Your client, a developer, finds slow economic times disheartening. In order to make money, your client needs to develop property and/or business. Can your local government help? The answer is yes. The Illinois Municipal Code1 provides the municipality with the ability to help fund projects. As the attorney for the developer, you should be aware of some of the economic development tools inside local government’s toolbox.
Local government tools, as a whole, are incentives designed to encourage development and redevelopment, to assist local businesses and to improve the quality of life within the municipality, especially in distressed areas. Some tools the practitioner should consider include property tax abatements, business improvement districts, sales tax rebate agreements and tax increment financing (TIF).
TIF. Tax increment financing (TIF) is an economic development and redevelopment tool that generates a pool of money which is used for reinvestment within a designated area. This money is created by freezing the assessed value of property that is to be developed or redeveloped. Taxing districts (i.e. municipal, county, school, township) continue to collect property tax based upon the frozen assessed value. As property values in the TIF district increase as a result of the development, additional tax reserves resulting from increased values are placed into a TIF fund for TIF development projects. This additional reserve from increased property values is the "increment".
A TIF district must be established by the municipality2 and, once established, the increment created maybe utilized to develop or redevelop the TIF district.
Use of the TIF increment for development or redevelopment is a political process which requires finesse rather than simply a box-checking process. The developer is partnering with a local governmental entity which has, as its governing force, a group of people who were elected by the masses. The project must be good for the municipality as well as for the developer.
What is the purpose of TIF? Incremental additional tax money is available to attract, develop or redevelop private investment in areas that are "blighted" or require rehabilitation.3
Key factors in a TIF:
· A TIF district must be created in an area considered "blighted."4 This means it is an area wherein progressive and advanced deterioration of structures by the overuse of housing and other facilities exists or where a lack of physical maintenance of existing structures which could have been caused by obsolete and/or inadequate community facilities or a lack of sound community planning due to obsolete platting occurred. Another blighting factor may be manifested by the growth of a large surplus of workers who lack the skills to meet existing or potential employment opportunities. Any one or a combination of these factors may exist in the area that is to form the TIF district.
· There must be a specified and identified redevelopment project area. This may mean that an eligibility study or other background work is required by either the developer or the municipality.5
· Redevelopment project costs must also be planned.6 Again, this takes background work.
· A TIF has a maximum life of 23 years.7 It can be extended with the authority from the state legislature.
· Within seven (7) years of creation of a TIF district, development or redevelopment must begin.8
· One of the most important factors for developers is the redevelopment agreement which must be negotiated with the local municipality and which will be discussed later in this article.
· Eligible costs9 that can be considered for reimbursement from the TIF fund include the following:
1. acquisition of land,
2. demolition of buildings,
3. site preparation,
4. site improvements,
5. costs of rehabilitation, construction, repair or remodel of existing public or private buildings,
6. costs of public infrastructure or improvements,
7. costs of job training and retraining,
8. financing costs,
9. cost of studies, and/or surveys in development of plans, and
10. professional services (i.e. legal architectural engineering planning and financial).
Creating a TIF. There are two methods to initiate a TIF. The first method is municipality-initiated and the second is developer-initiated. We will focus on the latter method. In a developer-initiated model, the first step is to identify the development/project. Secondly, attractive land must be located. Third, a preliminary analysis to determine the qualifications of the property under the required TIF criteria must be performed. Fourth, the developer must approach the municipality and introduce the concept and development. And finally, a redevelopment agreement must be negotiated. The developer must understand as much as possible about the municipality and its needs in order to finesse a development agreement with preferred terms.
Analysis of the project. Among things for the developer to investigate and to consider are the following: (1) the level of desire for the project by municipal staff, board or council members, and the public including public opposition as well as the desire by other overlapping taxing districts (i.e. sanitary districts, park districts, school districts, and fire protection districts); (2) past practices of the municipality in other redevelopment agreements or incentive-type situations; (3) municipal infrastructure (i.e. sewers and streets) needs that could be addressed by locating the project within that community; (4) municipal rates for property taxes, utility taxes, the municipality’s required insurance rates, the workforce availability costs and other matters.
In analyzing the project, the developer should consider the following: (1) Is the project good for the community? (2) Will jobs be created and is there an available workforce to fulfill those jobs? (3) What type or level of tax increment can be generated by this private-public partnership? (4) Will any congestion or traffic issues arise as a result of a new development in an area? (5) Will the project create unwanted environmental effects or will the developer be required to remediate any past environmental issues on the land? (6) Will municipal services (i.e. police, fire, schools, parks and libraries) be impacted? (7) Finally, consider the impact of the development on other taxing districts. For example, if a TIF-funded program is developed to create residential units, would local school districts be eligible for up to 25% of the increment? The answer is yes in most cases. The developer may need to enter into agreements with other affected taxing districts. Such agreements may include a commitment from the developer to pay an impact fee from non-TIF resources, or to accept less increment from the municipality so that the other taxing district may benefit, or reduce any negative impact from the development. The municipality has other alternatives available to it that do not necessarily involve the developer, such as, making payments to the other taxing district in lieu of taxing, or declaring a surplus of remaining increment so that it can pay the other various taxing districts.
