Build Now, Pay Later
Regeneration & Renewal
Herpreet Kaur Grewal
27 June 2008

With sources of European funding drying up, the credit crunch biting and house prices weakening, could a US technique help get UK regeneration projects off the ground? Herpreet Kaur Grewal reports.

Buy now, pay later is a familiar marketing tactic, designed to make consumers forget about their current financial situation just long enough to purchase the latest car, fridge-freezer or suite of furniture. But in the US, the concept has long been used as a way to kick-start the regeneration of some of the country's most deprived areas.

In the States, Tax Increment Financing (Tif) is a widely-used financial tool which enables public bodies to raise vast sums of money for the regeneration of neighbourhoods, towns and even cities. In simple terms, Tif allows the public sector to borrow cash for capital investment in a designated area, secured against the future increase in tax revenues that the project is expected to bring. Over a long period - sometimes as long as half a century - tax revenues should increase incrementally as a result of the regeneration, and the additional revenue is used to repay the loan. Toby Rittner, chief executive and president of national association for American economic development bodies the Council of Development Finance Agencies (CDFA), says that if the loan is paid off ahead of schedule, the leftover tax revenues can sometimes be used to fund extra projects.

In the UK, the Government is discussing the possibility of importing the Tif model, while remaining vague about its intentions. A Department for Communities and Local Government (DCLG) spokeswoman says it wants "to open up a full debate about long-term options and ideas for innovative ways to develop economic growth" - including looking at Tif. However, local government minister John Healey sounded more definite last month when he said he wanted to see models such as Tif trialled in the country. "It's a step I'd like to see in the UK," he said, "which is something we are saying clearly for the first time."

In fact, the Tif model is not all that new to DCLG officials. In 2000, a Tif-style model was proposed in the local government finance green paper. In the end, however, the proposal - called the Local Tax Reinvestment Programme (LTRP) - was dropped. Chris Brown, chief executive of investment firm Igloo Regeneration, says this was down to "a lot of criticism of the technical design of the proposal" when it went out for consultation. However, there are also concerns that introducing Tif would increase public sector borrowing, making it harder for the Treasury to stick to its borrowing targets. Asked for the department's position on the introduction of Tif, a Treasury spokeswoman refused to comment.

Jon Sawyer, managing director of consultancy Eye, notes that importing the Tif model into the UK is not as simple as it might seem. "The Federal Government in America does not make loads of money available to local areas, as our government does," he says. "States are their own source of funding. The starting point there is that if you don't have funding, you borrow it. It's different in the UK. We are addicted to grant culture."

Sawyer says that because Tif relies on councils borrowing money, it is crucial to consider how they service that debt. Currently, however tax revenue is collected, it is for the most part gathered into and distributed from the centre. So while recent initiatives such as the Supplementary Business Rate have seen an increase in town hall fiscal autonomy, the potential funds generated from such locally set taxes are unlikely to support American-style Tif-funded developments. Supporting debts of that size would require a major shift in taxation control from the national to the local level.

For this reason, large scale Tif-funded regeneration developments may not be the best idea - at least not initially. Sawyer suggests using Tif to provide part of the funding for a regeneration scheme. "I would say: 'Put Tif in the mix with other funding sources. If a local authority is trying to raise £20 million for a development, then use Tif to cover £10 million of it'," he says. Introducing Tifs could also mean that taxpayers bear the brunt of a tax hike if property revenues fail to rise enough to pay off the initial loan, Sawyer adds.
The major benefit of the Tif model is that it makes development possible in areas where it would be unviable if left to market forces. However, in Chicago - where Tif has been involved in much of the city's recent development - critics say that Tif is often used for projects which would have happened anyway (see box).

As complicated as it may be to plan, predict and devise a UK Tif model, the idea is likely to gather support within the sector as other sources of funding decline. The UK's latest tranche of European funding - which runs from 2006 to 2013 - is likely to be the country's last, says George Grace, a partner at consultancy King Sturge, which is preparing a report on Tif for an unnamed public sector body. "Europe has written what is likely to be the last cheque for Britain," he says, "and as a result we have to look at new ways of funding development."

CASE STUDIES

Chicago
To say that Tif is a popular financial tool amongst Chicago's leaders would be an understatement. There are now 131 separate Tif districts in the city and mayor Richard Daley has become famous for his enthusiastic support of the funding mechanism.
While nobody seriously doubts that Tif has been instrumental in many of the improvements that some of Chicago's most deprived neighbourhoods have seen in recent years, there are some who believe that the use of Tif has gone too far in the city.

Tif is meant to be used in areas where development will simply not happen if it's left to market forces, but campaign group the Neighbourhood Capital Budget Group (NCBG) has produced a series of reports that claim that Tif is being used in economically healthy communities. Rather than being used to tackle deprivation, the NCBG argues, Tif is used to get all kinds of development off the ground: the city authorities are shifting Tif funding away from poor communities and into some of the administration's pet schemes.

Ben Joravsky, a reporter on alternative newspaper the Chicago Reader, also claims that Tif has been used excessively in wealthy areas to the detriment of deprived communities. Earlier this year he reported that $75 million of Tif money had gone to the redevelopment of the Rush University Medical Centre, a move he claimed would result in significant delays to projects in nearby deprived areas.

Stapleton, Denver
Hailed as an "exemplar development" by consultants King Sturge, the Stapleton development is currently the biggest brownfield project in the US. The site extends over 1,900ha on the former site of Denver International Airport, and when completed will comprise 12,000 new homes, 1.6 million sq metres of commercial space with room for 34,000 workers, and 690ha of parkland.

The project began in 1995 with the formation of the Stapleton Development Corporation (SDC); a not-for-profit corporation authorised to act on behalf of the City of Denver on the project. Having produced a masterplan for the entire site, including detailed phasing reports, the SDC borrowed against the anticipated future tax revenue to fund infrastructure enabling work to begin.

During the first five years of Tif, all of the property taxes received were devoted to paying off the debt incurred by the development. Since 2001, however, an increasing percentage of the tax revenue has been retained by the city and used to pay for the increased demands from new Stapleton residents for services such as police and roadway maintenance. The retained tax revenue will reach 47 per cent by 2015.
Thirteen years into its projected 25-year lifespan, the project is already considered a success. In 2002, the development received an award from international research and campaign group Stockholm Partnerships for Sustainable Cities.