Affordable Housing TIF Gets Legislative Okay
(from Maine Townsman, June 2003)
By Jeff Austin, Legislative Advocate, State & Federal Relations, MMA
A significant addition to the way Tax Increment Financing (TIF) in Maine can be used was enacted during the first session of the 121st Legislature which has just adjourned. The enactment of LD 858, An Act To Establish a Municipal Affordable Housing Development District Tax Increment Financing Program, brings the world of TIFs to residential housing projects for the first time.
Affordable Housing TIF
Since its inception, Tax Increment Financing has only been available in Maine for commercial projects, not residential projects. That policy is embedded in the legislative preamble to the TIF statutes:
The legislative preamble to the existing TIF statute reads as follows:
“The Legislature finds that there is a need for new development in areas of municipalities to :
A. Provide new employment opportunities;
B. Improve and broaden the tax base; and,
C. Improve the general economy of the State.”
Alan Brigham of the Department of Economic and Community Development, which administers the TIF program, believes that the Legislature made its intent clear that TIF tax breaks are justified by their ability to promote “job retention” and expand general “economic growth” through commercial development. Housing, with its primarily private-purpose nature, according to Brigham, is not appropriate under the original TIF statutes.
LD 858 removes the barrier of using TIFs for residential development by setting up a separate body of law that provides municipalities with the authority to establish, by legislative action, affordable housing TIF districts. This separate statutory framework for affordable housing TIFs has its own separate legislative finding: “The Legislature finds that there is the need for the development of affordable, livable housing and containment of the costs of unplanned growth in Maine municipalities.”
In order to qualify as an affordable housing TIF, at least 25% of the district must be in an area that is “in need of rehabilitation,” or “blighted” or suitable for residential use. The district must be primarily, though not exclusively, residential and at least 33% of the residential units in the district must be affordable. These affordable units must be maintained as affordable for at least 10 years if the unit is a single-family dwelling and 30 years for rental units.
Affordability is determined by reference to households whose income does not exceed 120% of the median income for the area. Accordingly, affordable housing, by this definition, can include a different type of affordability than municipalities may be used to — specifically, the so-called “workforce housing” in addition to the more traditional low-income housing. This greater flexibility will allow communities to tailor programs to meet their local needs.
The pre-rehabilitated assessed value of affordable housing TIF districts within a municipality may not exceed 5% of the total taxable value in the community. A separate 5% valuation limit is allowed for commercial TIFs. Also, the total area encompassed by housing TIF districts is capped, but it is unclear if this capping is separate from, or added onto, commercial TIFs.
The municipal approval, state oversight and other hallmarks of the existing TIF program (30-A MRSA §§5221-5235) were basically preserved for the housing program.
On the expenditure side, LD 858 has a long list of permitted uses of the tax increment revenues. Those uses include the traditional financing costs for infrastructure improvements, capital costs including acquisition and fees, and professional services costs.
One notable exception to the existing TIF law was its inclusion of public educational costs as a permitted use. As many local officials know, education costs are the dominant part of local budgets and one of the greatest expenses that directly result from residential development. Unlike commercial or industrial TIF districts, this bill allows municipalities to devote the entire incremental increase in TIF revenues from the affordable housing TIFs for K-12 education costs. Furthermore, this additional funding will not result in decreased education funding from the State because the value of the TIF property, like traditional TIF property, is sheltered from state valuation.
According to Peter Merrill of the Maine State Housing Authority, this provision was instrumental in securing bi-partisan support. The education funding provision was not part of the original bill. Following inclusion of this provision, as well as amendments to extend the affordability period from 5 years to the 10 and 30 year periods identified above, support for the bill at the Tax Committee increased from a party-line split to its final margin of 10-3.
Also important to the final passage of the bill was the work of Rep. Ted Koffman who is the House Chairman of the Natural Resources Committee. Koffman's committee also had a number of bills before it this session which dealt with affordable housing. Rep. Koffman and other members of the Committee recognized the utility of pursuing only one affordable housing bill this session and the TIF bill had the broadest support.
Rep. Koffman believes that the largest employer in his district, the Jackson Laboratory, “will surely appreciate the benefits of a TIF district for workforce housing” and is hopeful that it can be utilized as an economic development tool.
History of TIFs
The original TIF statutes were enacted in the late 1970’s. The basic premise of tax increment financing is that a town can take the incremental increase in property taxes generated by new development and use it to benefit that development.
Early on, the incremental property taxes were returned to a TIF project by using that money to pay off financing bonds for municipal infrastructure projects that served the development (roads, sewer/water lines, etc.). The idea behind the original TIF program was that without these infrastructure improvements, a development could not happen; therefore no “loss” results to the town because without the subsidy, the project and the increased property value doesn’t occur.
This traditional TIF structure was not very popular and did not get very much use. An added problem of traditional TIFs from the municipal perspective was that the increased value in TIF districts was not excluded from State Valuation. With state education and revenue sharing funds and county taxes being adversely affected by TIF developments, municipalities saw little incentive in setting up a TIF district.