The municipality has other responsibilities with regard to creation of the TIF district which do not impact the developer. For example, a public hearing must be held10 and a joint review board ("JRB") must be convened.11 The JRB includes all impacted taxing districts, including but not limited to community college districts, elementary and high school districts, park districts, library districts, fire protection districts, county and township districts as well as one member from the public at large. The JRB makes a recommendation to the municipality regarding the planning documents and the development or redevelopment plan and whether the project meets the criteria set out in the statute. The municipality adopts an ordinance based upon this recommendation.
The ordinance is transmitted to the county clerk of the county within which the redevelopment project is located, along with a legal description and map of the area, a listing of the parcels included within the TIF area, and, a date determining the initial equalized assessed value.12 Then each year when taxes are paid, the county clerk determines the amount of taxes attributable to the current equalized assessed value over and above the initial equalized assessed value in the TIF area. The funds are then deposited into a "special tax allocation fund" which is created for the purpose of paying the redevelopment costs and obligations.13 Disbursements usually occur on a quarterly basis.
The Redevelopment Agreement.14 While the Illinois Municipal Code permits municipalities and developers to enter into redevelopment agreements setting out the terms of the TIF development, the statute does not specify what should be considered or included in a redevelopment agreement. Considering that this agreement is the operating agreement between the developer and the municipality, however, careful thought and consideration should be given to it. Most redevelopment agreements include the following:
1) Enabling statements which indicate that the municipality has the ability to enter into a redevelopment agreement with a private entity and that the municipality has the ability to carry out its obligations;
2) A description of the project or redevelopment plan;
3) Definitions of terms and phrases;
4) Recognition of the redevelopment plan and a commitment that the project will be developed in accordance with the plan;
5) A description of which costs will be eligible for TIF reimbursement;
6) Limitations on the amount of increment that will be available to fund the eligible costs;
7) The TIF payment process, such as a straight reimbursement, or issuance of bonds or other security;
8) Supervision and/or verification that the increment is actually used appropriately according to the Tax Increment Allocation Redevelopment Act ("TIF Act")15;
9) Required approvals by the municipality, or conditions precedent, prior to payment;
10) Any specific insurance requirements or indemnifications that may be required;
11) A commitment that all Federal, State and local laws rules and ordinances will be followed;
12) Reciprocal ability to review books and records and inspect improvements;
13) Contingencies for dealing with breach or default and any venue issues;
14) Notice requirements;
15) Provisions for any amendments to the agreement; and
16) Dates for specific actions and/or the effective date.
Keeping in mind that TIF districts must be continuous parcels of real property, would your client benefit from a TIF development? Perhaps another tool would be more beneficial for your client.
Real Estate Abatement and Sales Tax Rebates. Real estate abatements and sales tax rebates are effective tools for encouraging development as they are less expensive than the creation of TIF districts and the negotiations proceed much more quickly. In a TIF situation, the municipality has statutory compliance requirements that do not affect the developer, but which are time-consuming for the municipality. Less technical requirements exist in real estate abatement or states tax rebate situation. The developer’s attorney should take note of these two concepts when advising developers.
In order to obtain the assistance of a municipality in the area of real estate abatement or sales tax rebating, the project must comport with the "public purpose" test of the Illinois Constitution.16 This means that the funds received or abated shall only be used for public purposes. To help define what a public purpose is, the Illinois Supreme Court stated that "(t)he potential impetus to economic development within our State, which otherwise might be lost to other states with financing of this type, likewise serves the public interests. The private benefit resulting…is incidental to the public purpose and benefit to be served and there is no contravention of the constitution in this regard."17 Further, that "(t)he City’s determination to promote the commercial rebirth of its downtown area is a public purpose." 18 "It does not matter that there will be an incidental benefit to private interest."19 The theory is that "but for" the incentive to the private developer, the municipality would not enjoy the benefits of infrastructure replacement or commercial traffic into an otherwise unproductive area which results from a new development or redevelopment.
Sales Tax Rebates.20 In a sales tax rebate, the municipality will agree to rebate to the developer, a percentage of the Illinois Retailers’ Occupation Tax which it receives from the State for retail sales that occurred in the development or redevelopment area over a finite period of time. The amount of the rebate and the terms and conditions under which the rebate occurs are encompassed in a Sales Tax Rebate Agreement, also know as an Economic Incentive Agreement, which is an agreement between the developer and the municipality. Generally, the rebate period is limited to a term of years or up to a certain dollar amount.21 Rebates are paid to the developer on a quarterly, semiannual or annual basis depending on the agreed upon terms of the Sales Tax Agreement.
