Over the years, the Pittsburgh region has been noted for its transformation from a former industrial region to one of the new high tech centers in the country. To aggressively continue this transformation, governmental authorities on both state and local level offer incentives to qualifying entities to base their operations in the region to generate growth and employment. The incentives range from grants to low interest financing, to tax incentives. These incentives are available through various vehicles including, but not limited to, PA Opportunity Grant Program offering grants to spur job-creating economic development opportunities; Commonwealth Financing Authority offering loans to investments in real estate projects to provide gap financing; PA Economic Development Financing Authority providing low-interest financing to business through the issuance of tax-exempt bonds; Tax Incremental Financing (TIF) and Local Economic Revitalization Tax Assistance Act (LERTA). Initiation of the these incentives is not limited to forward thinking agencies but is strongly influenced by a forward thinking developer.
Coupled with these regional programs are various Federal Tax incentive programs providing reductions or elimination of certain Federal taxes for qualifying expenditures in economically disadvantaged areas, as well as tax breaks related to hazardous waste clean-up, job creation for certain employment groups, scientific development, and alternative energy source investment and development.
Although the breadth of these economic incentives is far too great for the space allotted in this publication, several above incentives have created large economic growth in the area, but are still generally not understood by the development community as readily available for use as a development tool by developers, rather than governmental avenues of development. These incentives are TIF’s and LERTA’s, which have allowed for revitalization of the former LTV site allowing for the construction of the University of Pittsburgh Medical Center, Pittsburgh Steelers training facility, and a major office and retail complex, as well as conversion of the Hot-Metal Bridge for vehicular and pedestrian traffic. The former USX Homestead Works has also benefited from TIF allowing for the development of the Waterfront Project.
What is TIF?
A TIF is a district authorized by the Tax Incremental Financing Act on June 11, 1990 in which one or more local taxing bodies contribute all or a portion of new tax dollars generated by a real estate development in the district to finance infrastructure and other costs directly related to the development. The goal of such an arrangement is to alleviate blighted and sub-standard areas, develop new employment opportunities, increase the tax base, and improve the general economy for the communities involved in the TIF district. Eligible TIF projects include commercial, industrial and residential developments. Costs associated with the development that are eligible for TIF funds, include land acquisition, infrastructure improvement, capital costs for construction, rehabilitation, repair of publicly-owned infrastructure located outside the TIF district which are a direct benefit to the project, financing costs and professional service costs.
Creation of a TIF district must follow a detailed procedure. The Act provides that an industrial and commercial development authority or redevelopment authority may exercise any powers necessary to carry out the purposes of the Act. The authority will propose the tax increment district boundaries, prepare the project plans and implement provisions of the plan, issue the tax increment bonds, maintain the tax increment fund for the purpose of receiving and reallocating local tax dollars, and disburse tax increment funds to pay for project costs. The procedural steps include:
- Authority Presentation. The Authority, and in some instances, the developer in conjunction with the Authority, makes a formal presentation to the taxing bodies within the proposed TIF district. The presentation includes the proposed boundaries of the district, development plans, tax impact, etc.
- Taxing Body Representative. Each taxing body, should it wish to participate, designates by resolution or ordinance, a representative to further meet with the Authority to discuss the project plan and increment financing. The passage of such a resolution does not obligate the taxing body to ultimately become part of the TIF financing program.
- Authority Recommends Plan. Once there is tentative agreement among the participants on the major issues, the Authority will recommend the boundaries of the tax increment district and submit recommendations to the local governing bodies.
- Municipal Hearing. The Act provides that the municipality that contains the proposed development area creates the TIF district. Even though a municipality creates the tax incremental district, it is under no obligation to participate.
- Taxing Bodies. There are three taxing bodies– the county, the municipality and the school district– and one or all of the entities could agree to participate or not participate in whole or in part in the tax increment district. However, the financial viability of a TIF project depends on participation. Formal action must be taken by each of the taxing bodies to participate or not participate prior to a public hearing to be held by the municipality.
- Municipal Approval. A minimum of three weeks must pass after the public hearing before the municipality can formally create the tax increment district and a project plan.
- Tax Increment Base. Upon creation of the TIF district, the tax increment base is established. The base is essentially the aggregate market value of all taxable property within the TIF district as of the date that district is created. The establishment of the tax increment base is a critical issue and should be agreed upon prior to the approval of the TIF district since the taxing bodies will retain the taxes assessed on the tax increment base throughout the term of the TIF.
Developer’s Role. Although the creation of the TIF district is done by governmental agencies, the developer serves an important behind the scenes role in creating the impetuous for the District and momentum in moving the process. The Developer also provides comprehensive data relevant to the project and other economic impact analysis, including economic projections over the life of the project, justification for the need for tax increment funds, and delineation of the number of new jobs to be created–including the type of job and anticipated wage levels. The developer also specifies the amount and allocation between private and public monies required for the project.
The Local Economic Revitalization Tax Assistance Act (LERTA) 72 P.S. §4722 et seq. provides for an exemption from local real estate taxes for certain industrial, commercial or other business property. Under LERTA, any taxing authority may exempt from taxation in whole or in part the assessed valuation of improvements to certain properties for a period of up to ten (10) years.
LERTA creates a real estate tax exemption for deteriorated or blighted property. The terms “deteriorated” or “blighted” normally are given a very broad interpretation. LERTA exempts from real estate property taxes the assessed valuation of improvements for new construction to deteriorated properties (72 P.S. §4725(a)). The local municipality designates the area covered by the exemption. The ultimate land use is always determined by local municipal zoning and land use regulations. The real estate tax exemption is specifically limited by the Statute to these additional assessments (72 P.S. §4726(b)(3)); therefore, the Act does not permit exemption on the original assessed value prior to improvements.
As with a TIF, the developer is a key behind-the-scene player in assisting in defining the scope of the development, its parameters, and substantiation for the establishment of a LERTA district. While the benefits of such a district may appear to be focused a single private entity, creation of the LERTA must have greater goals.
To establish a LERTA, certain detailed steps must also be accomplished, in which the local municipal taxing authority must hold a hearing for purposes of affixing the boundaries for the “deteriorated property.” At the hearing, the local municipal taxing authority must take into account the criteria set forth in the Statute for defining a deteriorated area. A resolution must then be adopted by the taxing authority which sets the boundaries of the deteriorated area, the cost of improvements to be exempted, and a schedule of taxes to be exempted. The adopting resolution can be dependent upon a coterminous taxing authority likewise adopting a similar exemption.
There are two methods for determining the assessment which will be tax exempt: (1) the actual cost of new construction or improvements; or (2) any maximum cost uniformly established by the taxing authority. The first method would have no “cap”. The second method could stipulate a stated maximum cost which would be exempt, with any costs over the maximum being assessed and taxed. If the latter method is used, the maximum cost must be uniformly applied to all eligible deteriorated property within the local taxing authority’s jurisdiction.
The actual amount of taxes exempted as a result of the Assessment Exemption Schedule are subject to the following limitations: A) the time period for tax exemption cannot exceed ten (10) years; B) the Tax Exemption Schedule must stipulate the portion of new construction or improvements to be exempted each year; and, C) the exemption of taxes is limited to the additional assessment valuation.
Although a TIF and LERTA are governmental actions, a hands on developer who takes a leadership role in moving a development to fruition in cooperation with local government can greatly influence the process in order to assist in seeing that needed infrastructure and other development costs are reduced or paid for with tax dollars to benefit both itself and the community.