Illinois Land Use and Economic Development: Getting More Bang for Your Buck
 
January 9, 2007
 
Victor P. "Vic" Filippini- Chicago

Part I (of a two-part series)

Part I provides a general discussion of available economic development tools in Illinois and a more specific discussion of two of those economic development tools – tax increment financing and economic incentive agreements. Part II, which will be published at a later date, provides a discussion of two additional economic development tools – business districts and special financing. Part II also discusses the link between economic development and land use. All references in Part I and Part II to municipalities or development issues refer to Illinois municipalities and development issues in Illinois.

 

Introduction

The powers of government, whether at the federal, state, or local level, exist to promote the public health, safety and general welfare. These purposes apply equally to the land use powers of Illinois local governments. Although prohibiting certain uses (such as tanneries near residential areas) or requiring development to conform to certain standards (requiring minimum setbacks and construction standards to reduce the risk of spreading fires) are clear examples of land use regulations that are aimed at furthering public health and safety purposes, the “general welfare” is a well recognized but amorphous part of the trio of purposes for which land use powers can be exercised. Illinois courts have variously included within the definition of “general welfare” the prosperity or economic interest of the public, but that definition says too much and too little. This article is not intended, however, to explore the realm of “general welfare” objectives for which land use powers in Illinois might be exercised. Rather, it will focus on just a part of that realm: economic development in Illinois.

Illinois courts have long recognized that promoting economic development is within the scope of the “public welfare.” This has sometimes been described in the context of maintaining and enhancing property values. From this perspective, perhaps the greatest instrument of economic development is maintaining the character of a community through the consistent application of logical and effective zoning regulations that protect existing development from incursions by inconsistent land uses. However, this purpose of land use regulations – as well as various techniques for achieving these ends – will not be the focus of this article. Rather, this article will focus on specific tools often used to promote economic development in Illinois as well as discussing means of employing economic development tools to promote land use policy objectives.

 

Available Economic Development Tools

Municipalities are often the preferred locale for development because of the economies of scale that they provide for businesses and developers: available water, sewer and roadway facilities, as well as public safety services such as fire and police. Clearly, having such facilities and services available for a developer or business to utilize is a selling point and a savings. In this respect, the normal and customary planning and capital development activities of municipalities that make such services and facilities readily available (or easily extended) is a crucial tool for promoting economic development in a community.

Oftentimes, however, having good services and available infrastructure facilities is merely the threshold for attracting economic development. Businesses or developers may be looking for a broader level of participation by a municipality prior to committing their own substantial resources toward a new development within a municipality. In such cases, there are several tools that a municipality may reach for, including: (a) tax increment financing; (b) economic incentive agreements; (c) business districts; and (d) special service areas. Each of these particular tools will be discussed in this article.

 

• Tax Increment Financing

Overview One of the most powerful tools for economic development in Illinois is the establishment of a “tax increment financing” (TIF) district. TIFs permit local governments to finance public improvements and provide incentives to attract new business or assist existing businesses to expand, using revenue sources other than general funds or new taxes. More specifically, tax increment financing is designed to tap the taxes from future anticipated increases in property values within an area (the “incremental tax revenues”) to finance current improvements and activities needed to make such increased property values possible. In other words, it is an economic development response to the adage that “to make money, you have to spend money.”

Although TIFs have now been in use in the United States for more than 30 years (29 years in Illinois), the opinions about TIFs are decidedly mixed, often being described as the best or worst tool for economic development. Depending on one’s perspective, it could be either.

Because TIFs are financed through increases in property values that would presumably have not occurred but for the TIF, the incremental tax revenues are “found dollars.” In this respect, TIFs are viewed favorably by some who see it as a means of “enlarging the pie” without increasing any taxes. On the other hand, because the incremental tax revenues are diverted from the affected taxing bodies and into the TIF during the duration of the TIF, many of those taxing bodies believe that TIFs simply are taking their money – a very bad thing for those taxing districts.

In light of the very mixed opinions regarding TIFs, establishing such a district often can be a hot political issue and, as a hot political issue, there are many interests that seek to ensure either that they are benefited by TIFs or that their ox is not gored by a TIF. Given this political climate, it is hardly surprising that the Illinois General Assembly is constantly called upon to “tweak” the TIF laws. For example, since the Tax Increment Allocation Redevelopment Act (the TIF Act) was first adopted in 1977, it has been amended more than 35 times – or an average of more than two amendments by each General Assembly convened since TIFs became a possibility in Illinois.

While one should be aware of the political fervor that often surrounds a TIF district, such political concerns have not prevented municipalities from using TIFs for redevelopment purposes. One source estimates that approximately 350 Illinois municipalities in 77 counties have created almost 1,000 redevelopment project areas as of January 31, 2005.