To qualify for a sales tax rebate, both the property itself and the developer must meet certain criteria.22 The developer must establish credit worthiness and financial strength by showing one of the following: (a) corporate debenture ratings of BBB or higher by Standard and Poor’s Corporation or BAA or higher by Moody’s Investors Service, Inc.; (b) a letter from a financial institution with assets of $10,000,000.00 dollars or more; or (c) evidence of equity financing for not less than 10% of the total project costs.23 The property must qualify in one of the following ways: (a) the property has been vacant for at least one (1) year; or (b) any building located upon the property was demolished within the last year due to either a lack of building code compliance or significant unoccupancy or underutilization for a period of at least one (1) year prior.24
The terms of a sales tax rebate agreement should include certain findings that the municipal corporate authorities are required to make25, including a statement defining the vacancy which has existed on the property, the expectation of jobs creation, expectation of tax base increases, that the project will strengthen the commercial sector of the municipality and that the project serves the best interests of the municipality. Additionally, the agreement should include terms such as the percentage or amount of rebate the developer can expect to receive, the term of years for rebate including the initial rebate date, the obligation of the developer to develop the property in compliance with municipal ordinances, and a statement that the developer will ensure that a viable business will be opened in the development, which will generate tax revenue.
Abatement of Real Estate Taxes. Pursuant to the property tax code26 and the Illinois Municipal
Code,27 taxing districts may abate taxes as an incentive to attract, maintain, or revitalize business areas. Home rule units of government (autonomous local governmental entities that do not require statutory authority for each act of government) are allowed more flexibility in this incentive program, whereas a non-home rule municipality must strictly comply with the rules set out by statute with regard to the purpose, amount and period of abatement.
There are various types of property which may benefit under the statute.28 Each type of property must meet certain criterion for eligibility in this program.29 For example, commercial and industrial properties eligible for consideration of abatement must meet one of the following criteria: (a) expansion in either the number of employees of a facility located in the taxing area or expansion of a building located in the taxing area; or (b) establishing a new business in the area by either moving into the area from another county, state or country or establishing a new business in the area by creating a newly-formed entity.30
The process for a municipality to establish a business district is much easier than the TIF process. But again this is a political decision. Does the municipality feel it appropriate to abate real estate taxes in the area? This incentive program works by initially obtaining an assessed valuation of property. Then, the governing board of the municipality adopts an ordinance that orders the clerk of the county to abate a portion of the property taxes. To qualify, the property must be less than five hundred (500) acres and the abatement cannot exceed four million ($4,000,000.00) dollars over ten (10) years.31
Although commercial and industrial revitalization is more prevalent, real estate taxes may be abated by the taxing body for the following, keeping in mind that each type of development listed below requires compliance with varied terms and conditions set out in the corresponding statute:
1) a new electric generating facility;32
2) horseracing facilities;33
3) auto racing facilities;34
4) academic or research facilities;35
5) affordable housing for older persons meaning over 55 years of age;36
6) historical society;37
7) recreational facilities;38
8) relocation of corporate headquarters;39
9) U.S. Military public or private residential development;40
10) enterprise zone;41
11) certain other types of housing;42
12) annexation agreements;43 and
13) vacant facilities, if vacant for two years.44
In real estate abatements, the amount of tax is generally reduced, not eliminated, for the particular property. Many municipalities will require a development or redevelopment agreement prior to such abatement. The amount of abatement is usually the most hotly negotiated area. The simplest method for abatement is to identify a specific dollar amount, such as $20,000, to be abated. Another method is to agree to a percentage. For example, 30% of the tax levied could be abated. The most widely used method is a combination of flat rate and percentage. In this situation, there is a guaranteed amount of rebate plus a percentage of anything over the guaranteed amount. For example $10,000 is guaranteed abated and also for any amount over $10,000, 10% is abated. By employing a mixed approach, there is a guaranteed amount available for development.
Both the Sales Tax Rebate and the Real Estate Abatement are incentives which lessen the developer’s burden, but do not create an increase of income for the municipality (although there are other benefits obtained by development of blighted areas). In trying economic times, the concept of spreading the burden may appeal to both the municipality as well as the developer. A Business Improvement District Redevelopment project may be the answer.
Business Improvement District Redevelopment. A business improvement district development or redevelopment can provide a benefit for a developer who would like to take on a concentrated or central business area.45 In this scenario, the municipality declares an area "blighted" and adopts a business district retailers occupation tax as well as a business district service occupation tax.
The retailer’s occupation tax is paid by all persons in the business of selling tangible personal items at retail in the newly created business district. The amount of tax cannot exceed one percent (1%) of the gross receipt from such sales.46 The tax is imposed in .25% increments.47 It is not imposed on certain things like food, drugs and medical appliances.
