Financing Tools for Downtown Revitalization
Recently, MRSC published several blogs about strategies for downtown revitalization. Despite many strategies available to spark activity and bring growth and vibrancy to a downtown area, many cities struggle with how to finance the infrastructure necessary to facilitate these changes. This blog will focus on different funding options available to cities as well as incentives designed to attract new businesses to struggling downtown areas.
Tax Increment Financing (TIF)
One of the newest financing tools made available to cities, counties, and port districts that can help downtown revitalization is Tax Increment Financing (TIF).
TIF was created with the passage of HB 1189 in 2021, and can be used as a mechanism to fund public infrastructure in targeted areas to encourage private development and investment. The local government creates an “increment area” surrounding the site of the public improvements. The property taxes from increases in the assessed value of properties within the increment area are then used solely to pay for improvements. For a larger discussion of TIF, see MRSC’s Tax Increment Financing (TIF) webpage.
Currently, the City of Federal Way is in the process of establishing a TIF for the purpose of downtown revitalization. The TIF is intended to transform an auto-oriented and underachieving area of Federal Way into a walkable gathering place. The additional property tax revenues will be used to fund public parking, recreational amenities, increased mobility, public safety projects, and other improvements.
Main Street Tax Credit Program
The Washington State Main Street Program helps communities revitalize their downtowns by leveraging their unique heritage and attributes, which can include historic, cultural, and architectural resources. Communities interested in utilizing the Main Street approach form independent 501(c)(3) or 501(c)(6) nonprofit organizations with a focus on driving downtown revitalization planning. These organizations are public/private partnerships comprised of local government agencies, merchants, businesses, and individual members of the public.
In 2005, the state legislature created the Main Street Tax Credit Program, which allows private businesses to donate funds to eligible downtown organizations and receive a Business & Occupation or Public Utility tax credit of up to $250,000. To be eligible, the downtown organizations must be designated as a Washington Main Street Community by the Washington State Main Street Program. Because the donation is to an eligible nonprofit, the donation would also likely qualify for a federal tax deduction for the donor.
Downtown organizations can use these funds to help make their downtown a vibrant commercial district by providing resources (e.g., funding, etc.) to programs, events, and activities that enhance the area. One popular tool that downtown organizations provide is storefront and façade matching grants for projects that improve the appearance of a building, including improvements to building façades, signage, and surroundings. Cities with downtown organizations offering such grants programs include Cle Elum, Stevenson, and Coupeville. Additionally, each year the Washington Main Street Program has an Excellence on Main awards, which recognizes organizations and businesses that have made outstanding impacts to their communities.
Bellingham, to further promote downtown revitalization, also offers a B&O tax credit. Under this program, businesses that chose to locate in one of the five eligible areas within downtown can receive a credit on B&O taxes due to the city. Eligible businesses can receive credits of 90% in the first year, 75% in the second year, and 50% in the third year.
Rural Counties Public Facilities Sales Tax
Rural counties with a population of less than 100 people per square mile or a county smaller than 225 square miles may impose a 0.09% sales tax credit against the state sales tax. These funds — commonly called .09 Funds — can be used to pay for public facilities (including public infrastructure) serving economic development purposes.
Although cities are unable to impose the Rural Counties Public Facilities Sales Tax (see RCW 82.14.370), many counties use these funds to award grants to cities for financing public facilities projects. Similarly, the .09 Funds can be used for this same purpose. For example, in 2021 the City of Mount Vernon was awarded a $100,000 grant from Skagit County for improvements to the historic Lincoln Theatre. More recently, in 2023 Lewis County awarded $1.6 million in .09 Funds to the City of Centralia for infrastructure improvements along a key arterial to the downtown corridor.
Multifamily Tax Exemption
Under chapter 84.14 RCW, cities with populations of 15,000 or more may offer a multi-family tax exemption (MFTE) to stimulate construction of multi-family housing (including affordable housing) within designated areas. Eligible housing projects can receive a property tax exemption on the value of eligible housing improvements, typically for 8 to 12 years.
To receive the 12-year exemption, property owners must commit to renting or selling at least 20% of the units to low- and moderate-income households. If use of the property changes in a manner inconsistent with the program requirements, back taxes will be recovered based on the difference between actual taxes paid verses what would have been paid without the exemption. New exemptions cannot be offered after December 31, 2032.
Community Economic Revitalization Board
The Community Economic Revitalization Board (CERB) is an organization that helps cities finance public infrastructure construction through loans and grants in order to support private business development. Applications for CERB’s funding programs are accepted on an ongoing basis with the CERB board meeting every two months to consider and make funding decisions.
CERB grants can be awarded for up to 80% of the total project with a grant recipient having to come up with a cash match for the remainder, including cash from other funding sources. Recent awards include a $75,000 grant to the City of Bingen for a waterline extension study, a $1.125 million loan and $375,000 grant to the City of Tenino for engineering, design, and construction of its SW WA Agricultural Business & Innovation Park, and a $50,000 grant to the City of Palouse for a feasibility study on renovating the city’s St. Elmo Hotel Building.
Many of these funding strategies for downtown revitalization involve planning and work with other agencies. Start planning now to take advantage of these tools and be on the lookout for MRSC’s next blog in this series, which will cover placemaking and parklets.
MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.