Tax Increment Financing - a lifeline for regeneration?

10/10/2011

By Richard Ellard, Partner in Commercial Property & Development.

With reductions in public spending the UK is facing significant challenges to deliver economic growth.

Infrastructure development

Although  the private sector is the primary generator of jobs and growth, it relies on the public sector to create conditions for business activity in particular through infrastructure growth.

The UK currently ranks only 34th in the world for its infrastructure, spending just 1.5% of GDP compared to 6% spent by Japan and 3% spent by France. The Organisation for Economic Co-operation and Development states that infrastructure development should be one of the three top priorities for the UK.

Last year, as a means of tackling the challenges facing the UK, the Government announced proposals to allow local authorities in England the power to raise finance against predicted growth in their locally raised business rates - Tax Increment Financing (TIF).

Tax Increment Financing - how it works

TIF can offer a solution for regeneration projects which depend on the delivery of infrastructure for which funding cannot be found. TIF allows upfront money to be raised by committing revenues which would not have arisen but for the project going ahead to be used to repay that initial investment.

The idea is that the local authority borrows money from public or private sources to pay for infrastructure on the basis that the increased business rate revenues generated by the scheme can be used to repay the initial investment.

TIF is tried and tested in the USA and is simply based on the concept that a developed site creates more tax than an undeveloped site.

New legislation is required to implement TIF in the UK, but several local authorities have already identified schemes they consider to be suitable for TIF. TIF will not work for all developments, but may help some up to now stalled projects proceed.

Although there are questions that need to be answered - who bears the risk if a project is not completed on time? What if revenues are less than predicted? Will lending banks require guarantees? - TIF could provide much needed investment at a time when raising capital by conventional means is difficult.