Adoption of a service occupation tax is required where a retailer’s occupation tax exists. This tax is applicable to all persons engaged in the business of making sales of service in the specific business district area. Just like the retailer’s occupation tax the service occupation tax shall be imposed at the same rate and under the same restrictions.48
Once collected the municipality may disburse funds, pursuant to a redevelopment agreement made with the developer of the property, in the form of reimbursement for
public improvements such as water main replacements, access improvements and aesthetic improvements. A good example of the use of this concept comes from Lombard, Illinois where a shopping mall had excessive vacancies and needed infrastructure improvements due to an aging development. At the request of the owner/developer, the Village designed a business improvement district and approved a 1% sales tax on all purchases that were to be derived from sales that occurred within the business improvement district after the improvements were completed. Those funds are presently being reimbursed to the developer to offset its costs to improve the area.
Conclusion. Local government can be good for business in trying economic times. A Business Improvement Redevelopment district can provide reimbursement for infrastructure improvements. Sales Tax Rebates and Real Estate Abatements assist the developer by alleviating some of the usual recurrent costs of developing an area (e.g. sales tax and real estate taxes). Through TIF, incremental additional tax money can be made available to attract, develop or redevelop areas in need of rehabilitation. Creativity and partnerships between public and private entities using the tools described in this article can make economic sense for both developers and municipalities.
1 65 ILCS 5/1-1-1 et seq.
2 65 ILCS 5/11-74
3 65 ILCS 5/11-74.4-2(b)
4 65 ILCS 5/11-74.4-3
5 65 ILCS 5/11-74.4-4.1
6 65 ILCS 5/11-74.4-2(n)
7 65 ILCS 5/11-74.1-3(n)
8 65 ILCS 5/11-74.4-4
9 65 ILCS 5/11-74.4-3(q)
10 65 ILCS 5/11-74.4-5(a)
11 65 ILCS 5/11-74.4-5(b)
12 65 ILCS 5/11-74.4-9(a)
13 65 ILCS 5/11-74.4-8(b)
14 65 ILCS 5/11-74.4-4
15 65 ILCS 5/11-74.4-1 et seq.
16 Article 8, Section 1(a) of Illinois Constitution
17 People ex rel. City of Salem v. McMackin, 53 Ill.2d 347, 291 N.E. 2D 807, 814 (1972).
18 People ex rel the City of Urbana v. Paley, 68 Ill.2D 62, 368 N.E. 2D 915, 920 (1977)
19 Id. at 921.
20 65 ILCS 5/8-11-20
21 Id.
22 Id.
23 Id.
24 Id.
25 Id.
26 35 ILCS 200/18-165 et seq.
27 65 ILCS 5/8-318
28 35 ILCS 200/18-165(a)(1)-(9); 35 ILCS 200/18-170; 35 ILCS 200/18-173; 35 ILCS 200/18-175; 35 ILCS 200/18-177; 35 ILCS 200/18-178; 35 ILCS 200/18-180; 35 ILCS 200/18-181; 35 ILCS 200/18-183; 35 ILCS 200/18-184; 35 ILCS 200/18-184.5
29 Id.
30 35 ILCS 200/18-165(a)(1)(A)
31 30 ILCS 200/18-165 (a)(1)(C)
32 30 ILCS 200/18-165(a)(1)(A-5)
33 30 ILCS 200/18-165(a)(1)(A-2)
34 30 ILCS 200/18-165(a)(1)(A-3)
35 30 ILCS 200/18-165(a)(1)(A-4)
36 30 ILCS 200/18-165(a)(1)(A-5)
37 30 ILCS 200/18-165(a)(1)(A-6)
38 30 ILCS 200/18-165(a)(1)(A-7)
39 30 ILCS 200/18-165(a)(1)(A-8)
40 30 ILCS 200/18-165(a)(1)(A-9)
41 30 ILCS 200/18-170
42 30 ILCS 200/18-163, 175, 177, 178, 180 and 181
43 30 ILCS 200/18-184
44 30 ILCS 200/18-184.5
45 65 ILCS 5/11-74.3.1 et seq.
46 65 ILCS 5/11-74.3.6(b)
47 Id.
48 65 ILCS 5/11-74.3.6(d)
Ann Marie Lampariello-Perez is with the law firm of Lamp Law LLC, concentrating her practice in municipal law and criminal law. Ann Marie received her undergraduate degree from Loyola University of Chicago in 1986 and her law degree from Chicago-Kent College of Law in 1990. Ann Marie served as a DuPage County Assistant States Attorney from 1990-2001 and as an in-house Assistant Village Attorney for Downers Grove from 2002-2008. Presently, Ann Marie serves as the Assistant Village Attorney for Westmont and Big Rock. Ann Marie acknowledges Hank Stillwell and Tracy Kasson for their guidance and review of this material.