A look at a relatively new economic development tool
Jeff Raatz was not yet Henry County’s state senator when he authored new legislation in 2019 that has laid the foundation for more than 100 new local homes.
Sen. Raatz (R-Richmond) is the father of Residential Tax Increment Financing (TIF) districts.
A TIF is tool that local governments can use to pay for new public infrastructure, such as roads, sidewalks, water and sewer lines and stormwater drains.
The process starts with a long-term bond – similar to a mortgage on a house – that the city or county uses to pay for the new infrastructure. The land is now ready for a new factory or shopping center. Once that new building is up and running, the property value goes up, which mean the property taxes go up.
The TIF district keeps those new property tax dollars until the long-term bonds are paid off. After that, the property tax dollars go to local government units, including schools, fire departments and libraries.
Cities and counties had been using TIFs to grow their industrial centers for sometime before 2019. Raatz’s legislation gave them the option to use the same method to grow local housing options.
“I had a request to create residential TIFs in hopes of spurring residential developments especially in rural Indiana,” Sen. Raatz told The Courier-Times. “There has been much conversation recently on the need for housing and this is one way to help spur development.”
“The cost to create residential developments with infrastructure, such as new water and sewer service lines, then roads, has become cost prohibitive from the development side,” he added.
Similar to traditional TIFs districts, the additional property tax revenue derived from the development in residential TIFs will pay for those public parts of the development over time.
“The TIFs are working as designed,” Raatz said.
Since Raatz’s original 2019 legislation, residential TIFs have been expanded to include condominiums and Townhome projects.
Henry County communities have embraced residential TIFs. Over the past five years, dozens of new homes have been built that likely would not have gone up without TIFs.
Knightstown TIF
Knightstown was the first Indiana community to create a residential TIF allocation area under the new law.
The Knightstown residential TIF was created in December 2020 and now includes the River’s Edge housing development, which is designed for 22 condominium units.
Knightstown Town Council President Roger Hammer said the Knightstown Redevelopment Commission contributed $158,392.58 to the public infrastructure in the River’s Edge housing development.
“The Knightstown Redevelopment Commission has begun to receive more TIF dollars and now has the opportunity to support new development in Knightstown and help with appropriate projects to make Knightstown a better place to live for all of us,” Hammer said.
New Castle TIFs
New Castle has two residential TIFs: one at The Preserve at Northfield Village and one at Ashbury Fields.
The Preserve, located near the Henry County YMCA, has room for 85 homes, which includes a mix of single-family properties and condominium “quad” units. The TIF district will expire after 25 years, with the bonds scheduled to be paid off in 2041.
Ashbury Fields, a new neighborhood planned for East County Road 200 N, is expected to have 65 homes over the next five years. The TIF district here will expire after 20 years, with those bonds also scheduled to be paid off in 2041.
New Castle-Henry County Economic Development Corp. President and CEO Corey Murphy explained that residential TIFs helped the New Castle and Henry County governments pass the risk onto the housing developers, not the local tax payers.
“The bonds are issues issued through the unit of local government. But the local government is not responsible for the debt service,” Murphy told The Courier-Times.
According to Murphy, each housing developer agrees to pay the long-term bond debt, using the new property tax dollars from the homes they are building within the TIF area.
“So the risk is transferred,” he said.
Murphy explained the public infrastructure bonds at the Preserve is also backed by a commercial TIF area right next to it, at Northfield Park.
“Both of those are pledged to the debt service on the bonds that are issued to pay for the public infrastructure for The Preserve project,” he said. “But if there’s a shortfall, that shortfall is borne by the developer, not the city of New Castle.”
“If the tax increment collected off of the new homes is insufficient to make the debt service, it is the responsibility – by contract, by agreement – the developer makes that shortfall up,” he added. “So there is a significant risk to the developers.”
Murphy clarified that the capture property tax dollars pay for the public infrastructure within each residential TIF, not for the homes being built.
“Some people out in the universe think that we’re using these dollars to help build the homes,” Murphy said. “Those dollars are used to build everything that you need to have in place to build a home on. And the idea is that that helps drive down the cost of the home. It makes it more likely developers will come and build.”
Murphy said it is difficult in many markets in Indiana, not just in Henry County, to spur home construction at the volume that is needed to address housing shortages.
He said the hope is that new homes, such as those at The Preserve and at Ashbury Fields, will open lower-cost homes in the current stock and provide a ripple effect of new home owners.
Delayed tax revenue
Although New Castle, Knightstown and Henry County are seeing their overall assessed values increase with every new home, property tax revenue is not going up. The new tax dollars stay within the TIFs until the loans are paid off.
“In a perfect world, schools would increase in student numbers and thus funding increased from the State and Federal governments, and county or cities will see revenue increases from property taxes from the beginning and would increase to 100 percent when the bond is paid off,” Sen. Raatz said. “Thus, theoretically it is a win-win situation for all with new tax revenue and an increase in residents.”
– Story by Travis Weik (Editor@TheCourierTimes.com) of The Courier-Times. Read more local stories at TheCourierTimes.com.