Determining Contributory Value Of Tif Agreement

[Gobears81]

All

Apologies if a similar topic has been posted already but I didn't find it in the search

I am appraising a proposed property and there is a TIF agreement. I will probably determine the anticipated TIF reimbursements via assessment comparables, though there are slim to no properties of this type in this county of comparable age/ quality levels. I've seen an appraisal where the appraiser "built up" the discount rate for the TIF income stream via a safe rate, then added a premium for management and illiquidity. I guess that's fine enough, but if a cap-rate driven investor is the most likely purchaser, are they really going to go this route? I'm thinking no. Then again, they would be more likely to head down this path than an owner occupant I would presume.

I am tempted to use a property model (R+G) to support a discount rate based on the premise that a passive investor won't significantly differentiate the rates for the property itself vs TIF reimbursements. But, I can't help but think that logic is a bit flimsy also. I am not aware of other comparable sales where a TIF value can be extracted. Any thoughts on supporting/ determining TIF discount rates?

 

[Artemis Fowl]

All

Apologies if a similar topic has been posted already but I didn't find it in the search

I am appraising a proposed property and there is a TIF agreement. I will probably determine the anticipated TIF reimbursements via assessment comparables, though there are slim to no properties of this type in this county of comparable age/ quality levels. I've seen an appraisal where the appraiser "built up" the discount rate for the TIF income stream via a safe rate, then added a premium for management and illiquidity. I guess that's fine enough, but if a cap-rate driven investor is the most likely purchaser, are they really going to go this route? I'm thinking no. Then again, they would be more likely to head down this path than an owner occupant I would presume.

I am tempted to use a property model (R+G) to support a discount rate based on the premise that a passive investor won't significantly differentiate the rates for the property itself vs TIF reimbursements. But, I can't help but think that logic is a bit flimsy also. I am not aware of other comparable sales where a TIF value can be extracted. Any thoughts on supporting/ determining TIF discount rates?

TIF is a tax capture program for the taxing authority which is reinvested into the district. There is no tax benefit or payment to the property owner...they are gonna pay what they are gonna pay TIF or no TIF. What income stream is being built up exactly? This doesn't sound like Tax Incremental Financing to me...sure it's not a different type of program or am I just confused?

 

[Gobears81]

TIF is a tax capture program for the taxing authority which is reinvested into the district. There is no tax benefit or payment to the property owner...they are gonna pay what they are gonna pay TIF or no TIF. What income stream is being built up exactly? This doesn't sound like Tax Incremental Financing to me...sure it's not a different type of program or am I just confused?

It is referred to as the tax increment allocation redevelopment act in IL Here, if you are in a TIF district, they reimburse for a % of the incremental increase in real estate taxes up to eligible project costs over a certain time period.

 

[PL1957]

One way of looking at it is doing a PV of the RE Tax savings over the term of the TIF. I'd bring it back at a safe rate, since the only things sure in life are death and taxes ...

 

[Gobears81]

One way of looking at it is doing a PV of the RE Tax savings over the term of the TIF. I'd bring it back at a safe rate, since the only things sure in life are death and taxes ...

Appreciate it, this is helpful.

Question on using a safe rate: do you think there is a market risk element associated with the reimbursements? Say that the market plummets or doubles overnight, yet the reimbursements are capped out by the initial project costs, so repayment will be that much faster. One could say that if the market tanks, then they won't be paying as much in RE taxes anyways, but it is a NNN lease and I believe the developer will be receiving the reimbursements (though I will need to verify that). In reality, the assessor is valuing based on the cost approach (though they don't have commercial building data on their PRCs ) and in this case the assessment is most likely to be considerably less than the value of the property, which acts as a cushion to market gyrations, but I wonder if there is still a risk element there?

 

[Artemis Fowl]

It is referred to as the tax increment allocation redevelopment act in IL Here, if you are in a TIF district, they reimburse for a % of the incremental increase in real estate taxes up to eligible project costs over a certain time period.

Ah...kk I was confused.

 

[Michael P Jacobs MAI]

I have always considered TIF "subsidies" of no market value. The fact that a development needs financial assistance suggests that it may not be feasible. The closest comparisons are favorable third party financing, which does not benefit a seller, or a contribution from a third party in exchange for intangible benefits expected to accrue to their property from the project (higher traffic, better market position, business synergies and so forth).