 

• Legislative Authority and Some Basics

The TIF Act is the primary tool developed by Illinois state lawmakers that assists local governments in restoring and reinvigorating blighted and economically underperforming areas. The TIF Act authorizes municipalities to (i) designate areas of at least one-and-one-half acres in size as “redevelopment project areas”; (ii) adopt “redevelopment plans”; and (iii) incur “redevelopment project costs.” A redevelopment project area is a contiguous area within a municipality that the corporate authorities have determined is blighted, will not reasonably be developed without the use of incremental tax revenues (otherwise known as the “but for” test), and the financing and development of which will benefit the municipality and affected taxing districts.

The TIF Act contains specific criteria describing what constitutes “blight” and detailed procedures for adopting a redevelopment plan and incurring redevelopment project costs. In order to qualify as a blighted area, the age, condition, suitability, utilization, degree of nonconformity, adequacy of utilities and amount of vacancies within the designated “redevelopment project district” are considered. Merely having the statutory attributes of blight is not enough, however. The statutory blighting factors should be present to a meaningful extent and reasonably distributed throughout a proposed TIF district so that reasonable persons will conclude that public intervention is necessary.

In addition to establishing that an area qualifies as a blighted area, a municipality must create a “redevelopment plan” for the area that sets forth the types of activities for which TIF revenues can be used. Prior to establishing a TIF district, the municipality must convene a “joint review board,” which consists of representatives of all the taxing districts affected by the TIF. The joint review board must make recommendations regarding the proposed TIF district and the municipality shall thereafter hold a public hearing on the TIF district.

Once a qualified redevelopment project area is designated by a municipality, the assessed value of all real property in the project area is “locked-in,” and the property taxes from such assessed value continue to be distributed each year to all affected taxing districts, including the municipality. However, any property tax revenue generated thereafter from growth in the project area’s assessed value (the incremental tax revenue) is dedicated solely to the TIF district to pay redevelopment project costs.

Municipalities can spend tax increment as they receive it or, more commonly, issue bonds secured by the future receipt of such tax increment. In this way, the municipality can use the bond proceeds to construct public improvements “up front” in the project area to stimulate investment by private developers and other businesses. As the project area develops, the assessed values of the properties within the project area increase and generate tax increment to repay the bonds. Redevelopment project areas are subject to time limits, currently 23 years, although such limits can be extended to 35 years under certain conditions.

For a municipality, a TIF district has several advantages in terms of economic development. First, it does not require a tax increase. Second, it does not divert any present tax revenues. Third, bonds can be issued to generate funds for immediate use in promoting redevelopment (i.e., there is no need to accumulate funds before commencing redevelopment activities).

Similarly, a developer or business will enjoy several advantages of a TIF district, including: (a) TIF revenues can be spent on installation of infrastructure, property assembly, building costs, and a wide array of other redevelopment costs; (b) no new taxes need to be imposed; (c) the flexibility of a TIF district in helping many different types of developments or businesses; and (d) the relatively long period (23 years) of a TIF district allows for staged infusion of public assistance as a business grows. One other potential benefit of a TIF district (and many other economic development tools) is that it can be used in conjunction with economic development tools.

 

• Economic Incentive Agreements

Although a TIF district has the ability to provide economic development in a variety of ways to a variety of known or unknown developers or businesses, other economic development tools are much more focused in their application. Economic incentive agreements – a/k/a sales tax rebate agreements – authorize municipalities in Illinois to entice a sales tax generating business to its territory.

Municipalities are authorized to enter into economic incentive agreements pursuant to Illinois statutory law. This allows a municipality to grant a rebate to a sales tax-generating business of a portion of any sales taxes such business generates under the Illinois Retailers’ Occupation Tax. Such an agreement is to be linked to a specific development or redevelopment project and must be for a finite period of time. Before entering such an agreement, the municipality must make a series of findings to establish that the rebate agreement is warranted. These findings include:

• either that:

– the property has been vacant for at least one year, or six months if the building was recently demolished after having been vacant or underutilized for a year or did not comply with building codes

– the property is developed but has been vacant or underutilized for a year or does not comply with building codes

• the project is expected to create or retain jobs

• the project will further the development of adjacent areas

• the agreement is necessary for the project to proceed

• the developer meets high standards of creditworthiness

• the project will strengthen the commercial sector of the municipality

• the project will enhance the municipality’s tax base

• the agreement is in the best interests of the municipality

Not only must all of these findings be made, the agreement cannot be for sales taxes that would otherwise be paid to a different municipality.

In light of the “but for” test, there should be a direct relationship between the benefit that the taxpayer-developer receives and the benefit arising from the project for which the rebate is granted. At the same time, many municipalities structure such agreements in a manner that either limits the tax benefits to the recovery of certain investment expenses that the taxpayer makes in connection with the development or based on a formula that establishes incentives for achieving higher sales levels.

A related form of economic incentive under Illinois statutory law is a real estate tax abatement. Tax abatements allowed by Illinois statutes must fall into one of the described categories (including newly created or expanded commercial or industrial businesses), and are limited both in duration and total amount of abatement benefit to be awarded. Importantly, the abatement to be rewarded affects only the municipality’s portion of the tax bill, which could limit the dollar value of the benefit.

For more information, e-mail Victor P. Filippini, Jr. atvictor.filippini@hklaw.com or call toll free, 1-888-688-8500.