Regeneration: off the drawing board

In the current economic environment, even well-planned local regeneration
projects can struggle to make the costly but necessary up-front investments in
basic infrastructure, such as roads, sewers and other services. Without the
ability to attract businesses and developers, the regeneration effort falls at
the first hurdle.

But there is a financing model that has yet to take off in
the UK, but has long been popular across the Atlantic, that
could solve many of these problems. Calls for its use are
growing and some even see it being used to help the troubled Olympics project.

Tax Increment Financing (TIF) works on the principle that local tax revenue
taken from regenerated land will increase following the completion of the
TIF-funded work. Under TIF, this future revenue is made available to fund
infrastructure up front.

Early last year, 82 public bodies put in 124 bids to pilot the model. This
covered some of the largest regeneration projects identified, including the £3bn
Ebbsfleet Valley new town, the extension of London Underground’s Northern Line
and the Sevenstone development in Sheffield. The potential involvement of the
model to finance the Olympics has been mooted. Up in Scotland, the giant
Ravenscraig regeneration project would seem an ideal candidate, as might
projects surrounding the Commonwealth Games in Glasgow.
The government first committed to considering the TIF model as early as 2000.
Yet, despite support from the property industry and local authorities, there has
been little movement.

The reality behind why TIF has not been introduced is basically two-fold.
First, while the economy was ploughing ahead through the first decade of this
century and finance was readily obtainable, there was not a need to identify new
and novel funding models. The second reason is a perceived opposition by the
Treasury.

But the days of easy access to finance have now passed and there is an
appetite for any model that does not depend on the pumping in of funds, public
or private, up front.

Enabling legislation would almost certainly be desirable, if not required,
for a full roll-out of TIFs – from Westminster and Holyrood. Westminster-based
legislation would also be required to allow tax exemption on interest received
under TIF bonds.

The model, however, has faced criticism in some US quarters as being used to
finance perfectly viable, mainstream developments. If TIF is to be implemented
in the UK, its use must be carefully controlled through the development of a
suitable framework to identify deserving projects.

The acid test should be whether a project would be financially viable without
TIF. If it is, then it is difficult to justify the redistribution of tax income
to finance that scheme.

And there are other potential issues. TIF effectively sets aside a portion of
business rates for specific local use, which goes against the role of rates as a
national tax distributed pro-rata according to population. Also, rather than
creating new development and employment, there is the danger that TIF may simply
shift opportunities from another area. In either case, there is a fundamental
need to demonstrate any proposed TIF will create net benefits and tax income
which would otherwise not have existed.

Fundamentally though, and while not short-selling the complexity of such a
model, TIF should not in principle create more challenges than any other
financing model that relies on future income streams, whether from the lease of
a property, or under a pool of mortgages that support a bond issue. As always,
detailed due diligence will be key.

TIF does not offer a funding panacea, nor is it the only game in town.
However, it does potentially offer a useful mechanism for kick-starting economic
development at a time when there are few other sources of finance available.
And, 10 years on, December’s pre-Budget report commitment to simply continue
considering the model was certainly a major disappointment. Local government and
the business community are keen to take advantage of the opportunities offered
by TIF. Now is the time to move forward with pilot projects and, where
necessary, new legislation.

How tif works

The mechanism underpinning the TIF process varies. Typically though,
predicted future revenues are compared for the land with and without the
presence of a TIF scheme. The difference is then ring-fenced from future revenue
over a number of years and used to underwrite a municipal bond, issued by the
local authority and sold on the open market. It is the proceeds of this sale
which fund the TIF work.

Municipal bonds are common in the US, often linked to a tax break on interest
received. However, there are alternatives that could be used in the UK. For
example, prudential borrowing is straightforward and currently relatively
inexpensive, though it has the disadvantages of requiring the associated debt to
be serviced throughout the period of the loan.

Chris Dun is a partner in and head of the banking and finance team at law
firm Maclay Murray & Spens LLP