A Primer on Retail Incentives
Written by
Rickey Hayes
Retail Attractions, LLC
One of the essential elements to recruiting national retailers is providing incentives to set your community apart from the 200 other communities vying for the same deal. There are a wide variety of incentives available for city governments to use and even more if the incentive is offered through a private organization. To help you understand the lingo a little better, I have outlined the most common incentives and included a brief description of each.
TIF – TAX INCREMENT FINANCING
Tax Increment Financing is a public financing method which has been used for redevelopment and community improvement projects in many countries including the United States for more than 50 years. With federal and state sources for redevelopment generally less available, TIF has become an often-used financing mechanism for municipalities. Similar or related approaches are used elsewhere in the world. TIF is a tool to use future gains in taxes to finance current improvements. The improvements will create those gains. When a public project such as a road, school, or a large retail development is carried out, there is often an increase in the value of surrounding real estate, and perhaps new investment (new or rehabilitated buildings, for example). This increased site value and investment sometimes generates increased tax revenues. The increased tax revenues are the “tax increment.” Tax Increment Financing dedicates tax increments within a certain defined district to finance debt issued to pay for the project. TIF is designed to channel funding toward improvements in distressed or underdeveloped areas where development might not otherwise occur. TIF creates funding for “public” projects that may otherwise be unaffordable to localities. Currently, thousands of TIF districts operate nationwide in the US.
PILOT (OR PILT) – PAYMENT IN LIEU OF TAXAS
A Pilot is a payment in lieu of taxes (also sometimes abbreviated “PILT”), made to compensate a local government for some or all of the tax revenue that it loses because of the nature of the ownership or use of a particular piece of real property. As an incentive for investment in taxable infrastructure or other facilities that create a public benefit, a PILOT may be negotiated to limit or defer the property taxes on a developer, striking a balance between public and private economic needs. In effect, the local taxpayers are subsidizing the commercial development, which might otherwise have gone elsewhere.
SALES TAX REBATE BACK TO DEVELOPER FOR COSTS OF PUBLIC IMPROVEMENTS
Sales tax rebates are incentive monies returned to the developer of a retail project for the actual costs of public improvements constructed in the project.
RETAIL DEVELOPMENT INCENTIVES FUND
Incentives support the expansion of existing retail businesses and the recruitment and development of new retail businesses. Cities have established Retail Development Incentives Funds administered by an overseeing entity. The funds are used exclusively for retail projects which are relocating to or expanding within the corporate limits of the cities and which are projected to generate new retail sales which in turn raise new sales taxes. Eligible recipients of these incentives are any retailer, any developer, or any owner of retail property in the cities is eligible for these incentives. The funds are discretionary funds and may be used only to support an expansion or location which would otherwise not likely happen without an incentive offer.
Eligible projects include, but not be limited to, these purposes:
- Road improvements, including turning lanes, traffic lights, resurfacing, lowering of grades, new extensions, and intersection improvements.
- Drainage improvements, including culverts, piping, and impoundment structures.
- Utility extensions.
No Retail Development Incentive can be effective and no payment made until a written contract has been executed by the business or by the developer or owner of the retail property benefitting from an approved Retail Development Incentive. Such contracts will include a “claw back” provision requiring the recipient to reimburse the Fund a pro-rated amount of the Retail Development Incentive received in the event that the benefited retail property should become non-productive.
LESS COMMON TYPES OF DEVELOPMENT INCENTIVES
- Sales tax deferral on construction (done through public trusts)
- Use tax deferred (not common in retail development incentives)
- Property assemble and acquisition
- Extension or provision of sewer, water, and other utilities to an area
- Incentives through downtown development authority (grants, CDBG monies and local incentives)
- Waiving building permit fees, sewer and water tap fees, and other local fees
- Sign, advertising, and marketing concessions
If your community is trying to develop an incentive plan that will be attractive to the investors but still fiscally rewarding to the city, contact us. Retail Attractions has extensive experience with incentives and has legal counsel available for even the most challenging proposal. Contact Retail Attractions to find out how to make your city irresistible to retailers.
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