Taking advantage of TIF

How will tax incremental financing work? What are the risks? And what needs to be done? Alan Aisbett examines how local authorities might use this new tool in their locker.

Tax Incremental Financing (TIF) may be a new name in the UK but the underlying concept is not new. Local authorities in the 1970s and early 1980s frequently issued Municipal Bonds financed from revenues to fund capital works. However, bonds fell out of favour due to tight controls over credit brought in during the late 1980s and the plentiful supply of cheap money through the HM Treasury financed Public Works Loan Board (PWLB - now part of the UK Debt Management Office).

What are the mechanics of TIF?

In a sentence, TIF will enable local authorities to borrow against the predicted growth in locally based business rates to fund infrastructure. The Government's White Paper Local Growth: realising every place's potential clearly sees the introduction of TIF as one of the principal incentives for driving forward local economic growth. The White Paper promises new borrowing powers to enable local authorities to carry out TIF. In determining the affordability of borrowing for capital purposes local authorities will be able to factor in the full benefits of growth in local business rate income.

The White Paper suggests the model will involve borrowing by local authorities to fund infrastructure although developer financed models, with repayment from business rates, are not expressly ruled out.

How might a local authority establish a TIF?

This will require legislative change. The local authority will designate the area covered by the TIF (TIF Zone). At least initially the White Paper sees establishing a TIF Zone as a competitive process to achieve pilot status. It is not clear whether there will be pre-conditions to establish a TIF Zone. For example, will there be economic pre-conditions around economic growth or addressing regeneration and financial pre-conditions similar to the US "but for test" (but for the TIF finance the infrastructure could not be provided)?

There may be restrictions on certain assets within the TIF Zone. Although these may be self determining in relation to, say, housing as Council Tax will not be part of the ringfenced revenues, only business rates. Another issue will be the potential displacement effect and avoiding economic activity transferring from one area to another.

It is suggested that the establishment of a TIF Zone will include some or all of the following steps; preparation of outline proposals for the TIF Zone, establishing a stakeholder organisation within the TIF Zone to agree proposals probably involving the Local Enterprise Partnership, business case or plan for TIF Zone, designation of TIF Zone, master planning and costings, planning permission and any CPOs, raising of finance whether public or private, a funding agreement with the developer and mechanics for ringfencing the business rates to repay the finance.

How will a TIF be funded?

One of the popular TIF models in the US is the so called "pay as you go" model. This involves developer finance re-imbursed from local taxes without incurring debt. This model results in "capitalised interest" costs lying with the developer. However, this model may be costly and in any event the White Paper only refers to local authority borrowing for TIF.

As such therefore the likely source of funds is local authority borrowing from public or private sector sources. The cheapest source of finance (notwithstanding the recent increase in interest rates) will be from the PWLB.  However, such borrowing will appear on the public sector balance sheet. Private finance is a possibility, but there may be little appetite for development risk and possibly also repayment risk unless a local authority guarantee is in place. Private finance may bring commercial discipline but is still likely to be public sector borrowing unless recourse is limited to the business rate cash flow bringing with it repayment risk once again. There is potential for mixed funding of public or private development finance refinanced through a bond when the cashflows are mature.

What are the risks?

The critical element for the local authority will be certainty of the completed and occupied (occupation is critical in rating law) development yielding the anticipated cash flows. As such the local authority may look for completion and occupation guarantees beyond the usual due diligence on cash flows. There will also be risks which feed into completion of the development for example, completion of the TIF funded infrastructure. Where private finance is involved the local authority may wish to de‑risk the project as much as possible to enable refinancing of the cash flows to be put in place.

The local authority will also seek to secure certainty of cash flows, as will any private funder should this be the route. Various events may bear upon business rates not least the vagaries of rating law. Risks to cash flows will include, flawed business plan including levels of rates, robustness of tax revenue streams (eg nature of and concentration of occupiers), economic strength of TIF Zone (eg empty rates are 50% of full rates), movement in rateable values from re-valuation, collection levels and other uninsurable risks.

What needs to be done?

There needs to be legislative change to bestow a new borrowing power on local authorities for the purposes of TIF, to enable diversion of business rates and potentially to charge revenues by way of security (where private finance is involved). Government will need to look at EU procurement law to ensure that funding controls do not amount to "works" and also State Aid rules to ensure there is no aid in the TIF funding through favouring specific undertakings.

Alan Aisbett is a partner at Pinsent Masons. He can be contacted on 0121 626 5742 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..