Tax Increment Financing

Tax Increment Financing (TIF) is a public finance tool used by municipalities to leverage new property taxes generated by a specific project or projects within a defined geographic district. Any portion of the new taxes generated in the area may be used to finance the project(s) for a term up to 30 years.

The Program is locally-driven: the municipality, town, or city defines the district and chooses how much of the new taxes will be dedicated to public and private projects over what period of time, with the whole package requiring local approval.

Additionally, a municipality may provide payments of TIF revenue to a developer/property owner through a Credit Enhancement Agreement (CEA).

In simple terms, Tax Increment Financing (TIF) is a way for local governments to fund development projects in a specific area by using the future increase in property taxes generated by that development.

Here's how it works:

1. Define a TIF District: The town designates a specific area that needs improvement (like a struggling neighborhood or vacant land) as a "TIF district."
2. Establish a Baseline: When a TIF redevelopment project area (often called a TIF District) is created, the value of the property in the area is established as the “base” amount (i.e., the current property value and the taxes collected from that area are determined and considered the "base value").
3. Invest for Improvement: The municipality or a developer invests in improvements within the TIF district (e.g., new infrastructure, building renovations).
4. Capture the Increment: As a result of these improvements, property values in the district go up, and the property taxes collected also increase. The difference between the original base tax revenue and the higher revenue is called the "tax increment."
5. Fund the Project: This tax increment is then used to pay for the improvements made in the TIF district, either by paying back bonds issued to cover the upfront costs or by funding new projects as they arise.

A TIF does not capture the existing taxes generated within an area, only the new taxes generated by new development at an incremental level for up to 30 years. All assessed real property values captured in a TIF District are added to the general tax rolls at the end of the TIF term.

 

 

At the beginning of a TIF district's existence, the valuation for all property (land and buildings) within the district is recorded by the Tax Assessor. This number becomes the base amount of property tax value also known as the Original Assessed Value (OAV). From that point forward, if a property within the TIF district increases in value the dollar difference between the OAV (base) and the new value is called the "increment."

When tax dollars are collected, those incremental dollars are set aside into a special TIF fund. The TIF fund can only be used for projects and programs identified in the proposed TIF program as eligible expenditures authorized by state statute. Before any TIF funds can be spent, the town's elected officials must approve proposed expenditures at a Town Meeting.

Towns can only pay eligible expenses with TIF funds, such as:

• Specific road and utility work
• Bonds issued by the Town as part of a large infrastructure project
• Staff expenses overseeing TIF projects
• Economic development activities, and
• Credit Enhancement Agreements (“CEAs” are payments to investing businesses)

TIF funds CANNOT be used for schools, libraries, or general Town government expenses.

The new value in a TIF District is sheltered from the municipality's State Valuation and directly affects important areas of municipal finance, such as:

• How much of a State education subsidy the municipality receives
• How much a municipality pays in county taxes
• How much of a portion a municipality receives as subsidy from State revenue sharing

With a designated TIF District, the Town can “shelter” the increase in municipal valuation that development in the District will bring about. This tax shift benefit mitigates the adverse effect that the District’s increased assessed property value would have on the Town’s share of state aid to education (depending upon the application of applicable formulas on the Town), municipal revenue sharing and its county tax assessment (minimizes potential increases). 

No – actually, TIFs can create money for schools.

First, schools continue to receive all the tax revenue they were entitled to before the creation of the TIF district.

Second, under most circumstances, a school's state aid is greater when a school district overlaps a successful TIF district. The incremental growth in property values is excluded from the property tax base when the state calculates the amount of aid it should award to a school district.

Third, the property tax revenue generated from private development attracted by a TIF designation is truly "new" money. Without TIF, development would often not occur and the tax increment would not be produced. Not only would new tax money not be generated but also the area itself may   remain economically stagnant.

