Understanding DIF

Thursday, February 19, 2009

"In the recession we're in now, with a stimulus packaging coming our way, this concept of partnering is even more important than it's ever been," said Brian W. Blaesser of Robinson & Cole LLP, a connoisseur of district improvement financing.

There were eager developers, investors, and others at a recent Real Estate Finance Association breakfast gathering on "District Improvement Financing: Definitions, Mechanics and Process," at 60 State St.

The DIF concept has been around since the '50s, said Blaesser, who was a principal author of the legislation in Massachusetts. Like a lot of things, good and bad, it started in California.

Massachusetts has a 2003 statute, making the commonwealth a little late to the game.

Arizona is the only state where the practice doesn't exist statewide.

Some definitional clarification is due here: DIF in Massachusetts is the same thing as TIF, or tax increment financing, in other states. The commonwealth already had something called TIF, which here involves tax exemptions and abatements and a council that designates economic opportunity areas eligible for favorable treatment.

DIF in Massachusetts, on the other hand, is a way to close the financing gap -- and we're seeing no shortage of those -- on projects developers want to move forward with in undeveloped areas. Developers partner with communities in these agreements and get bond money to help with the infrastructure underlying the development -- the kind of thing government used to do on its own -- and related costs that otherwise would be borne by the developer.

The funding is based on a stream of new revenue generated by the development itself -- revenue that wouldn't exist unless the project were built but that would except for DIF go to the municipality -- in situations where the development accomplishes public purposes.

The statute is Chapter 40Q. (TIF is in Chapter 40, Section 59.)

The purpose of DIF is based in urban renewal and blighted land areas of the law, the traditional reasons. But additional purposes include development of greenfield (nonblighted) areas, affordable housing, brownfields, and redevelopment of low- and moderate-income neighborhoods.

First, property taxes in DIF districts get frozen at the levels where they were before the new development, and that amount still gets paid to the community.

Additional tax revenue goes to pay off bonds used to finance the improvements. When those bonds are all paid off, the additional money than goes to the community.

For DIF to be used, an establishing authority (like a redevelopment agency) has to be created, and there has to be an assessment of needs, a redevelopment plan, adoption by the Legislature, monitoring -- and an end to it all at some point.

It's not impossible, Blaesser said, but rarely would DIF and TIF be used together.

The state's Economic Assistance Coordinating Council is involved in both DIF and TIF.

Revenue bonds issued are usually not general obligation bonds, so they don't affect the borrowing capacity of the city or town.

"Municipalities get very nervous" about these programs, Blaesser said, and the concept isn't employed as much here as in other states. "If these bonds don't do well, are we on the hook?" they want to know.

The agreements can be structured in ways that give extra protection to communities, he said. Developers can be required to do "credit enhancement." These are partnerships between developers and communities, and the bonds can be paid by some or all of the revenues the are generated.

There's an inflation factor in the statute, which the real estate industry isn't crazy about. Representatives say DIF would be used more without that factor.

Revenue is based in part on increased assessed value as a result of infrastructure investment, under the program.

DIF districts come in parcels, up to 25 percent of a community, and the land doesn't have to be contiguous. Multiple developers and DIF arrangements can be included in a single district. Financing can go up to 30 years, but 15-25 is typical. Interest can be financed. And the program doesn't introduce new taxes or reduce taxes.

But, "There's a public perception they have to deal with," Blaesser said. "The politics."

It also doesn't involve the state, as, say, I-Cubed does. That's the three-way bank shot -- city, state, and developer -- that helps new projects with infrastructure financing.

"It's not intended to turn this into a bonanza for a private developer," and doesn't, Blaesser said. Imminent domain can be used in DIF projects, though.

Soft costs, like paying legal fees for a town or for engineers, can be considered infrastructure, and can be reimbursed as project costs.

So, the town or city applies, the state EACC council approves, monitors, and enforces the arrangement.

In can be phased in, Blaesser said is happening with City Square in Worcester, being planned and built by Berkeley Investments Inc. "Worcester looks to be a poster child for DIF," but Springfield and Quincy are also being watched.

Still, officials are cautious.

"My view of local government is they don't understand the risk at all in the private sector," Blaesser concluded. "That's not their job. They understand political risk."

People say Chicago is different politically.

"Chicago uses TIFs all over the city," said Blaesser. "If you want a TIF-rich environment, look at Chicago."

Fenway Center

 

A massing model of developer John Rosenthal's mixed-use project across Brookline Avenue from Fenway Park, recently given the go-ahead by the Boston Redevelopment Authority. He hopes to break ground in 2011. It was originally called One Kenmore and was planned for over the Turnpike on the other side of Brookline Avenue.