article
Jump-starting regeneration
10 July 2009
Local authorities struggling to fund regeneration may be able to
kick-start projects through a new scheme based on lending secured
against predicted increases in tax revenue. The scheme, known as
Tax Increment Financing (TIF), would allow councils to borrow money
from private sector investors and secure the loans against the
expected increase in business rates generated by improving the
local area.
Constraints on public spending due to the recession and the
downturn in the property market have significantly reduced the
amount of money available for regeneration. Local councils are
shelving projects and traditional funding sources are no longer
readily available. MPs on the all-party Urban Development Group
have therefore recommended the TIF scheme as a way to ensure that
redevelopments can still go ahead.
The TIF mechanism
Tax Increment Financing allows local authorities to grant
‘bonds’ to private investors which are secured against anticipated
increases in business rates tax revenue as a way to secure
investment in public projects. This avoids the need for councils
themselves to find the money upfront to fund regeneration.
Revenue from business rates tends to increase as a result of
redevelopments. This is because housing developments and urban
renewal make the local area more attractive leading to an increase
in the rateable value of commercial property. The extra tax
generated is the ‘tax increment’ and is used to pay back loans from
investors. Currently, business rates are paid direct to the
Treasury, but under the TIF scheme the additional tax revenue from
designated local areas would be ring-fenced and paid back to
investors. The interest on loans paid to investors is likely to be
tax exempt.
TIF could be used for a wide range of projects, including
affordable housing, new roads and cleaning up contaminated land.
Leeds City Council is currently exploring the potential for
redeveloping a former manufacturing area in the Aire Valley that
has gone into decline. The project aims to regenerate brownfield
land and improve the nearby river and canal. The Council has
secured £32 million of public money but this leaves a funding gap
of £250 million. It is projected that the extra business rates
generated through a TIF scheme would be around £289 million over 13
years, more than covering the shortfall.
Pros and cons
Local councils favour TIF schemes because they make projects
possible which would otherwise have stalled due to lack of public
funding. TIF promotes regeneration without councils having to fork
out upfront, and money can be raised without having to use general
revenues, capital reserves or funding from central government with
conditions attached.
Private sector partners are also more likely to invest in TIF
projects because they can secure their investment against tax
recouped and claim a tax exemption on loan interest. Local
residents are likely to see a rise in the value of their properties
after redevelopment and local businesses will benefit from
increased trade as more people move into the area.
TIFs are not without their risks. If the predicted additional
tax revenue is not as high as expected, investors will not be able
to recover the full amount of the loan they made. It may also take
up to 25 years for enough tax to be generated to pay off loans.
There is also concern that TIF schemes may be used for areas
where redevelopment would happen anyway, such as those on the edge
of central business districts. This would mean that the extra tax
generated is used up paying off loans, rather than being available
as revenue.
The TIF method has also been accused of encouraging favouritism
for politically connected developers and other associated parties
whom some people believe are more likely to be granted bonds by
local councils.
The US experience
TIF was first introduced in California in the 1950s and became
popular in the US by the 1970s. The scheme has been successful and
is used by many states. Illinois introduced TIF around 30 years
ago, and it is a sign of the programme’s prevalence that this one
state now has over 900 schemes, of which 130 are based in
Chicago.
However, despite its popularity, there can be problems with TIF.
One issue is that where areas have been regenerated, this often
leads to increased service needs which have to be paid for by local
residents through higher local taxes. The scheme has also been
criticised for attracting development to certain areas at the
expense of other parts of a city. There is also concern that
councils often designate areas as part of TIF schemes which do not
benefit from the redevelopment.
The criteria which make an area eligible for a TIF scheme are
also contentious. For example, in Wisconsin in 1999 a new
industrial park and Wal-Mart centre were built after an area was
designated as in decline because one, single house in the district
was uninhabited. The system has therefore been criticised for
allowing local authorities to use a definition of ‘derelict’ which
is too wide. One of the reasons suggested for the loosening of the
criteria is that councils know that developing an area where
property prices are already high will generate even more extra tax
in the long-run.
The administrative costs of TIF schemes can also be high. In the
US, the process has a number of stages and typically involves an
eligibility report, financial analysis of the feasibility of the
project and a detailed redevelopment plan.
New taxing powers
The new Business Rates Supplement Act passed earlier this month
has given local authorities the power to levy higher business rates
on certain properties to raise money for public projects. Under the
Act, councils can charge up to 2p more per £1 of business rates to
pay for new housing and infrastructure schemes. The levy would
apply to commercial property with a rateable value of over £50,000
and local business would be able to vote on whether or not to
accept the proposed supplements. The CBI says that the right to
vote is important to ensure that the extra tax is applied to
projects that are economically sound. The London Crossrail is one
project that will be funded by supplemental business rates, but
businesses will not be allowed a vote on this scheme.
Grass roots support
The TIF scheme has its advantages and disadvantages. However, in
a recession it is vital that regeneration continues and new funding
streams are found. The parliamentary Urban Development Group wants
the Government to pilot the new TIF programme in England in up to
six local authority areas, with a view to introducing a national
scheme in 2011. Local councils across the UK, including Birmingham,
Leeds and Manchester, have recently submitted proposals for TIF
schemes to the Treasury. Wandsworth Borough Council has also
requested a TIF scheme to develop Battersea Power Station. The
Chancellor is expected to announce which programmes will get the go
ahead in the pre-budget report in November.
This article was first published in Estates Review
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