Fourth, when the TIF district expires, the tax increment that had been used by the municipality to pay off the redevelopment costs is returned to the “general fund” tax rolls and available to schools and other local taxing bodies

TIFs do not determine what is developed in the area—zoning does. Land use regulations and State law also determine what owners can and can't do with their property in specific areas of town. TIFs do not impact or change the possible uses or types of development.

The TIF application to the State requires the Town to provide a projection of potential new valuation that could occur in a TIF district during a specified timeframe, which could be as long as 30 years. The future valuation is often based on the current zoning of the specified area to be included in the district. This estimate of development potential is used to calculate the likely “shelter benefit” in a TIF district. This is an estimate, not a plan, and is not in any way a regulatory tool. In the case of the proposed Dunstan TIF, the estimate was based on an assessment of existing zoning by consultants in 2013-14. Since the zoning has not changed, that estimate was used as a theoretical buildout scenario in an effort to project the potential for creation of new taxable property.

The application also includes what's called the "Development Program". The Development Program outlines how revenues collected within the TIF will be spent, with specific uses such as environmental or roadway infrastructure, or water and sewer. They aim to align with the priorities outlined in the Comprehensive Plan, considering fiscal wellbeing, housing diversity, conservation, traffic impacts, and more.

A Credit Enhancement Agreement (CEA) is a financial agreement, often used within a Tax Increment Financing (TIF) district, that helps compensate a developer or business for approved development project costs using TIF funds. Essentially, the agreement outlines how a portion of the incremental tax revenue generated by a new investment will be used to pay for specific project expenses. A CEA is often used to reduce credit risk and improve a borrower's creditworthiness, ultimately leading to better terms for debt financing. This is achieved by providing additional security to lenders or investors, often through mechanisms like guarantees or insurance, which can lower interest rates and make debt more attractive.

A CEA agreement is a negotiated agreement between a business (often a developer) and a municipality. It outlines how future tax increases generated by a specific project within a designated area (the TIF district) will be used to support the project's development or associated public improvements.

• Outlines the goals of project
• Defines roles and responsibilities
• Provides transparency
• Encourages and promotes use

TIFs alone retain all taxes from new assessed value in dedicated Town accounts that can be used for a variety of purposes as permitted by statute and approved in the Development Program. In most cases, operating expenses and capital costs are covered with TIF revenues, thereby offsetting costs that would otherwise be covered by general fund tax dollars. Within a TIF district, a town may choose to establish a Credit Enhancement Agreement (CEA) with a specific developer, in which a percentage of property taxes from new development would go toward specific uses (like public infrastructure). In that scenario, instead of the Town paying directly for infrastructure, the developer pays for it. The CEA reimburses the developer for a portion of that investment over time. A town may also use a CEA to offset extraordinary development costs incurred by a developer, making a specific site more attractive.

It is up to the community whether or not to create a CEA in a TIF—the CEA is not automatic. The Town has a formal, rigorous, and public-facing process in place to establish CEAs. The developer requesting one must prove the various benefits to the Town and the financial needs necessitating the consideration of a CEA being granted for the new construction project to be financially possible. 

A TIF district is a specific geographic area identified for commercial growth and expansion, or an area identified as blighted and in need of rehabilitation. A development plan is created that outlines the project objectives and public purpose. A  financial plan details the financing mechanism for the improvements, the duration of the program, and how the revenues from the captured valuation are to be used.

TIFs can be used to encourage further business investment and assist in job creation and job retention. When improvements are made within the district and value increases, the difference between the original value and the new value is called the “captured value,” and property taxes generated by that captured value are used to support the development project.  In 1993, an amendment to the TIF statute allowed Credit Enhancement Agreements (CEAs). CEAs permit the “captured” property tax dollars to be directed to the business doing the development.

When a town realizes an increase in valuation created by a new investment it also experiences a reduction in its share of state revenues and an increase in county taxes for property not located in a TIF district. However, through its designated TIF districts, Scarborough shelters the new valuation from the calculations of state revenue sharing, education subsidies and county tax assessments. Sheltering this new property value within a TIF district avoids the reduction in state revenue sharing and education subsidy and increases in county taxes due to the investment.

