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How TIFs Can Be Used for Affordable Housing

If the improvements supported by TIF are successful in raising property values, there is a good chance that housing costs will also increase and make the neighborhoods in TIF districts less affordable over time. Long-term residents may be at risk of displacement due to higher taxes, escalating rents or home prices, and communities may no longer be able to provide housing opportunities for families with a diverse range of incomes. Incorporating affordable housing into TIF programs is important if the benefits of TIF are to be distributed equitably.

A good example of where such a tool is needed is around areas slated for new public transit. In strong housing markets, such investments tend to drive up land prices near planned transit, reducing the supply of affordable homes as rents and home prices rise, precisely where they are needed most. By establishing a TIF district in the area surrounding a newly designated transit stop or extension, communities can capture TIF revenue associated with those land price increases that can be used to build or preserve affordable homes near public transit.

In some communities, TIFs are created expressly to fund the development of affordable housing. In such cases, affordable housing is the capital investment that is intended to fuel community revitalization. In Massachusetts, for example, the Department of Community Development and Housing’s Urban Center Housing Tax Increment Financing Program (UCH-TIF) authorizes local governments to use TIF financing for affordable housing in commercial centers that have a low population during non-business hours. Municipalities must demonstrate the need for multifamily housing within the area they target under this program and designate at least 25 percent of new housing units to be affordable.

Another example can be found in the State of Maine. MaineHousing, the state’s Housing Authority, created the  Affordable Housing Tax Increment Financing (AHTIF) program in 2004 as a tool for jurisdictions to finance efforts to support affordable housing and associated infrastructure costs, such as street improvements or school construction, to handle population increases. Under Maine’s law, municipalities can designate up to two percent of their land in an AHTIF district. This creates money for housing by allowing municipalities to capture the new property tax revenue generated in the AHTIF district. All or part of that revenue can be used to support affordable housing in the district. Through AHTIF, rental units must be maintained as affordable for 30 years and homeownership units must be maintained as affordable for 10 years.

More often, however, affordable housing is funded as a secondary activity using revenues generated from the primary capital improvements (or bond proceeds raised in anticipation of those revenues). Because there is generally considerable competition for the expenditure of TIF revenue, a number of states and localities have passed legislation to require that a minimum portion of TIF revenue go toward developing or preserving affordable homes. To ensure that affordable housing does not get lost among other competing priorities, it is critical that as a condition for approving the TIF, a minimum amount of TIF revenue be reserved for affordable homes. Although communities can fund affordable housing with revenue generated by TIF without an established housing set-aside fund, it is less predictable and likely to be less effective in meeting a community’s housing needs.

For example, the State of Utah mandates that municipalities that have adopted TIF after May 2000 and generate $100,000 of annual tax increment must set aside at minimum 20 percent of the funds collected for affordable housing construction, retention or development within TIF boundaries. An additional 20 percent of TIF revenues can be used to replace homes lost to urban renewal and to housing preservation efforts outside of the TIF project area. 

In states without such requirements, some localities develop similar mandates. In 2007, Portland, Ore., passed a TIF set-aside requirement that mandates spending 30 percent of total TIF resources in its Urban Renewal Areas (districts that generate TIF money) on affordable housing. The set-aside fund supports two city priorities related to housing, including affordable homeownership for families and low-income rental housing for low-income and formerly homeless individuals and families.

In Chicago, the Affordable Requirements Ordinance (ARO), passed in 2007 and modified in 2015, requires that developers include a certain percentage of affordable units in their projects. ARO is triggered by a number of conditions when a housing development larger than 10 units is seeking approval. One of these conditions is the use of city financing, which includes the use of any TIF funding. The use of city financing increases the amount of affordable housing required from 10 percent to 20 percent, increasing the utility of TIF in the development of affordable housing. Chicago’s program has an added benefit of placing some of the units created through ARO into the City of Chicago Community Land Trust, which enforces a 99-year restrictive covenant that limits the resale price of the unit.

Legal Authorization of TIF

Depending on how strict states are in defining the areas where TIFs are permitted, using TIF to preserve affordable housing opportunities in areas likely to experience economic growth may or may not require new legislation. In some states, communities have relatively wide discretion to define an area as “distressed” so that a TIF can be implemented.  But in other states, this term is more narrowly construed and new legislation may be needed. 

Communities might also be able to utilize the “but-for” test by arguing that but for the imposition of the TIF, the intended use of the TIF—affordable housing–would not be feasible. Where jurisdictions cannot meet existing criteria for designating TIFs, it may be worth considering new legislation to expand the authority to use TIFs as an affordable housing preservation tool. The legislation to create Austin’s Homestead Preservation Districts is one example.

Use of TIF for affordable housing outside of distressed neighborhoods

While TIFs are traditionally set up to fund investments that will revitalize distressed communities, there is also justification for establishing TIFs or TIF-like districts to help preserve affordable housing opportunities in neighborhoods that have already begun to experience development pressure. By establishing a TIF district in a neighborhood already experiencing or likely to experience economic growth, communities can capture tax-increment funds that they can use to build or preserve affordable homes or to help existing renters buy into their neighborhoods.

Using TIFs in neighborhoods experiencing economic growth is a somewhat non-traditional use of this tool. Critics argue that if not implemented properly, this approach enables government to divert the tax increment toward specific projects (not always in the public interest) instead of supporting public services such as school districts, police and fire departments or utilities. The relationship between school districts and local TIF districts can be especially controversial since, in most states, school districts receive a large share of local property tax collections and many are opposed to taxes for schools being levied for non-educational purposes. According to a 2003 report by the National Education Association, property taxes could be diverted from 22 school districts in the 48 states that allowed TIF without their consent. In Georgia, each school district must individually approve its participation in tax allocation districts (TAD, Georgia’s version of TIF). This approach may be a model for other states that can help defuse some of the tension around TIFs.

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