Tax increment financing (TIF) is a value-capture financing tool where future property tax growth funds redevelopment and infrastructure today. 

Raising taxes to directly fund projects is politically difficult. Yet, projects such as new utilities or transportation infrastructure still require that major upfront investment, long before they pay their way.  TIF is not a grant, nor does it hinge on a tax increase. Instead, future increases in property tax revenue pay for the infrastructure improvements that make the development possible in the first place. 

Once a TIF district is established, current property tax revenue within that area becomes the base tax amount. This will be distributed as usual to existing local services. But as redevelopment progresses, that property tax revenue will grow. This additional revenue is the “tax increment,” and heads straight into the dedicated TIF fund to pay down bonds issued to finance redevelopment costs.

Typically, TIF districts are established for a fixed period (usually 20 to 25 years). After that, the new-and-improved property tax revenue heads back to the public purse. 

Financing Development

For municipalities, TIF is a funding tool for large-scale projects like roads, utilities, parking facilities, and public spaces, as well as behind-the-scenes projects like environmental remediation and site preparation. 

For developers, it is a form of gap financing with government backing. The future tax revenue covers the costs that the project can’t support through more traditional debt and equity financing. We look at funding models below, but the concept is the same for all: the project helps to pay for the infrastructure and improvements that make it possible.

And that’s an opportunity developers should be watching carefully.

Why Cities Partner With Developers on TIF Projects

Who doesn’t like the idea of a project “paying for itself”? Especially if you are a struggling municipality in need of an upgrade, keen to avoid dipping into the funds you do have, and trying to attract developers. 

Today, you’ll find thousands of TIF districts across the United States. Illinois alone has around 1,488 active TIF districts across 511 of its municipalities. 

Why?

When well-implemented, these projects support job creation and increase base property values. Plus, there’s that long-term growth in the local tax base once the revenues head back to the general fund. And they get private developers involved (and paid) in projects that would otherwise die on the drawing board.

TIF financing can be highly successful. Take the revitalization of Washington, D.C.’s The Wharf. Launched as a two-phase project valued at $3.6 billion in 2017, it was announced in mid-June 2025 that the project had paid off its TIF revenue bonds 15 years ahead of the original maturity schedule. 

TIF and Private Developers

But the real magic behind the TIF model is in encouraging developer participation.

TIF funding is not a free-for-all. Developer agreements will outline what costs are funded, for how long, and how it will be received. Two structures are common:

• The developer carries upfront costs and is reimbursed over time from the fund, a kind of “pay as you go” voucher or bond model. 
• Tax-exempt bonds backed by the projected tax increment are issued for upfront funding and repaid over time.

As The Wharf shows, the latter can be highly successful. Unsurprisingly, municipalities like the former more, given that the developer carries more of the risk.

TIF Risks and Rewards

Yes, there are risks, as with any project. 

Most notably, that the projected income never materializes. There’s also the bureaucracy and regulatory demands that working with any governmental entity brings to the table. 

Ironically, one of the best-known and largest TIF projects, New York City’s Hudson Yards, shows the risk of over-valuing. Major upgrades to the No. 7 subway line and Eastern Rail Yard areas transformed a previously underutilized area into a thriving commercial and residential hub. 

Success for the area, yes. But the city guaranteed interest payments on up to $3 billion in bonds. Where incremental revenue fell short, the city faced $2.2 billion in unexpected costs. 

However, municipalities make strong partners, with an incentive to ensure developers have clear paths and support. They want the development to succeed. They also reduce the upfront capital burden on developers, which is often what makes redevelopment projects financially feasible in the first place.

TIF models can even increase the ROI and financial viability of large or complex projects. And lenders love a government-backed bond, which can lead to better terms for the developer on project-related loans. 

TIF Implementation That Works: Best Practices

This leaves us with a core question: what separates unsuccessful TIF districts from those that succeed on the developer side?

TIF districts succeed when:

• There is clear communication and transparency with affected entities and the public
• The development has “but for” necessity (it wouldn’t happen without the TIF assistance)
• Strong agreements exist between the developer and the municipality, with clear terms
• TIF agreements and bond structures are attractive to the developer, with risks reduced

Just because it’s a municipal entity does not mean developers should view it as a blank check or risk-free opportunity. Experienced legal and financial guidance will be needed to navigate regulations and negotiations favorably. 

But TIF projects actively benefit when entrusted to developers with strong track records and community presence. Communities want developers they see as there to help, not just to profit. 

TIF doesn’t eliminate risk. It doesn’t make bad projects good ones. But for the right developments, it creates financial viability. For developers willing to work with municipalities and structure deals carefully, TIF can unlock projects that would otherwise never move beyond the planning stage.

It’s a win-win for everyone. And an opportunity developers should not be snoozing on.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.