What exactly is District Improvement Financing (“DIF”)?
The DIF statute passed in July 2003 (Chapter 40Q of the Massachusetts General Laws and enacted into law as Section 18 of the Acts of 2003), allows a Massachusetts municipality to pledge future increases in property taxes generated in a specified section of a community (the “Development District”) to the repayment of a bond issue used to finance capital improvements benefiting the Development District.
Prior to the passage of the DIF statute, Massachusetts differed from the vast majority of states in that its existing tax increment financing statute did not permit a community to pledge future property tax receipts to secure bonds used to finance needed infrastructure. With DIF in place, Massachusetts’ cities and towns needing to finance infrastructure costs have more financing options. Depending on the project, they may be able to issue bonds secured by only the pledge of new future property taxes in the Development District. In other instances, the community may decide to pledge its full faith and credit but size the bond issue on the anticipated increased taxes. A letter of credit may be needed to secure certain bond issues when the community does not choose to pledge its credit. However, the community may take comfort in allocating the new tax receipts to the payment of the bond issue.
Why should a community use DIF financing?
In our revenue strapped environment, Massachusetts’s cities and towns are looking to expand their local property tax valuation. In particular, it is often a goal to broaden the commercial/industrial tax base. Unfortunately, many locations in the Commonwealth lack certain infrastructure such as roads, and water and sewer systems or connections. Businesses and real estate developers may find that a project is not financially feasible if the community does not pay for all or a major portion of these costs. With DIF in place, a city or town may decide to “invest” future tax growth resulting from new real estate development in order to fund the needed improvements. The investment will not decrease existing tax receipts. Instead, an increasing stream of new revenue should be generated by such an investment that will be in excess of the debt service necessary to fund the improvements. Additionally, a DIF bond issue is exempt from Massachusetts debt limits imposed on cities and towns and so will not crowd out other needed borrowings.
How will the DIF statute assist a business or developer with a project?
The DIF statute does not impose a new tax on the project. It directs the increased property taxes resulting from the new construction to service the debt on the bonds used to finance the project infrastructure. Without DIF as a tool, the needed infrastructure may very well be too expensive for the business or developer to finance. Operating in a community that is receptive to the project, the business or developer may be able to work with the city or town and the other property owners in the Development District to structure a workable financing plan.
In brief how does DIF work?
Through a public process, the Development District is designated and the community fashions a development program and a financing plan that are the tools for the completion of the needed infrastructure and the operation of the District. The development program outlines the necessary public improvements, any relocation required, traffic and environmental information, and the means and objectives to improve affordable and market rate housing. A baseline valuation is computed for the land and existing properties in the Development District. A percentage of any increased taxes generated by the additional property valuation resulting from new private commercial and residential investments are escrowed for the payment of the debt service on the bonds financing the infrastructure improvements.
What is the approval process to use DIF for a project?
Once the development program and financing plan are prepared, the town meeting, town council, or the city council and mayor must approve the Development District. The Massachusetts Economic Assistance Coordinating Council must also approve the designation of the District pursuant to any regulations it may choose to adopt.
Does the DIF statute involve any affordable housing requirements?
The development plan should deal with the issue of affordable housing. There are a number of ways of dealing with this issue. Two possible approaches are to designate a portion of the Development District for housing or to use a portion of the future tax growth for housing purposes.
How does the new DIF Statute differ from the previous use of tax increment financing?
Tax Increment Financing had previously focused on job creation for individual projects located in designated Economic Opportunity Area located in communities approved as Economic Target Areas. DIF focuses on the entire development district. In most cases, the owner of the real estate that generates new employment will receive a property tax exemption for some portion of the increased valuation resulting from the planned improvements. An additional 5% investment tax credit from the Commonwealth may also be available for qualified investments. While this program was and still can be used to indirectly fund infrastructure costs, it does not permit the pledge of new taxes to support a bond issue. It is possible to use the Economic Target Area program and DIF together.
What type of projects may be supported through DIF?
Residential as well as commercial and industrial development may be supported through the use of a DIF. A Development District may have a number of residential or commercial/industrial projects that will benefit from the infrastructure improvements. The type of costs that may be financed are quite broad and include land acquisition and development, rehabilitation costs, administrative and financing costs as well as the construction of needed improvements itself.
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