Growing by Increments

Further details are awaited with keen anticipation on how tax increment financing can be taken forward to secure investment in urgently needed development and infrastructure projects.

Birmingham...transport proposals focus on city regional benefits
Birmingham...transport proposals focus on city regional benefits

As the government seeks to move the public agenda from funding cuts to measures to promote economic growth, the commitment to allow tax increment financing (TIF) confirmed in the comprehensive spending review could give councils a tool to unlock stalled commercial schemes.

Last week's local growth white paper proposes a bidding round for a series of TIF arrangements to inform future use of the power to "minimise the risks to both local and central government." Proponents argue that it is a win-win formula.

The idea is that borrowing against future property rates income will allow schemes to go ahead.

According to Core Cities Group director Chris Murray, who has pioneered work on TIFs, boosting business rates income in an area is a virtuous circle. "The Treasury is not losing out because it would not get the rates income if the scheme cannot proceed," Murray reasons.

But some commentators are more reserved in their support because of the risk involved. Councils might raise the funds for the infrastructure but for one reason or another, the scheme might still not go ahead.

The advent of TIF signals a radical change in responsibility for delivering major infrastructure, giving local authorities access to new funding sources which they can negotiate themselves rather than relying on handouts from government departments and the Treasury.

Murray points out that up till now only 60 per cent of authorities have taken full advantage of prudential borrowing opportunities. "TIF will allow them to share the benefits of growth, rather than the uplift all going to the Treasury," he argues.

The private sector is also behind the TIF concept. "At the height of the boom, many commercial schemes could have funded the infrastructure needed to make them work but now they are not viable," says British Property Federation head of policy Michael Chambers. "Local authorities need access to the rates income which the schemes would generate to help forward-fund the infrastructure they are lacking."

The USA pioneered the concept in the 1950s and all but one state has legislation. The Labour government's invitation to councils last year to put forward TIF proposals drew 127 submissions.

It set aside £120 million to take forward pathfinder projects but these have not been progressed since the election. Some of the TIF ideas are considered high-risk because the elements that will generate rates income are highly speculative.

GVA Grimley financial consulting director Andrew Screen is concerned that unlike TIF schemes in the USA, which are mostly linked to specific sites, many of the UK proposals see the funds as an area regeneration tool. In the Birmingham city-region, for example, they would support a range of strategic transport projects (see panel).

"With local authorities leading the TIF process, there is a risk that they will be too optimistic on their ability to bring business to an area and will ultimately end up funding the infrastructure and bearing the costs," Screen warns.

Joint sector vehicle explored to share risk

He advocates a clear framework for sharing risk. A joint venture vehicle between the local authority and the developer could ensure that the private sector is rewarded when the scheme is built and reduce public sector risk, he suggests. Even so, relying on private sector income to service a debt might be risky in the current climate.

Curzon Investment property director James Moss comments: "The money only gets paid back if the projects prove profitable. With the occupier market flagging and retail bracing itself for a VAT hike in the new year, the prospects of filling vast new commercial developments are not too rosy."

Chambers counters this concern by pointing out that the income to service the TIF is not expected for a couple of years, when hopefully the property market will be in a better state.

Cushman & Wakefield development partner Alistair Parker supports the US single scheme model, pointing out that the business rate uplift is relatively easy to identify.

The Liverpool One mixed-use scheme generates £21 million per year for the Treasury, he notes. But while developer Grosvenor could afford to pay £98 million for infrastructure, many other schemes are on hold.

Parker cites the example of a £600 million retail-led scheme in Sheffield with a £140 million viability gap, mainly resulting from the infrastructure needed to service it. The scheme would raise about £26 million per year in business rate income.

A TIF arrangement could advance the funds, which would then be paid back over 20 years. There are similar city centre schemes in Preston, Crawley and Guildford.

Parker's recommended model would be for the developer rather than the local authority to raise loans for infrastructure. In return, the developer would gain access to business rates from the scheme that would have been paid to the Treasury for a fixed period of time.

This "pay as you go" model minimises the risk to the public sector and developers are prepared to go forward on this basis, particularly as they have pre-lets: "Major shopping schemes tend to have anchor tenants before they go ahead."

TIF promoters will need to convince the Treasury that schemes really will add to the business rate base for the area rather than simply diverting business away from another location. In the first example of a TIF in Scotland, only half of the business rate proceeds from the Leith project in Edinburgh are committed to funding the TIF because of possible diversion (see panel).

Cambridgeshire Horizons chief executive Alex Plant points to experience in Chicago, which has 900 TIFs. "Diversion from one TIF to another is a problem, as much as from outside the area," he says. His organisation is taking a more cautious approach, putting forward a £25 million proposal for transport improvements to integrate Cambridge station with the city centre and facilitate a 160,000m2 development. Cambridge is a dynamic area. "TIF only works in areas with considerable economic growth potential," Plant believes.

TIF may not be the silver bullet for transforming languishing industrial areas, but it could offer hope for places that missed the boat in the last boom and accelerate marginal schemes with good growth prospects. The dead hand of the Treasury could kill TIFs if it insists on excessive red tape. Given this government's commitment to localism, however, they would allow councils a more active role in promoting development.

EDINBURGH TAKES FIRST STEP

The Scottish Government has stolen a march on England with its approval of the first tax increment finance project to support the £600 million redevelopment of the Leith waterfront in Edinburgh. This is likely to be the first of several because, under Scottish legislation, a statutory instrument is considered sufficient to allow local authorities to borrow against future rates income.

Edinburgh City Council has taken out an £84 million loan to pay for various pieces of infrastructure around the docks. The intention is to unlock a development comprising around 50,000m2 of office and business space and 25,000m2 of retail. The uplift in rates income is expected to service the loan.

A development agreement with the council will ensure that developer Forth Ports progresses the regeneration scheme. Servicing the loan requires only about half the projected increase in business rate.

"This would allow for any displacement with firms moving into the scheme from other parts of the city," says Peter Reekie, finance director of the Scottish Futures Trust, an agency set up by the Scottish Government to promote new infrastructure.

John Handley, a partner in DPP's Edinburgh office, underlines the risk the council is taking: "If only the first phase is built there will be a significant shortfall in business rates income, which the city's ratepayers would have to cover. The risks have to be weighed up carefully."

CITY SPREADS RISK

A city-region regeneration approach is being adopted around Birmingham in developing tax increment financing (TIF) to share the risk and promote wider benefits. Eight projects have been identified with a total £1 billion investment that could create 44,000 jobs, with borrowing contributing £856 million.

The schemes will have different timescales for bringing benefits. "Some would pay back over five years but others would take up to 40 years," explains city-region director Simon Murphy. The schemes have been worked up to the level of detail required by the Treasury's "green book" business case mechanism. "Most are transport projects and the red lines where the majority of the rates uplift is expected are drawn about 1km around them," Murphy adds.

The links between the developments and the TIF-funded projects have not yet been clarified, but a special purpose vehicle is one option for the smaller projects. However, many schemes cross authority boundaries, so councils would have to share the risk as part of the funding arrangement.


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