences

(cont'd) • To provide financial assistance to enable individuals and families to purchase or lease residential units within the allocation area. However, financial assistance may be provided only to those individuals and families whose income is at or below the county’s median income for individuals and families, respectively.

• To provide financial assistance to neighborhood development corporations to permit them to provide financial assistance for the purposes described in the above 20

Differences

(cont'd) •

PTRC

– –

"Regular" TIF: HoTIF:

requirements: Must pass resolution to deny.

Must pass resolution to grant, with additional • That the money to be collected and deposited in the allocation fund, based upon historical collection rates, after granting the credit will equal the amount payable for contractual obligations from the fund, plus ten percent (10%) of those amounts • If bonds (or lease rentals to pay bonds of a lessor) payable from the fund are outstanding, that there is a debt service reserve for the bonds that at least equals the amount of the credit to be granted 21

• •

Tax Increment Financing for Housing Programs

22

Tax Increment Financing

Practical Tips

(cont'd) • Partner with strong developer – Experience with urban redevelopment projects – Effective marketing plan (welcome center, web site, model homes) – Able to secure builders with take down commitments – time tables and improvement values must be reliable – Request certification letter for data relied upon in financial projections – Monthly progress reports on status of lot sales and development 23

Tax Increment Financing

Practical Tips

(cont'd) • Grant Funds – HUD Homeownership Grant – consulting fees, property acquisition, engineering, architectural, urban design, appraisals and title work – Other federal grant money provided down payment assistance to mainly low/moderate income households to stimulate initial demand 24

Tax Increment Financing

Practical Tips

(cont'd) • Establishment of Base Assessed Value – Work closely with Auditor’s Office to ensure their understanding of base for a HoTIF – Review parcel level detail after the area is set up to verify 25

Tax Increment Financing

Practical Tips

(cont'd) • Estimating Value of Improvements – Market costs from developer – Meet with Assessor for guidelines on assessed values – Fall Creek experience showed a wide variety of results within one development; average gross AV was 78% of market value – Rehabs pose additional challenges but in Fall Creek Place resulted in highest values 26

Tax Increment Financing

Practical Tips

(cont'd) • Property Tax Replacement Credit (PTRC) – Taxpayers in the HoTIF do not receive the benefit of general PTRC on the captured AV – The RDC may elect annually to grant an additional credit equal to PTRC, however, the following specific findings must be made to do so – Estimated TIR after granting of PTRC must be 110% of obligations payable from HoTIF 27

Tax Increment Financing

Practical Tips

(cont'd) – If there are bonds or leases payable from HoTIF, there must be a debt service reserve in place that is a least equal to the amount of PTRC – There must be assurance that all obligations of the allocation fund can be met if the credit is granted since it is lost revenue to the TIF area – PTRC is applied to the net assessed value (after adjustment for the Homestead Deduction and Mortgage Exemption) 28

Tax Increment Financing

Practical Tips

(cont'd) – Estimates of tax increment revenue with and without the credit must be prepared to verify that the revenue is sufficient if the credit is granted – Circuit breaker may be a factor depending on the assumed gross tax rates 29

Tax Increment Financing

Practical Tips

(cont'd) • Property Tax Abatements – Provides another tool for stimulating early sales – Amount of abatement was increased in 2004 to the lesser of the assessed value of improvements or $74,880 for a single family dwelling – Findings made must support the designation of a residentially distressed area as defined in IC 6-1.1-12.1-2 which focus upon the character and condition of the area (parcels consist of vacant land or dwelling units not permanently occupied, evidence of significant building deficiencies, area experienced net loss in dwelling units) 30

Tax Increment Financing

Practical Tips

(cont'd) – Abatement is for no more than five years and requires the property owner to file a deduction application with the Auditor’s Office annually – Represents a significant deduction from assessed value; must ensure that impact on revenue does not adversely affect bond obligations – Fall Creek Place limited eligibility to those properties with building permits issued in the first year of the development 31

