Determining the Need for Financial Assistance

Once a plan is in place, the next step is determining if the project requires financial assistance. There are generally four questions DURA asks when assessing whether or not a given project warrants assistance – Is the planned redevelopment feasible? Is there a financing gap? Is there a reasonable expectation that the marketplace could affect an appropriate redevelopment on its own? And, are the incremental taxes that are expected to be generated by the site sufficient to close the identified financing gap?

The “But for…” Analysis

Even when the proposed redevelopment of a blighted property is a desirable outcome, it is important to make sure that the proposed project requires financial assistance before DURA agrees to provide TIF. Determining whether or not a project needs assistance is sometimes called the “but for” analysis, as in “But for DURA’s assistance the project will not happen.” The “but for” analysis helps to insure that the public investment in the project is minimized while still allowing the project to move forward.

In determining the “but for”, DURA looks at the ability of private financing institutions to loan money for the project, as well as the expected return on private equity invested in the project, to understand whether or not there is a financing gap that the private sector cannot reasonably be expected to cover. In general, there are three types of situations where it is appropriate for DURA and the City to assist in closing a financial gap —

When conditions on the site make private market rate redevelopment impossible

Examples:

When the cost of needed environmental remediation far exceeds the value of the remediated property such that privately financed redevelopment is virtually impossible.
When the perceived risk of investing in a blighted area is so high that redevelopment cannot be privately financed.
When a large parcel (decommissioned Air Force base, vacated hospital, etc.) lacks the major public infrastructure necessary for redevelopment consistent with City plans for the area.

In situations like these, property will remain underutilized or vacant, bringing down property values in the surrounding area and shifting the cost of providing public services to other taxpayers – and the use of TIF in a public-private partnership to offset the additional/exceptional costs of redeveloping such sites is a sensible investment.

When conditions on the site make the timing of market rate redevelopment uncertain

Examples:

When redevelopment/revitalization of an area is critical to the health of the city (downtown, regional corridors, etc.) but market uncertainty limits pioneering private investors’ willingness to invest.
When failure to redevelop an area is harmful to the health of the city or surrounding area and waiting for the market will exacerbate the situation.

In situations like these, the risk associated with investing prevents redevelopment of important areas of the city – and the use of TIF in a public-private partnership to accelerate redevelopment of critical sites is a sensible investment.

When conditions on the site are such that the likely market rate redevelopment outcome is not desirable.

Examples:

When the cost of rehabilitating an historic structure exceeds the costs/benefits associated with demolishing it and building a new structure.
When land prices in critical areas (downtown, etc.) are so high that the inclusion of valued land uses (affordable housing, open space, etc.) are prohibitive.
When the land uses the market can support are contrary to the vision and goals laid out in City plans.

In situations like these, what the market is expected to deliver may have exigent costs that run contrary to the sound growth and development of the city – and the use of TIF in a public-private partnership to improve development outcomes on critical sites is a sensible investment.

When the use of TIF is limited to situations like these, the public can be assured that its investment is just that, something that will reap tangible, sustainable benefits (safety, quality of life, fiscal, etc.) in the long run. And, in the short run, it helps to insure that these projects pay their own way – because if, but for the TIF investment the projects would not happen, then but for the investment the new/incremental taxes generated by the redeveloped site would not exist either.

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Determining the Need for Financial Assistance

Ability of TIF to Close the Identified Financial Gap

Once it has been determined that a project warrants assistance and the financial gap has been identified, the next step is to insure that TIF is able to close that gap. To do this, DURA must determine what is sometimes called “the lesser of three,” because DURA seeks to assist with an amount equal to the smallest of:

The amount of the identified financing gap
The amount of net new/incremental taxes generated by the redeveloped area
The amount of TIF eligible costs in the developer’s budget -> by statute TIF can only be used to pay for certain costs associated with a public purpose. Examples include environmental remediation, site-wide improvements, utilities, publicly accessible parking, life/safety measures, etc.

Obviously in situations where numbers 2 and 3 are smaller than 1, the project cannot proceed until additional sources of assistance are identified.

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