Within the next few weeks, Massachusetts municipalities will finally be able to use “district improvement financing,” or “tax increment financing” as it is known in 46 other states.

District improvement financing is a proven, powerful new tool for Massachusetts communities to stimulate and guide new development and revitalization. District improvement financing enables communities to allocate new tax revenues from new and prospective real estate projects for financing specified improvements within a defined geographic district. Typical examples include the extension of a sewer line to an office or industrial park, the construction of parking, or streetscape improvements.

District improvement financing is an attractive new economic development tool in Massachusetts because it enables communities to:

• Cohesively plan and implement a program of improvements for a specified district, stimulating appropriate private investment and growth;

• Utilize a financing mechanism that is a revenue bond, which is not counted as part of the municipality’s debt limit;

• Dedicate new tax revenues from a specific area to support improvements in the same area;

• Generate new real estate tax revenues for the general fund;

• Make use of a new way of financing desired public improvements.

Real estate developers will also find district improvement financing an attractive financing mechanism for public-purpose investments. Often communities have asked developers to pay for water and sewer lines and other public improvements, which in the long term benefit many property owners, but the cost is borne by a single developer. These public infrastructure costs can now be more equitably financed with district improvement financing bonds, which are paid from the new tax growth generated from multiple development projects with different property owners.

Unlike many economic development tools and funding programs, all Massachusetts municipalities, regardless of size, location or wealth, can use district improvement financing. It enables communities to bond in advance, based on anticipated private investment, and to build the necessary infrastructure to set the stage for private investment, redevelopment and appropriate growth.

The Massachusetts district improvement financing statute is very flexible, particularly as to the use of funds. It can be tailored to the unique needs of each redevelopment scenario. Eligible expenditures permitted by the statute include land assembly, water and sewer lines, roads and transportation, parking lots, pedestrian enhancements, land assembly, relocation, capital costs, financing, professional services, environmental expenses, organizational expenses, as well as brownfields cleanup and remediation.

In recognition of Massachusetts’ transition to an information-based economy, training is an eligible expense for district improvement financing investment. However, it cannot be used to construct municipal buildings, such as city or town halls.

Municipalities and developers wishing to use district improvement financing for public-purpose investments will need to work together to development a plan. A geographic area, or district improvement financing district, must be designated, and cannot exceed 25 percent of the municipality’s town land area. The district may consist of up to three non-contiguous areas.

The district improvement financing plan describes a program of improvements and services for which the revenues will be used for a period not exceeding 30 years. Municipalities borrowing funds for capital improvements in the program will need to exercise prudence, and possess a high degree of confidence about prospective private investment, requiring a strong working relationship with affected property owners and real estate developers in the formation of the plan.

District improvement financing bonds can be revenue bonds, secured by the new real estate taxes generated by the new investment within the district. Some situations may require credit enhancements from the municipality. The bonds are a tax-exempt issue. Although district improvement financing is new in Massachusetts, the bonds are a familiar product to bond buyers and investors, since they have been available for over 40 years. In Massachusetts, they will be called “TIF” bonds, but throughout the rest of the country and on Wall Street, they are known as “DIF” bonds. The attractiveness of each bond issue will depend on the viability and strength of the local development program, including the credibility of the local real estate development team and tenants in the district. As a revenue bond, a DIF bond is not counted as a part of a municipality’s indebtedness.

Municipalities looking to grow their tax base may use district improvement financing to help stimulate appropriate growth and development. The new tax revenues may be allocated, in part, to both the general fund and to pay for the program, including all district improvement financing indebtedness – provided that there is sufficient new increased real estate tax revenues for both.

In the early years of a district, much, if not all, of the new real estate tax revenues will likely be dedicated to bond payments. New growth tax revenues allocated for the program will likely not be eligible to be counted as part of the municipality’s tax base. However, new revenues going to the general fund will be counted in the 21/2 formula.

Municipalities and developers interested in district improvement financing will need to work together to form the plan and secure local and state approvals, before starting. The local governing body, either city council or town meeting, approves and authorizes the district improvement financing plan and borrowing for the projects.

State approval of district improvement financing plans must also be secured from the state’s Economic Assistance Coordinating Council, co-chaired by Barbara Berke of the Department of Business & Technology and Jane Gumble of the Department of Housing and Community Development. The draft regulations governing state review of the projects will be issued in late April for public review and comment, with an anticipated effective date of July 2004. The Massachusetts Office of Business Development is the lead state agency working on district improvement financing.

The enabling legislation sponsored by Sen. David Magnani was enacted last year, with advocacy support from Massachusetts chapter of the National Association of Industrial and Office Properties.

District improvement financing is a welcome tool in the Massachusetts economic development tool box. It can and should be used with other existing economic development and revitalization tools, including state and federal grant resources, housing programs and the state’s Economic Development Incentive Program.

In these restrained and lean economic times, Massachusetts municipalities can now tap a new source of financing for capital infrastructure improvements using district improvement financing, which will stimulate and enhance private sector real estate investment.