Funding Downtown Revitalization Projects With Tax Increment Financing

Back in December of 2023, I wrote a blog about several financing tools available to local governments that can fund infrastructure to facilitate downtown revitalization, including tax increment financing (TIF).

TIF was created by the legislature in 2021 with the passage of HB 1189. Since then, there have been 22 local governments (1 county, 9 ports, and 12 cities) that have submitted TIF Project Analysis to the Office of the Washington State Treasurer, including the cities of Federal Way and Lakewood, both of which have created tax increment areas (TIAs) for the purpose of downtown revitalization.

This blog will focus on the City of Federal Way’s TIA, and offer considerations for other cities that might be interested in this approach.

Federal Way’s Vision for Downtown Revitalization

The City of Federal way is embarking on a transformative journey to revitalize the downtown core. In 2024, Federal Way formed a TIA with the aim of shifting the downtown area from a suburban, auto-centric area to a vibrant, walkable urban center.

The city’s vision for a revitalized downtown includes a mix of residential, commercial, community, and cultural spaces, as demonstrated in the image below.

Image courtesy of the City of Federal Way

The following are the city’s proposed infrastructure improvements that can be funded through TIF revenues:

• Added public parking — construction of new parking facilities to support increased downtown activity
• Increased recreational opportunities — park expansion, civic plaza, or other projects that add recreational amenities
• Expanded options for multimodal transportation — pedestrian promenade, protected bike lanes, transit shelters, and bicycle lockers
• Improved community spaces — public market, senior center, and meeting rooms that add indoor community space
• Increased public safety — improvements to police and fire services
• Added placemaking elements — public art, lighting, and special street furniture

If a city is considering using TIF as a mechanism for financing improvements for downtown revitalization, it should evaluate risk, bring in private developers, and make sure the right professionals have been engaged for the project.

Key Questions to Evaluate Risk

The decision to use TIF for downtown revitalization does not come without risk. A city should ask itself:

• How probable is development if this infrastructure investment is made? Future increases in TIF revenue depend on increases in property values — which will only happen if private development occurs.
• Is the resulting outcome worth the investment? The investment should provide long-term tax growth, a benefit to the community, and align with city goals.
• How confident is the city that downtown revitalization will occur, and what is the city’s risk tolerance? The city should be confident that revitalization will occur, and if underperformance occurs, the city needs to be able to absorb potential losses.
• How reasonable are the TIF revenue assumptions, and what is the return on investment? A revenue forecast should not be overly optimistic but realistic enough to ensure that infrastructure costs are covered.

Consider the Role of Private Development

To help lessen risk, a city should have contracts in place with private developers or be in serious discussions with private developers about specific projects. Without private development, the TIA will not provide the TIF revenues to finance public infrastructure. For example, the City of Federal Way did not form its TIA until it had a development agreement with One Trent (a Seattle-based development company) to develop a four-phase project that includes both commercial and residential construction.

TIF revenues are generated based on increases in assessed property values in the TIA. If there is no development or not enough development in the TIA, then not enough TIF revenue will be generated to fund the infrastructure improvements. Creating a TIA and building infrastructure in hopes that private development will occur increases the risk that a city will not receive sufficient revenues to reimburse the city’s infrastructure expenditures or repay any associated debt.

Engage the Right Professionals

If contemplating TIF, a city will want to work with three key professionals:

• bond counsel,
• a financial advisor, and
• a TIF consultant.

These individuals are crucial to ensuring that a project is legally sound, financially viable, and strategically executed. The bond counsel and financial advisor both have a fiduciary responsibility to advocate for a city's interests, and a TIF consultant understands the intricacies of this finance tool and can provide guidance in setting up a TIA.

Conclusion

TIF can be leveraged as a tool for downtown revitalization. It requires careful planning, realistic projections, and an understanding of the risks involved. Cities considering this tool must ask hard questions about development probability and revenue assumptions. For more information on TIF, check out MRSC’s Tax Increment Financing (TIF) webpage.