The primary tool used by DURA to finance redevelopment efforts is tax increment financing (TIF). Through TIF, the incremental new tax revenues generated by a redevelopment project are used to fill the gap between private financing and the total cost of a redevelopment project.
The new development made possible by a TIF investment can create significant new tax revenue, but the revenue will be generated 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 from the TIF revenues generated by the project. Bonds supported by TIF are not guaranteed by the city or DURA.
Under this financing mechanism, the existing level of property and/or sales tax collections in a project area is set as a base, and an estimate is determined for the new future level of tax revenues expected to be generated. The difference between the base and the expected level of increased taxes collected as a result of the redevelopment project constitute the “tax increment.” The base continues to be paid to the existing taxing entities, while the increment is used for a specified period of time to pay off the bonds or to reimburse the developer. Once the incremental taxes generated have paid for the gap in financing, typically over a period of not more than 25 years, the local taxing entities have new, permanent sources of revenue that would not have existed if the project had not been undertaken.
DURA works cooperatively with other taxing entities, such as school districts and special districts whose jurisdictions include a proposed urban renewal project, to manage the impact this financing tool might have on their delivery of services.
The amount of TIF varies from project to project. In order to determine the level of TIF funding a project is eligible for, DURA typically uses the lesser of three amounts—the financing gap, the TIF capacity of the project (how much sales and/or property tax increment it is expected to generate) or the eligible costs.
The length of the period in which TIF may be used in a redevelopment project is tailored to each specific project. The maximum length of a TIF project area is 25 years, but many have shorter durations.
Taxing entities such as Denver Public Schools and special districts continue to receive all the tax revenues they were receiving the year a redevelopment project was begun (the base year). Over the long term, they benefit from the redevelopment project and the tax increment financing process because once DURA’s financial obligation has been repaid they begin to receive all the tax increment created by the redevelopment that DURA had been using to repay bonds or to reimburse development costs.
While there is no increase in tax rate in an urban renewal project, increased property values do often result in increased property tax revenue.