South Carolina law provides several methods to finance the costs of capital improvements associated with residential, commercial, industrial, and mixed-use developments. Often called “public-private partnerships,” these financings require the cooperation of local governments with private developers or industries in order to achieve mutually beneficial goals for the public sector and the private sector. The bond attorneys at Howell Linkous & Nettles have served as bond counsel and underwriter’s counsel for improvements funded with TIF bonds, such as roads, streets, storm water drainage, water and sewer lines, other utilities, parks and playgrounds and public parking.
Under South Carolina statutes, municipalities and counties can create TIF districts. The local government must determine that the proposed TIF district is a “blighted area,” a “conservation area,” or an “agricultural area” meeting certain statutory requirements. Unlike some of the other economic development incentives, property owner consent is not a condition to including property in the TIF district. In the case of counties, instead of “agricultural areas,” there is the category of “sprawl areas” (in addition to blighted areas and conservation areas) as the basis for the formation of a TIF district. This category, a “sprawl area,” would permit the creation of TIF districts in the unincorporated areas of the county.
Tax increment financing is secured by taxes generated by the increase in property value in a district after a redevelopment project has begun. As such, it does not increase the tax rate on district taxpayers, but merely reallocates tax revenues that would otherwise flow to pre-existing taxing entities in favour of redevelopment project costs or debt service on bonds issued to fund redevelopment project costs.
It has been the experience of our bond lawyers that TIF bonds benefit from several favourable structural elements compared to other development incentives. Unlike CDDs, MIDs, and special tax district bonds, no additional tax burden is created for property owners. Tax collection rates are generally of less concern for a TIF bond, unless TIF district tax payments are concentrated in a few taxpayers. Although undeveloped land in a CDD, MID, or special tax district can lead to high debt burdens, undeveloped land in a TIF district is generally a favourable factor, since tax revenues will increase to the extent new development occurs and taxable property values grow.
Investment-grade TIF bonds handled by the bond lawyers at Howell Linkous & Nettles usually have sufficient TIF revenues to cover future maximum annual debt service (“MADS”) at the time of the issuance of the TIF bonds. This circumstance is known as “coverage in the ground.” Some of the common pitfalls our bond attorneys have seen for TIF bonds include volatility in commercial real estate values during an economic downturn, particularly for warehouse and hotel properties. A residential real estate bust, such as the one we have seen recently, would similarly harm TIF bonds. Plant closures can harm TIF bonds for an industrial TIF district. Construction risk for projected development is another pitfall in a TIF financing. Concentration in a few taxpayers is a common problem for TIF bonds. High tax increment volatility ratio for a newly formed TIF district can be problematic.
The bond lawyers at Howell Linkous & Nettles can advise the local government and the private developer on structures to avoid or minimise these pitfalls in order to close on a successful tax increment financing.