How Tax Increment Financing (TIF) Works

How Tax Increment Financing (TIF) Works

When DURA partners with a private developer and provides assistance to help finance redevelopment of a blighted property in Denver, the principal tool it uses is tax increment financing or TIF.  TIF is a mechanism to capture the net new or incremental taxes that are created when a vacant or underutilized property is redeveloped and use those revenues to help finance the project.  In the example below, the assessed value of a vacant manufacturing site was only $900,000 in 2005 and that the property generated approximately $50,000 for taxing entities such as the City and County of Denver and Denver Public Schools at the time.  The value associated with the property’s original use is called the Base Valuation and the revenue generated by it will always be paid over to the original taxing entities throughout the term of the TIF Area.

Enlarge Sample TIF Calculation

Then, in 2006, DURA approved the creation of the XYZ Urban Renewal Area and agreed to provide TIF to help finance infrastructure, open spaces, and historical preservation to assist with redeveloping the site.  As a result of its redevelopment into XYZ Village, a mixed-use, mixed-income development, the assessed value of the property more than quintupled to $5 million and in 2008, the property was generated more than $380,000 in property taxes.  With Tax Increment Financing, DURA is able to capture the net new / incremental increase in revenue (in this case, $300,000) and the original taxing entities continue to receive (appreciation-adjusted) revenue as if the site were still a vacant manufacturing site ($80,000).

Enlarge Tax Increment Financing

The example used here is for property tax, but a similar approached can be use to capture sales tax as well.  Under state statute an urban renewal authority can capture and pledge these incremental revenues for a period of up to 25 years.  In practice, DURA captures these revenues only until the identified financing gap associated with the project has been satisfied or 25 years, whichever is less.  The chart below shows how, over time, TIF can be a powerful tool for financing difficult urban infill projects.

Bonds versus Reimbursement
The new development made possible by a TIF investment can create significant new tax revenue, but as shown in the chart above, the revenue will be generate and collected over time.  Thus there is not any revenue available at the inception of the project when the development costs are being incurred.  In order for the project to progress, money must be borrowed or invested up front and be repaid over time.  There are two principal ways in which this is done – DURA can agree to reimburse the developer or DURA can issue TIF bonds.

When DURA agrees to reimburse the developer, the developer must borrow or invest equity to pay the eligible project costs and use the pledged TIF revenues as collateral and source of repayment for the bank or the investors.  If DURA issues TIF bonds, the bond proceeds are used to pay for project costs and the bonds are repaid form the TIF revenues generated by the project.

The decision about which of these approaches to take is a function of project size and the relative efficiency of each financing method.  Since the actual amount of TIF revenue that the project will generate is a function of numerous variables, including the success of the project itself, there is risk associated with incurring this debt regardless of who issues it.

After the Obligation Has Been Paid Off
Once DURA has repaid the TIF obligation it incurred to finance the project or projects within the urban renewal area, the incremental revenues will be available to the original taxing entities from that point forward.  This results in a win-win-win situation in which the blight has been eliminated, the obligation fully repaid, and the tax base significantly increased.

< Financial Assistance Back to Main

redevelopment & dura

Translate This Page

The Denver Urban Renewal Authority (DURA) offers language translation by utilizing Google's free translation service. While it's common to find some imperfections in these translations, the service provides easy access to translation in several different languages at no expense. If you have any specific questions or would like to speak with someone in Spanish, please contact DURA at 303-534-3872.