The Town of Scarborough invests in economic development and affordable housing through the State’s Tax Increment Financing (TIF) District program, as a means of maximizing potential from new growth and development in town. These economic development opportunities are a way for the Town of Scarborough to fund projects in a fiscally responsible way. The projects are determined by need in the community and sometimes in response to infrastructure needs from the development happening within the TIF district.

Scarborough’s Current Tax Increment Financing (TIF) Districts & Credit Enhancement Agreements (CEAs):

Economic Development TIF Districts:

1.      Downtown Omnibus TIF

• CEA: Crossroads Holdings (The Downs)
• CEA: Oak Hill Senior Housing (Jocelyn Place)
• CEA: Avesta US Route One (Village Commons)

2.      Haigis Parkway TIF

3.      Business Office Retail (BOR) Zone TIF – concluded FY25

Affordable Housing TIF Districts:

1.      AVESTA Southgate TIF

• CEA: Avesta Southgate

2.      Bessey School I TIF

• CEA: Bessey School

3.      Bessey Commons II TIF

• CEA: Bessey Commons II

A Credit Enhancement Agreement (CEA) within a Tax Increment Financing (TIF) district is a contract between a municipality and a developer or business that uses a portion of the incremented tax revenue generated by the development project to pay for certain project costs. Essentially, it's a way to leverage the increased tax base from the new development to help finance the project's infrastructure or other development expenses.

Before a TIF District can be established, the following must occur:

• Town Council review and endorsement
• Public Forums
• Public Hearing 
• Town Council approval
• Economic and Community Development - Commissioner approval

No. The Downs is not a TIF District. The Downs developers (Crossroads Holding LLC) entered into a Credit Enhancement Agreement (CEA) with the Town of Scarborough. The Downs project is within the Downtown Omnibus TIF District. The Downtown Omnibus Municipal Development TIF district was established in 2018 in order to help accomplish the goals of Scarborough’s Downtown Redevelopment Plan. The designated area encompasses the municipal campus in the center with Oak Hill to the north and The Downs to the south. It also includes a small section of Route One in front of the municipal campus.

In Maine, TIFs and CEAs involves various types of performance reporting, specific data reporting by designated businesses, post-construction reports, annual reports to local councils, and reporting to relevant state agencies like DECD or MaineHousing, all while adhering to established policies and guidelines. Municipalities that utilize TIFs, report on the financial transactions related to these districts as part of their overall financial reporting.

For the Town of Scarborough, the Assessor compiles and reports the captured value and revenues associated with each TIF district annually. This information is then published in the annual Tax Commitment report. Additionally, the Assessor also compiles and reports the cumulative totals over time for the economic development DECD TIF Districts and Affordable Housing TIF Districts in the Tax Commitment Report.

TIF districts in and of themselves do not promote growth. Rather, they allow the Town to gain the most financial benefits from the State and County if growth does occur in the designated TIF area. All property tax revenues from pre-existing assessed value still goes into the general fund to support any budgeted Town and School needs. If new assessed value is created, the new value is "sheltered" from State funding formulas. If growth does not happen in the TIF districts, there is no benefit nor detriment to the town, but if there is new construction, the Town is poised to benefit. Lastly, the Town Council ultimately determines how much of the property tax revenue from the new value goes into the general fund, and how much goes into TIF revenues. This “capture rate” can be changed at any time by the Town Council throughout the life of the TIF.

The uses for TIF funds are numerous and broad. The proposed uses are outlined in the budget document every year and undergo the same public-facing process as all other proposed expenditures before Town Council approval. Some recent uses of TIF revenues have been covering debt service for the Public Safety Building and Gorham Road improvements, and funding capital expenditures for infrastructure and recreational projects. The items that are funded through a TIF would fall to the general fund if not paid for through the TIF. TIFs are anticipated to remain a significant tool for managing the Town's tax rate in the coming years.