Between the lines: A TIF in time for the construction industry

Published on Thursday 25 June 2009 21:54

LET ME introduce you to an exciting new idea – tax increment financing. No, no, don't turn the page or fall asleep. It is thrilling stuff this, especially if you are a property developer currently fighting off the accountants from moving in to close you down. It could well be the saviour of the industry.

Big developments such as, say, the Edinburgh waterfront scheme or the former Ravenscraig steelworks site, currently face a problem. At any time, getting such brownfield sites built on involves a lot of work which tends to be undertaken by the public sector – site clearance, provision of water and sewerage, new roads, and so on.

In the good old boom years, councils would demand that developers stump up a share of the cost of these these things. Builders, while they grumbled a lot about this imposition, generally paid up because they were anxious to get the profits that would flow from selling the new buildings in a rising property market. Councils were also able to find much of the money by selling surplus land and buildings.

There's no chance of that these days. So places such as the Edinburgh Waterfront are quietly mouldering away. The only green shoots to be spotted on them are weeds. Getting work going on them again is where tax increment financing (TIF) comes in.

The idea is a new way of raising the initial amount of money needed to do all the public infrastructure work to permit private building to begin. What you do is draw a line on a map round the area you want to redevelop. Within this boundary, you calculate all the property taxes – business rates, council tax, stamp duties on building sales – that are currently raised within the boundary.

Then you produce a plan showing how many houses, shops, offices, restaurants etc will be built inside the boundary. You get some clever people to work out how much extra property tax will be raised by all the new buildings. Armed with this, you go to someone with money to lend and ask for a loan. You say to them that you plan to ring fence all the extra property tax, and put it into a special account which will be used to pay back the loan.

And if your business planning is sufficiently impressive, you will get the loan. Seempells, as the meerkat says.

This isn't idealised theorising. Actually the TIF concept has been working in America for the past 50 years. There are thousands of TIF districts all across the USA. Surprisingly, no TIF district has ever been tried in Britain before, but Edinburgh could be the pioneer. Edinburgh Council and its (with Scottish Enterprise) development subsidiary Waterfront Edinburgh has been working on a scheme.

The aim is to try a TIF out on the Leith Docks area, about 1 sq km between the basin where royal yacht Britannia is moored and the docks on the other side of the Water of Leith. A lot of basic construction works including extending the Ocean Drive road and greatly improving the area around the Ocean Terminal shopping centre to provide a public entertainment venue would be done.

More imaginative works including a new pier for royal yacht Britannia and visiting cruise ships, plus a dock for cross-Forth ferries to Fife, should they ever materialise, are also planned.

The hope is that about 2200 houses, lured by the location close to the terminal of the by then hopefully completed tram line, along with a fair amount of shops, offices restaurants, bars, will then by built. Studies commissioned by the council from accountants PricewaterhouseCoopers reckon that once work starts, about 279 million in additional business rates revenue will be collected over the following 30 years.

They would be plenty to repay the interest and capital on a 50m loan to pay the estimated costs of all the initial works.

The operative word in the above paragraph is 'hope'. In the current economic downturn, it is quite a big hope. Nevertheless, the Scottish Futures Trust, chaired by Sir Angus Grossart and not a man to indulge in pipe dreams, is sufficiently interested to be pursuing the concept.

If the sums add up and excite financiers and developer, Barry White, the Trust's chief executive thinks the concept could be tried out lots of other places, such as the now-cleared Ravenscraig steelworks site in Lanarkshire and the A96 corridor between Inverness and Nairn where there are lots of schemes to build little new towns.

But there are a lot of problems to be overcome first. Since private finance is likely to be extremely expensive, at least until the concept is proven, public loans will be initially needed. And a gap of up to seven years before the tax revenues start to flow is likely, so public gap-filling will be needed. And then what happens if the shop and house builders don't build? or if they do and but they can't sell? These problems are not insuperable, and in the current climate, a TIF looks well worth trying.

&#149 Comments, criticisms, welcomed at: [e-mail].