Tax Increment Financing Districts
Tax increment financing districts, often referred to as TIDs or TIFs, are used to increase economic development to an area, provide an opportunity for developers, as well as increase property tax revenue to counties, cities, and schools, which in turn, can benefit citizens. This article will not address the legal requirements of TIDs, but rather focus on the accounting for such.
A common example of a TID is a housing development. In this scenario, a City will pay for the infrastructure, such as water/sewer lines and roads, and the developer will bid the project and hire a contractor to complete the work. In turn, the City is indebted to the developer for its portion of the infrastructure costs unrelated to the actual homes being built within the development. This is referred to as a developer-financed TID.
Under the same housing development example, it is also possible for the City to obtain traditional bank financing and pay for their portion of the infrastructure costs or even borrow from other funds within the City. In this scenario the City is indebted to a bank or other funds within the City. This is referred to an entity-financed TID.
The accounting for TIDs can oftentimes lead to confusion. Each TID different from another. Regardless of the type of financing within the TID, the terms should be explained within the project plan, which will cover whether payment amounts will fluctuate as property taxes are collected, or whether a specific, set amount is required, as well as the frequency of payments, interest, etc.
The confusion with a developer-financed TID stems from the difference between what a developer might owe the bank for his/her costs relating to the development vs. what the City owes the developer for just its portion of the infrastructure. For example, a housing development will cost a developer $2 million to construct, but $1 million of such relates to water lines, sewer lines, and roads. In this example, the City is indebted to the developer for $1 million. The developer is responsible for determining how to fund the $2 million project, whether from external bank loans or cash reserves. The City collects the portion of increased property taxes applicable to the TID area and remits them to the developer, generally upon collection from the County throughout the year. Thus, payments cannot be made to the developer until homes are constructed within the development and property taxes are collected on such homes. If the development has homes built right away, the City will make payments to the developer sooner. In a development with slow growth, developers will not receive payments from a City, but most likely will be required to make payments on its external debt.
With entity-financed TIDs, whether from bank or internal financing between funds, these agreements tend to require regular payments, regardless of whether related TID property tax revenues are received. Again, keep in mind that the terms vary amongst each TID and no one TID looks like another.
Per South Dakota Codified Law, TIDs expire after 20 years. Thus, a City is no longer required to make payments to a developer after the 20-year mark and any remaining debt is written off the City’s general ledger. Once a TID has been paid off or reached 20 years, the property tax revenue related to the TID should be included in the general property tax revenue allocation to the City, County, and School Districts.
Please contact Shelley Goodrich or Traci Hanson on any further questions relating to this topic and governmental accounting.