Shopping Centers Today

DEC 2018

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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68 S C T / D E C E M B E R 2 0 1 8 retail, restaurant and office development called Arlington Highlands followed. The city projected that the land's taxable value would increase to $130 million, but that was wrong — it soared to $230 million instead, an increase of 1,250 percent from pre-reinvestment-zone times. Without the TIF, "there's little reason to believe the land would be more than a field of Texas weeds," wrote former Arlington Mayor Richard Greene in a Fort Worth Star-Telegram op-ed. That reinvest- ment facility, originally set to expire in 2025, was terminat- ed this year — seven years early — thanks to its success. First implemented in the 1950s, tax increment financing has become one of the coun- try's most commonly used economic-devel- opment tools. The TIF mechanism has long been used by state and local governments to help fund development and infrastructure proj- ects that might not oth- erwise have gotten off the ground. But because the far-reaching tax-reform law of last December has undermined this mech- anism, ICSC and other trade groups are urging Congress to address that law's unintended conse- quences with regard to TIF, according to Phillips Hinch, ICSC's vice presi- dent of tax policy. The TIF mechanism allows municipalities to encourage economic development in a desig- nated area by earmark- ing increases in future property-tax revenues resulting from higher property values in the so-called TIF district. The incremental tax rev- enue can be used, for instance, to prepare land for development, make infrastructure improve- ments, or to underwrite certain public structures, such as parking garages. It may also be used to compensate developers for their investments. Before the Tax Cuts and Jobs Act of 2017, developers (organized as C or S corporations) that received TIF grants could defer tax liability on the proceeds under Section 118 of the feder- al tax code. The new tax law effectively repealed this exclusion, however, potentially rendering the TIF proceeds developers receive taxable as ordi- nary income. What prompted the change was that some lawmakers sought to eliminate a federal tax subsidy for certain state and local incentives that municipalities were using to encourage business- es to relocate from one jurisdiction to another. In seeking to level the playing field among state and local governments, lawmakers went too far, says Hinch. "This change hijacks local investments intended for under- served areas and sends a portion to the federal government instead," he said. "ICSC advocates changes to Section 118 to ensure that legitimate economic development and infrastructure proj- ects are not unfairly penalized by the federal tax code." Congress grandfa- thered certain types of projects under way when the tax law was enacted, such as those that are part of a gov- ernment-approved, master development plan, Hinch notes. But as of mid-October, the Treasury Department had yet to issue any guidance on what con- stitutes "an acceptable master development plan," he says. The new tax treatment for TIF proceeds, and this uncertainty surround- ing what constitutes an acceptable master development plan, has already led some devel- opers to take a wait- and-see approach on potential projects. "There are people waiting on the sidelines or trying to figure out dif- ferent ways to structure a project," said Hinch. He advises that develop- ers contemplating any TIF-related project ought to consult a tax profes- sional. Municipalities can still use TIF proceeds to undertake projects that serve as a catalyst for development. States and cities may use TIF proceeds to remediate a brownfield, say, but if the property is given to a developer, then that would constitute a taxable transfer, Hinch explains. "A municipality can still issue a TIF and use the proceeds them- selves," he said, "but there are new impli- cations for developers when they are consider- ing financing options." THE POLITICS OF TIFS BY ANNA ROBATON Washington D.C.

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