Frustration at delays to new way of funding

Mark Simpson, tax partner at Squire Sanders Hammonds in Leeds, called on Whitehall to implement Tax Increment Financing (TIF) – whereby the Government would lend to councils against the promise of increased revenue from future business – as soon as possible.

Speaking at the Unfold Property event organised by Financial Leeds and sponsored by the Yorkshire Post, he said the legislation would offer a vital push to kickstart large scale projects – such as the Aire Valley development.

“It is frustrating to hear from the US how TIF has worked there, knowing that it could potentially open doors to finance projects in the UK,” he said.

“We need to get the message back to Whitehall that TIF should be introduced as soon as possible. It would give us the opportunity for large projects like the Aire Valley to use TIF to maximum benefit as the economy starts to move ahead.”

TIF has been used to finance infrastructure projects in the US for 40 years and has generally been seen as a success. Differences in the tax system mean there would be differences between TIF in the UK and TIF in the US.

Labour had toyed with the idea of introducing Tax Incremental Financing – also known as Accelerated Development Zones – but failed to back a proposal from Leeds City Region to borrow £250m to turn the 1,000-acre site in the Aire Valley into an eco-settlement. Now councillors are keen to revive the proposals.

During last month’s Budget, Chancellor George Osborne said the Government would work with individual local enterprise partnerships (LEPs) to consider the use of TIF to support the long-term viability of enterprise zones, in tandem with the Local Government Resource Review which is expected to develop proposals by July 2011.

Mr Simpson told an audience of property professionals at Leeds Town Hall: “We don’t know what model the Government will allow, whether it will be municipal bond or local authority borrowing or a pay as you go structure. There is currently great interest in TIF and allowing its use now would exploit that enthusiasm. It would give us the opportunity for a large project such as Aire Valley.”

He added: “TIF isn’t the only way to finance projects. It will always be part of a range of funding structures but it has great potential to help get projects going.”

Greg Stype, partner at Squire Sanders Hammonds, in Columbus, Ohio, presented a case study on TIF and the role it has played in increasing investment into regional areas in the US.

Showcasing the 1,200-acre mixed use Easton development in Columbus, which includes 2.4m sq ft of shops, 3m sq ft of offices, a cinema, restaurant, apartments hotel and fitness centre, he outlined how the TIF process had evolved at the site since it was originally agreed in 1996. He highlighted a number of key lessons for the implementation of TIF in the UK, including writing a broad infrastructure package and ramping up revenue almost immediately to de-risk. He added that if developers have the right mix they can be strategic about how to apply the tax regime but flexibility is key.

Ian Fletcher, director of the British Property Federation, who chaired the seminar entitled The Future of Financing Development and Regeneration, said: “This is not additional taxation. It’s very much about borrowing off the back of future cash flows.”

Mr Stype insisted most TIF-funded projects in the US had been very successful. “Very few have got it wrong,” he said. “The only TIF out of hundreds in Ohio that has been disappointing was put together just before the recession. Everyone thought the bank financing was firmed up but before the private development could get on its way the recession hit and the loan defaulted. It’s an example of the worst possible unforeseen timing.”

Alan Gay, finance director at Leeds City Council, said if the council was given TIF to kick start the Aire Valley development, it would spend the money on decontaminating the land and transport infrastructure to make better connections with the surrounding area.

The £350m Aire Valley project aims to become a key economic driver for the city and the region and a sustainable community, creating new homes and jobs.

A different investment tool

tax increment financing is an investment tool for financing infrastructure and other related development.

The UK TIF model is based on reinvesting a proportion of future business rates from an area back into infrastructure and related development.

It applies where the sources of funding available for a scheme to deliver economic growth cannot cover the cost of infrastructure by the scheme and is often used to help finance regeneration projects.

The money may be borrowed from either public or private sources on the basis that the increased business rate revenues generated by the scheme can be used to repay the initial investment.