Kentucky adopted its current tax increment financing statute in 2007 at the beginning of the financial crisis. A significant number of TIF Act projects representing new capital investment totaling billions of dollars have been approved for pledges of local and state taxes since 2007, including the Western Kentucky University Gateway Project in Bowling Green; three separate University of Louisville research projects; the Centrepointe, Red Mile and 21c Hotel projects in Lexington; Ovation in Newport; and the Ark Encounter Project in Williamstown.
“Tax increment” refers to the increase in tax revenue a project creates as a result of higher valuations for property taxes, new or higher occupational taxes from new jobs, plus increases in local and state sales and income tax payments due to new or growing business activity. Tax revenue increases in the project area are counted from pre-development baseline.
Most developers in Kentucky are generally aware of TIF. However, they may not know how TIF can be used to assist with the financing of a project.
Additionally, the TIF Act allows a city or county to designate a project “local development area” (for undeveloped property) or a “development area” (for redevelopment of property that meets certain factors of “blight”), and use a portion of the new tax dollars generated to promote new development within that area’s bounds. Cities, counties and special districts (except school and fire districts) may pledge up to 100 percent of increased occupational taxes revenue (business licenses and payroll taxes) and real property taxes for up to a 30-year period to be an incentive to promote new projects or assist with the development of the TIF area.
The TIF Act defines the types of projects eligible for TIF incentive assistance very broadly. Basically, any project – residential, commercial or industrial – that contributes to economic development or tourism may be eligible for TIF incentives. Additionally, local tax revenues pledged to a TIF area may be used broadly to pay for project costs (including the private costs of development) or to provide redevelopment assistance to that area.
Beyond those local tax pledges, the Kentucky TIF Act uniquely permits projects that meet certain requirements to seek a pledge of 80 percent of the incremental increase in state sales taxes, income taxes from employees and real property taxes for a 20- or 30-year period, depending on the size and scope. Project costs recoverable with state TIF revenues are generally limited to site development costs and costs to build approved public infrastructure related to or required for the project such as parking, utilities, streets and public spaces or amenities.
Projects that qualify for state TIF designation normally must be in a development area that exhibits certain blight factors, though TIF Act exceptions do allow certain areas that are undeveloped or not blighted to be development area eligible for state tax revenue pledges.
TIF financing may support bonds issued to pay for certain elements of a project, such as parking, or to reimburse capital and financing costs for a project annually as incremental local or state tax revenues are generated over time.
TIF may be used in conjunction with other development incentive programs, such as New Market Tax Credits, historic tax credits and Kentucky tourism development incentives. For instance, the WKU Gateway Project in Bowling Green utilized local and state TIF incentives combined with New Market Tax Credits; and the 21c Hotel Project in Lexington’s capital stack included local and state TIF incentives, New Market Tax Credits, historic tax credits and a HUD Section 108 loan, along with conventional bank financing.
Developers who may be interested in exploring whether a TIF incentive could assist their project should consider TIF or other potential incentives during the planning stage – before they start construction or expend capital dollars. Once the project is started or the developer is committed to undertaking the project, there is no reason a local government or the state would agree to an incentive, and the project then may not be eligible.
James E. Parsons is an attorney with Taft Stettinius & Hollister LLP in Covington.