Tax Increment Financing: Cases for Study

The city of Princeton, MN (bond rating Baa) is considering a tax-increment district for financing a downtown development project. The city must raise $400,000 for the project. The project will generate $94,000 a year, once it is in place; the city estimates it will take 2 years before any tax-increment revenues are generated. Surplus earnings will be invested at 7%. Bond rates are projected at 7.25% for the first year, and will increase at .25% each year, to a maximum of 9.0%.

1. Assume the city capitalizes $60,000 of the interest. What is the payback period and the pattern of debt coverage for this project?

Suppose the project will generate only $50,000 of revenue each year. Can you develop a feasible schedule of debt repayment for the project, assuming $60,000 capitalized interest?

3. Using the original assumptions, compare the effect of $30,000 capitalized interest and $60,000 capitalized interest on the feasibility of the project.

4. Suppose the city's bond rating is upgraded to A. At this rating, bonds start at 7.0%, and increase in the following pattern: 7.0%, 7.2%, 7.4%, 7.75%, 7.9%, etc. What difference does this make in the feasibility of the project?

5. Suppose interest rates jump by 1%. What is the effect on project feasibility? What schedule of debt repayment would be necessary to make the project work?

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