In recent decades, county and city governments have started offering Tax Incremental Financing (TIF) to encourage development in economically vulnerable areas. This financing technique helps local governments increase their tax base and helps developers fund projects that might not otherwise see completion—mutually benefitting both parties. At Neumann Monson, we have designed several projects that have utilized TIF. Here, we explain TIF’s requirements and explore a recent project to secure TIF, the East College Street development in Iowa City.
TIF is a public funding method that encourages urban development, infrastructure, or other projects that benefit the community. Government bodies may allocate TIF in one of two ways. First, they may offer up-front cash to fill a funding gap. Once the project is complete, the developer pays back the investment through the increase in property taxes generated by the new development. This method helped fund Plaza Towers in Iowa City, which before development, was a public parking lot that provided no tax revenue to the city. The city provided $5M in funding and earned back their investment through Plaza Tower’s property taxes.
The second form of funding occurs through tax rebates. In these situations, a municipality pledges the difference between the pre-development taxes and the taxes it expects to receive after the project is complete. The property’s tax rate is “frozen” for a specified period (usually 15-20 years), and the municipality rebates the difference between the previous and current tax rates. In short, the municipality forgoes some tax revenue to secure a project that will generate more tax revenue long into the future.
TIF plans vary based on the municipality and project. Generally, funding is only offered in economically vulnerable areas that have been deemed “TIF districts.” Even within TIF districts, municipalities may only fund projects that align with their public policy goals and may stipulate requirements for sustainability, historic preservation, or cultural opportunities. To secure funding for the East College Street development, the Tailwind Group aligned itself with each of these goals.
Funding for East College Street
The East College Street development began in 2017 when the Tailwind Group, a developer from Mankato, Minnesota, acquired the Crescent Building on Iowa City’s Ped Mall. After meeting with Neumann Monson, they decided to purchase and rehabilitate the four surrounding buildings and add a 102-unit student housing complex on the alley side of the site. After securing all other means of funding, Tailwind applied for TIF to fill a $12M financing gap.
To secure TIF, Tailwind aligned the project with the City of Iowa City’s public policy goals. The five original buildings on the Ped Mall were granted Local Historic Landmark status, saving them from future demolition. Additionally, a portion of the Crescent Building was set aside for the Riverside Theatre, a non-profit professional theatre company. In doing so, the project bolstered an already thriving downtown arts scene. As a TIF stipulation, Tailwind also aligned the project with the city’s sustainability goals. Through photovoltaic arrays and energy-efficient features, the student housing complex—named The Nest—will seek a Leadership in Energy and Environmental Design (LEED) Gold certification, the second-highest LEED certification behind Platinum.
Benefits of TIF
Tailwind’s East College Street development touches on a range of public priorities, making it an ideal candidate for TIF. In an interview with the Iowa City Press-Citizen, Wendy Ford, the City’s Economic Development Coordinator, stated, “TIF policies lay out minimums for developers to achieve; [Tailwind Group] hits all of them—and exceed on several of them, as well.”
The city will fill the $12M financing gap through a 15-year tax rebate. For the first eight years, Tailwind will receive a 100% rebate, and for the final seven years, they will receive a 75% rebate. This benefits the city by allowing the public to experience part of the property’s tax revenue sooner rather than later. As Tailwind’s development demonstrates, TIF represents a partnership between local government and private developers. By providing Tax Increment Funding, a municipality can encourage projects that enhance the public realm.