Tax Increment Financing

Practical Tips

(cont'd) • Other Deductions and Credits – Homestead deduction in 2003 was raised to the lesser of $35,000 or one-half of gross assessed value; maximum dollar limit raised to $45,000 for pay 2007 only – Mortgage exemption provides an additional $3,000 reduction in assessed value for qualifying property owners 32

Tax Increment Financing

Practical Tips

(cont'd) – Homestead Credits are also applied to the net tax liability for parcels which receive homestead deductions; these credits do not impact TIF since they are replaced by the State, however they may benefit the HoTIF in the case of parcels which would otherwise exceed the circuit breaker limitation 33

Tax Increment Financing

Practical Tips

(cont'd) • Conservation Assumptions – Key assumptions impacting tax increment revenue calculations should be conservative – Timing – when properties are acquired; sold; developed/improved; assessed and captured; roll off of abatement if applicable – Projected tax rates – Lot sale proceeds 34

Tax Increment Financing

Practical Tips

(cont'd) • Bonding Considerations – HoTIFS generally have the same capacity, structure options and risks as traditional TIF areas in terms of issuing bonds – Bonds are issued to fund the cost of redevelopment, property acquisition and local public improvements that benefit the TIF area – Bonds are secured by property tax revenue from captured assessment or by a special benefits tax levied in the redevelopment area or a combination (i.e. TIF with property tax back up) 35

Tax Increment Financing

Practical Tips

(cont'd) – Some or all of the projected revenues to repay the bonds will come from future development that has not yet occurred at the time bonds are issued – There can be a significant delay from the time bonds are issued, improvements are constructed, assessed and begin generating TIR • HoTIFS may have special financing risks – The area includes many smaller parcels rather than a few – Underwriters and insurers are less familiar with HoTIFS 36

Tax Increment Financing

Practical Tips

(cont'd) • Interim financing through Bond Anticipation Notes (BANs) may be a way of funding up front costs and public improvements before the issuance of permanent financing 37

HoTIF Real Life Examples

•

Fall Creek Place

– Begun in late 90’s: “Dodge City, because of crime, decay and blight – Federal dollars and local initiative – $4 million Home Ownership Zone grant , local investment – Vacant lots, abandoned and dilapidated homes were acquired, new streets, sidewalks, lighting, utilities, and trees were installed, and special financing packages were assembled for homebuyers – Today, more than 400 new families join many long-time residents in calling the neighborhood home. In less than five years the neighborhood has changed from having the highest crime rate in the city to one where you can always find families pushing strollers or walking dogs.

– So popular and successful that Phase 4 is underway 38

Real Life Examples

2364 N. PENNSYLVANIA STREET Fall 2000 Fall 2004

39

Real Life Examples

NORTHEAST CORNER 25 TH STREET AND PENNSYLVANIA STREET Fall 2000 Spring 2004

40

Real Life Examples

2364 N. PENNSYLVANIA STREET Fall 2000 Fall 2004

41

Real Life Examples

25 TH STREET AND PENNSYLVANIA STREET Fall 2000 Spring 2004

42

HoTIF Real Life Examples

•

Near Eastside HoTIF

– Part of Mayor Peterson’s Great Indianapolis Neighborhoods Initiative – Replicate success of Fall Creek Place – Notes issued for streets, sidewalks, trees, property acquisition – Upfront work with other taxing units, schools – Partnership with the neighborhood 43

Tax Increment Financing

More Practical Tips

• Team approach – Neighborhood Associations – Other taxing units – Financing team • Share vision and goals – Dream big – Project conservatively – Tell the story!

Role of the Auditor 44

Tax Increment Financing

More Practical Tips

(cont'd) • Political challenges: The Much Maligned TIF • Understand and appreciate political sensitivity • Redevelopment Commission • Small bites at the apple: interim financing • Grants to Community Development Corporations • Public bidding laws • Project Management 45

Tax Increment Financing

• Questions?

• Answers!

46