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Brownfield Tax Increment Financing

How it works

November 10, 2005 |

Mac McClelland

The Traverse City Downtown Development Authority financed a new parking deck to complement brownfield redevelopment.

State law allows for the increased taxes generated by brownfield redevelopment to be captured each year to repay the costs of eligible environmental activities on contaminated sites. The state also has designated “core communities” where tax increment financing can be used for lead and asbestos abatement, demolition, site preparation, and infrastructure construction on blighted, functionally obsolete, or contaminated property.

To capture school taxes, a brownfield plan needs local approval and a state-approved work plan.

Here’s how it works. Tax increment financing, or TIF, uses the increased taxes generated from new projects to repay certain expenses associated with the investment, something downtown development authorities have long done to fund streetscapes, sidewalk improvements, and other infrastructure that enhances downtown investment. More investment generates more tax revenue to make more improvements.

Since the enactment of the Brownfield Redevelopment Financing Act in 1996, local governments have used TIF to level the playing field between greenfield site development, which has no environmental costs, and brownfield site development, which can have high environmental and other special costs. 
 There are, however, a few differences between a traditional downtown development TIF and a brownfield TIF:

  • Brownfield TIF is for a specific period of time that is related to the cost of the eligible activities. Taxes are captured until those costs are paid off and, in some cases, for up to five more years for a local site remediation revolving fund. A downtown development TIF generally spans a longer, specified period, like 30 years.
  • In a brownfield TIF, tax capture is limited to the specific eligible property that is redeveloped; DDAs typically capture the increased taxes from all properties in a larger downtown area.

Useful Example

Grand Traverse County

Traverse City’s  brownfield redevelopment sites attracted more state support than any other Michigan city. Click to enlarge
A vacant factory sits along a harbor that is part of a waterfront redevelopment plan. The property’s market value is $200,000; its taxable value is $100,000. The total millage rate for both local and state school taxes is 50 mils. The property generates $4,950 in annual property taxes.

The plan is to demolish some of the building and renovate the rest into offices and second-home condominiums. The estimated investment is $2 million.
The contamination problem results from the old boiler’s leaking underground fuel oil storage tanks, which taint groundwater seeping toward the harbor. The cost to demolish the boiler house, remove the contaminated soil, and install a groundwater cleanup system is $185,000.  The cost for preparing the work plan and funding the administrative and operating costs for the brownfield authority is $15,000, bringing the total eligible activities to $200,000.

When finished, the property is put on the tax rolls and generates $80,150 in annual property taxes, roughly 20 times more than before the work started. The tax increment, the difference between the base-year taxes and the new-year taxes, is $75,200. That sum becomes a payment to the developer for a portion of the $200,000 spent on eligible activities that were approved by the brownfield authority and the state.

In three years the TIF has fully repaid the eligible activities costs. After that, the additional state taxes, in an amount equivalent to the original state tax capture, along with up to five years of local taxes, can go into a local revolving fund to help finance cleanup costs for other brownfields, or can be returned to the local and state taxing authorities.

If the additional taxes are put into the revolving fund, the fund would have $324,000 after five years. After 30 years, the taxing jurisdictions would realize over $2.9 million in additional taxes, and continue to accrue about $180,000 every year thereafter.

Michigan Land Use Institute

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