Investments in infrastructure were not attractive either, for two other reasons. First, if the project failed, the town was still obligated to repay the bonds for the infrastructure investment, even though the property taxes from the project disappeared. Second, not all areas that towns wanted to develop needed infrastructure improvements.
Two changes to the TIF program addressed these problems and the popularity of TIFs increased. The first change sheltered the increased (or captured) value from State Valuation. A municipality’s GPA, revenue sharing, and county taxes are now unaffected by a TIF project.
A second change, in the early 1990’s, expanded the ability of municipalities to return the increased taxes to the development project. This change created so-called “Credit Enhancement Agreements” (CEAs) between the developer and the host municipality. The CEA allows the municipality to return the increased tax revenues generated by the development directly to the developer for use in the project (within statutory limits). Thus, long-term infrastructure commitments, and the corresponding bonding, have waned and direct subsidies have increased.
The total number of approved districts as of March 2002 was 175, with 152 still active. Current DECD estimates put the March 2003 numbers at 200 total and 175 active TIF districts.
TIFs and Housing
The previous exclusion of housing from the existing TIF program has made for some tough situations when DECD’s permission was sought to use TIF revenues for housing.
Not long ago, structural problems occurred in a building that was included in a TIF district in the Saco mill complex. That building, which was rehabilitated as part of the larger project, was predominantly used as residential condominiums. When it was determined that the building needed repairs, a request to the DECD was made for use of the TIF funds to make those repairs.
Again, according to DECD’s Brigham, the request was contrary to the TIF law because the repairs would not have a “general economic benefit” to the community but an impermissibly narrow benefit to the residents. Thus, despite the need, DECD had no choice but to disallow the request.
Brigham is quick to point out that housing has benefited from TIF funds when it wasn’t the primary or intended beneficiary. Some buildings that are equal parts commercial and residential have received TIF funds where the funds only subsidized the commercial portion of the project. While the residential component was enhanced by those improvements, that benefit was incidental and allowable.
Also, the TIF laws allow for remediation of environmental hazards, regardless of the ultimate use of the property, even residential use.
Accordingly, if meaningful subsidies of housing developments were to occur, a legislative change was needed to permit TIFs for housing.
Other Housing TIF Proposals
That something was going to happen on the issue of affordable housing this first session was pretty clear. The Maine State Housing Authority had been outlining the problem repeatedly. The MSHA identifies the shortage of affordable housing as “a serious challenge.” MSHA calculates that median home in Maine now costs $133,500 which is 17.7% higher than two years ago. However, incomes have not kept pace rising only 9.6% over the same two-year period.
The problem is as pronounced in the area of rental units as well. According to MSHA director Michael Finnegan, “We estimate that 56% of Maine renters cannot afford the median rent for a two bedroom unit. Our research indicates that, in order to provide affordable rental housing to households currently earning 50% or less of the median income, we would need to develop an additional 16,354 apartments for low income families.”
The real issue is what can be done to stimulate this development. Since the TIF program is viewed by many as a success, its formula was appealing.
However, it was not smooth sailing for LD 858. Two other bills were filed this session that address the issue of TIFs and affordable housing:
LD 202, An Act To Make Certain Housing an Acceptable Use of Tax Increment Financing, filed by Representative Ed Suslovic (Portland)
LD 1320, An Act To Extend Tax Increment Financing Zones To Include the Development of Large-scale Affordable Housing, filed by Representative John Eder (Portland), and,
Rep. Eder’s bill was a concept bill that sought to create TIF zones for housing and mitigate sprawl. The other two bills also sought the use of TIF funds for housing but in different ways. LD 202 was the “quick” way to that end by merely adding affordable housing to the list of allowable “project costs” in a TIF district. No other significant changes to the TIF laws were proposed.
This bill encountered some resistance because housing was simply inconsistent with the legislative basis for the existing TIF laws described earlier. While increasing affordable housing opportunities and mitigating sprawl would be readily supported as State goals by most, they are distinct issues that present their own challenges and would not easily be incorporated into legislation that was drafted for other purposes.
Furthermore, many, like DECD’s Brigham, felt that this bill would not give affordable housing the boost it needs. Since LD 202 did not increase the aggregate value limitation on the total amount of property in a community that may be in a TIF district, housing and commercial projects would be competing for TIF designation and the commercial projects would have routinely been selected.
However, TIFs are not universally well received. Senator Richard Nass speaks for many, particularly rural communities, which see the TIF model as unfair. The reason is that since the value of the TIF property is sheltered from the State revenue sharing formula TIF communities get both the development and the State aid. It is this “continual shift” according to Sen. Nass that is wrong and other solutions to the problem should be explored. Nevertheless, the issue had enough support to withstand the objections and is now available for use.
Affordable housing is a nation-wide problem. Whether TIFs will provide the elusive solution to that problem in Maine remains to be seen. Given the track record of commercial TIFs, it would appear that affordable housing TIFs will be given a chance.