Financing a project through future taxes

If used correctly, tax increment financing can be an effective economic development tool.

That’s according to experts who see the value in the tool, which relies on a portion of taxes from future development to repay the loan funding the development.

The method is especially helpful for large projects that need extensive infrastructure improvements, experts said.

In Bethlehem, it’s been used to fund massive projects like the Sands Bethlehem Casino Resort and the ArtsQuest Center at SteelStacks.

The city also used tax increment financing, known as a TIF, for Five10 Flats, a $20 million five-story apartment building at 510 E. Third St. that opened this year with Starbucks as its first commercial tenant.

In Lehigh County, near the border with Berks, Hillwood Investment Properties used a TIF for development of The West Hills Business Center, an industrial park in Weisenberg Township that began construction in 2013 off Interstate 78.

For the West Hills project, the TIF helped fund an estimated $15 million in public improvements to the intersection of I-78 and Route 863 – Exit 45 bridge replacement, traffic signals and turning lanes – as well as replacing the Arcadia Wastewater Treatment Plant.

Developers also used a TIF for Hamilton Crossings, a massive outdoor shopping center in Lower Macungie Township.

And in Palmer Township, Chrin Companies owns about 1,000 acres of land in what has now become an industrial park supported by TIF funding, which helped construct new warehouses and pay for construction of a new interchange off Route 33 that opened in 2015.

The TIF gives access to financing based on the future value of the improvements made to the property by the developer.

FOCUS ON BLIGHT

In Pennsylvania, a redevelopment or industrial development authority can use a TIF to promote an eligible project, which has to be in an area certified as blighted by the local planning commission, according to Lehigh Valley Economic Development Corp.

That’s typically the format that a TIF project follows in Pennsylvania. In Lehigh and Northampton counties, LVEDC forms a TIF committee with representatives of each taxing body.

According to LVEDC, the base taxes, which are the current taxes paid on the property, continue to be paid throughout the life of the TIF, which is often 20 years but can be shorter. Only the incremental taxes are used to pay debt service on the loan.

If either Lehigh or Northampton counties are considering a TIF, the Lehigh Valley Planning Commission conducts a review of the project, said Becky Bradley, executive director.

“When we look at things from a planning perspective, we look at infrastructure … Is it planned for growth in that area, is there job growth expected?” Bradley said.

The state sets the criteria for blight, and the LVPC studies the area against that definition and then gives an opinion to the involved parties, she said.

There is some gray area in the criteria of what the state constitutes as blighted, she added.

“Even though there is a definition, you have to really explain the conditions of the site,” Bradley said.

LVPC provides that information so that the parties can make a decision, she said.

Overall, TIF can be very effective, she said.

“There are definitely examples in other places where the anticipated return on the TIF is longer than it was estimated when it was first put together,” Bradley said. “That’s not uncommon.”

However, in Lehigh and Northampton counties, when projects use TIF funding, they’ve been largely successful so far, according to Don Cunningham, president and CEO of LVEDC.

Cunningham served as mayor of Bethlehem when the first TIF was introduced for the Bethlehem Sands project. In 2013, as county executive, he helped create a TIF for the West Hills Business Center.

Today, he has seen several of these projects show promise in the form of new businesses opening up, along with job growth and long-awaited infrastructure improvements. From his perspective, he thinks they work if they have three basic elements:

< The projects span a large area of land and potential users.

< There’s a tremendous need for public infrastructure to support it.

< The interested parties analyze the financials to ensure they work.

“I think TIFs are very market-based economic incentive tools when you have a large-scale project that requires a lot of infrastructure improvement in order for it to work,” Cunningham said. “They require a significant amount of public infrastructure, site prep.”

Although three taxing parties are usually involved in a TIF project – a school district, municipality and county – not all three need to take part. As an example, the Hamilton Crossings project earned a TIF without county support.

“You have to have a site that’s huge, large scale, significant,” Cunningham said. “From my view, you want to be selective. If used appropriately, it’s a good incentive tool.”

Proponents of TIFs view the funding as different from simply giving a grant, since a developer receives no money up front.

Also, if nothing were done with the site, none of the taxing bodies would receive any funds from the future taxes generated from development at the site. As another plus, the infrastructure, once it’s in place, is there indefinitely.

“It’s only a portion of future revenues that you normally wouldn’t have,” Cunningham said.

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