I've never come across the term, "TIF Value." A TIF or other Public-Private Partnership has value, but it is absorbed by the project's functional and/or external obsolescence... unless the government is just giving the people's money away for no reason.

That's my story and I'm sticking to it. Please excuse smartphone typos.

 

[Gobears81]

I have always considered TIF "subsidies" of no market value. The fact that a development needs financial assistance suggests that it may not be feasible. The closest comparisons are favorable third party financing, which does not benefit a seller, or a contribution from a third party in exchange for intangible benefits expected to accrue to their property from the project (higher traffic, better market position, business synergies and so forth).

I've never come across the term, "TIF Value." A TIF or other Public-Private Partnership has value, but it is absorbed by the project's functional and/or external obsolescence... unless the government is just giving the people's money away for no reason.

That's my story and I'm sticking to it. Please excuse smartphone typos.

I agree that sales with "TIF value" appear to be almost non-existent and that term isn't heard much from brokers either, so I'm open minded to what you are thinking. Sometimes the tenant gets the TIF reimbursements though, which could negate its benefit seen in a sale price. But, the feasibility of an investment exclusive of TIF and TIF reimbursements are two separate considerations. IMO, transferable reimbursements have value, particularly if collected by the owner. In my situation, the project actually is feasible, even before the above-market rent and TIF reimbursements. Illinois' TIF act is described as targeting blighted areas, and while the subject being appraised is being constructed in a "not happening" area of the state, the location is one of the best in the town. It seems that municipalities are competing for sales and RE tax dollars anymore (and businesses adding to the employment base), so it is pretty common to see someone striking a bargain with the municipality for some sort of tax abatement or incentives in exchange for developing, regardless of feasibility.

 

[Michael P Jacobs MAI]

I see your point. When I was "selling" gap financing, though, we always needed it to make the project feasible. I never worked on a PPP where the project was feasible without Public money in one form or another... your project would be my first.

My direct experience - not substantial enough to be considered another career - was mostly in the valley (L.A.) and the municipalities often fought one another for these projects. However, it was always public policy and in many cases the law that the developer would not be able to do the project without Public money before it was given. "Public benefit" was not a high enough test unless the project was civic and/or infrastructure.

That was 20 years ago and of course there are a lot of variables (side-deals and lobbying among them), but that's still my story and I'm still stickin' to it: there us no Market Value for TIF or any other Public incentive.

 

[Gobears81]

I see your point. When I was "selling" gap financing, though, we always needed it to make the project feasible. I never worked on a PPP where the project was feasible without Public money in one form or another... your project would be my first.

My direct experience - not substantial enough to be considered another career - was mostly in the valley (L.A.) and the municipalities often fought one another for these projects. However, it was always public policy and in many cases the law that the developer would not be able to do the project without Public money before it was given. "Public benefit" was not a high enough test unless the project was civic and/or infrastructure.

That was 20 years ago and of course there are a lot of variables (side-deals and lobbying among them), but that's still my story and I'm still stickin' to it: there us no Market Value for TIF or any other Public incentive.

You mentioned favorable third party financing in post #7, but I would regard TIF reimbursements as closer (though certainly not identical) to tax credits for LIHTC or historical properties. If that is the case, the consensus has been that they are intangible assets?
In IL, there are TIF districts, so if you build in these locations, you have a pretty high likelihood of TIF money, regardless of feasibility. Tertiary Illinois is different than that of LA or S Florida in that some feel that they should be compensated for investing in an economically soft area. I agree that the intention of TIF was to create it for areas that aren't feasible for development though.
I remember a hotel that had sold twice for between $800,000 and $1,200,000 had shut down for the THIRD time and I predicted (without my appraiser hat on) that it would not sell for any more than the prior sale price, despite the minimal renovations, yet it sold for almost $4,000,000! But the buyer turned around and asked for $15,000,000 in incentives from the municipality. Everyone knew that the guy was overpaying and when the municipality eventually said no, the deal fell apart. In that case, it wasn't feasible to make such an investment without subsidies, yet he was willing to overpay based on the municipality kicking in huge incentives. Kind of like a land residual, it would make an interesting case study on how the as-is value of the land or existing property is affected by the knowledge of future government incentives.