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US firm capitalises on TIF experience
Published: 2010-05-24 13:28:26
"One thing we know for certain: done well and done right, TIFs work."
That's according to Greg Stype, partner at international law firm Squire, Sanders and Dempsey. He is a tax increment finance (TIF) specialist who has been involved in more than 50 TIF projects.
His firm has worked on hundreds of TIF schemes in the US, where TIF is regularly used as a vehicle to finance infrastructure for regeneration schemes using future projected tax streams as collateral to raise finance for upfront funding.
As the UK takes its first steps towards implementing TIF-based schemes, Stype identified some useful US lessons for SocInvest. Some were relevant to the framers of legislation; others relate to project scoping and implementation.
"Legislation needs to be flexible," he began, "and it needs to be enabling."
US experience shows that setting broad parameters for TIF projects is far preferable to over specifying, advised Stype. Where US legislation has been too prescriptive there are examples where it has failed to anticipate the scope of public infrastructure development needs.
Stype cited one mixed-use scheme where originally unanticipated parking facilities needs called for a work-round for the project to be TIF qualifying since parking space was not eligible under the regulations. In this case, the developer had built new roads and these were bundled in to raise finance through TIF.
When it comes to practical considerations risk, and risk allocation between public and private partners, are significant issues. "Most TIF projects run out 20 to 30 years," said Stype. The problem with any vehicle that depends on future tax revenues over this time scale is making realistic assumptions, not just about tax revenues, but also levels of tax rates."
How much of the US practice is transferable to the UK remains to be seen. In the US either developers or city authorities can be prime drivers of TIF schemes and either may shoulder the majority of the risk. In many cases, municipal bonds are the favoured means for raising finance against anticipated TIF revenues. Whether bonds, prudential borrowing or other methods of raising finance will be sanctioned in the UK has yet to be finalised. Regardless of the financing mechanism, there will be a need for risk analysis.
"The smart approach is to be financially conservative with revenue projections," said Stype.
There are other risks to be managed. Not least around construction. "Until you build, there's nothing to drive the TIF revenue," he added. Where developers shoulder this risk, there is always the danger that bank finance can be withdrawn or bankruptcy derails the project. "There are government lending programmes in the US and TIF projects are often tied into these rather than relying on private finance," said Stype.
While experience has shown that it pays to develop contractual arrangements that take into account contingencies for transferability of rights and project responsibilities over the life of the project that is not the only requirement.
"For both the development phase and the revenue payback, you need to develop trust between the parties to lock them in for the long term."
Greg Stype and Stephen Nelson, partners, Squire, Sanders and Dempsey, will be hosting a lunch-time discussion session on US TIF lessons for the UK at SocInvest 2010 on June 16.