Investment in regeneration has declined over the last couple of years and potential urban developments across the country have come to a standstill. With viability proving to be a significant challenge, additional support is essential to bring projects back to life. A potential new lifeline could be the introduction of tax increment finance (TIF).
TIF is an established and successful concept in the USA, the basis of which is that a developed site generates more tax (in the UK principally business rates) than an undeveloped site. The question it seeks to address is how to harness that future revenue to bring in additional finance now.
On 20th September 2010 the coalition government announced proposals to grant Local Authorities in England power to raise finance against predicted growth in their locally raised business rates. Essentially TIF is a funding mechanism whereby infrastructure and other capital projects are paid for today out of tax revenues to be generated tomorrow, the aim being to drive local investment and economic growth.
Local Authorities will be able to look afresh at the opportunities to use wider borrowing powers - possibly through capital markets - to invest in the up front infrastructure needed to kickstart regeneration areas. Depending on the precise form of TIF introduced, developers may be able to secure their own funding with the benefit of an agreement from the local authority to refund the infrastructure costs out of future local tax revenues from the completed project. Clearly a potential area of interests to banks and other finance parties.
The legal issues
New legislation is now awaited to address the legal hurdles that have previously prevented these schemes in the UK. Local Authorities are presently required to pool business rates centrally and, although they can borrow against their overall revenue stream, they cannot yet charge specific sources of income. The exact extent of Local Authority powers as well as issues around state aid and procurement will all need to be taken into account.
A need for clarity
There are currently many unanswered questions. Where will the balance of risk sit if a project is not completed on time or if business rate revenues are less than expected? On larger schemes, will lending banks look for guarantees and if so from whom? Where local authorities borrow, how much will they be required to hold back from what they can invest in order to provide a contingency fund to service the debt if problems arise? Where does all this leave investor landlords in the debate about their liabilities for void rates?
It is also unclear whether a new UK TIF will facilitate not only those projects where local authorities wish to borrow, but also those where the private sector believes that it is best placed to secure the finance. Public sector commitment to refund part of the new business rates generated by a successful project could make a number of stalled development schemes viable again.
How we can help
Our team has been involved from the outset of the UK TIF debate working with organisations such as the British Property Federation and major developers and property professionals. As the likely form of new legislation is clarified our team can provide insight to both the private and public sectors on the potential opportunities for bank finance, capital markets or other development funding structures. Our market position ensures that we are well placed to advise on how to make any TIF structure fit to create a viable and fully fundable development. We are also able to navigate the associated European and procurement issues that will inevitably flow from public sector involvement.