Law

by Randell D. Wallace

It often happens in real estate development, once the project has been conceived and the architects and engineers have studied the concept: you run your financial analysis and, given the location of the property, you begin to doubt whether your financial goals will be realized.

Fortunately, developers can turn to two options for economic assistance Tax Increment Financing or Chapter 353. The only obstacle then lies in deciding which option is best suited to your situation.

Tax Increment Financing. With Tax Increment Financing, any increase in tax that results from redevelopment of the land is labeled as "increment" and paid by the developer. In addition, TIF captures 50 percent of economic activity taxes generated at the site, including sales, earnings and utility taxes. Those dollars are available for financing bonds or reimbursing eligible costs to the developer.

To qualify for Tax Increment Financing, a development plan must be approved and the area of land in question must be proven a blighted, conservation or economic development area. In addition, the owner must have sufficient data demonstrating that the project will not proceed without TlF, a process commonly referred to as the "but/for" test.

Chapter 353. Under Chapter 353, Revised Statutes of Missouri, a developer can receive the power of condemnation and tax abatement on a project. From a tax standpoint, the land value is frozen for up to 10 years based on the year immediately preceding acquisition by the redevelopment corporation. Once the 10-year period expires, taxes are paid at a level of 50 percent of the land and improvements for a second period of time (not to exceed 15 years).

As in the case of TIF, a development plan must be approved and the land must be blighted, to qualify for aid under 353. Also, the developer is limited to 8 percent earnings, determined over the life of the project (not to exceed 25 years).

Choosing the best option. Because of similarities in the TIF and 353 programs, make sure you have specific goals in mind before you decide which option is best for your development. Keep in mind that TIF requires payment of taxes but provides relief through reimbursement.

For example, TIF appears to be the better option when there are extraordinary expenses, such as increased costs for land preparation or major sewer and road construction. Also, TIF works better on properties with environmental cleanup issues.

Chapter 353 is better suited to projects if the major concern is not funds available for reimbursement but a reduction in cash flow. For example, Chapter 353 is appropriate for projects if the developer intends to be the occupant.

Other 353 situations include the rehab of older buildings with adequate public facilities (roads, sewers) already available, single-phase developments and residential developments in which lower taxes and lower monthly payments attract potential home buyers.

While both methods take advantage of condemnation, there is an advantage with Chapter 353 because the private redevelopment corporation can move at its own pace to complete the condemnation rather than rely on the pace of the local government.

While many developments can benefit from Tax Increment Financing or Chapter 353 assistance, there will be some instances when the end benefit is not enough to justify the costs to prepare the supporting documents for either program.

(Randell D. Wallace is an attorney with Lathrop & Gage LC. Additional information was provided by Kathy Hauser.)

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