The ABCs of Opportunity Finance: Understanding TIFs, CDCs and More

Improving Access to Community Development Capital Series

In a tiff over TIFs? Wondering what a CDC is? What about a CDFI?

More than 100 people with the same questions attended a recent Fed-sponsored seminar to learn about the topics from experts in the field. Appropriately, the event was held at the Centene Center for the Arts, a historic structure in St. Louis that was redeveloped with the help of tax increment financing (TIF).

The topic that created the most buzz was TIF. Although often controversial, a TIF can be the answer to developing a project that is good not only for business, but also for the community, panelists said. They outlined business, housing, nonprofit and public improvement projects that all benefited from TIFs.

Important points to remember:

• There must be a need for a TIF. It might not be the right tool for your project.
• It must be structured in a way that results in a good and safe deal for the community.
• It is a complicated process and thus requires developers to get a specialized team of experts on board to handle the process.
• Various governments have various laws regarding TIFs.
• There are often several TIFs in place in the same district, which can affect how a community responds to a TIF proposal.

Definition
Tax Increment Financing (TIF) — a tool to help local governments redevelop declining or economically stagnant areas. A TIF allows local governments to make improvements, such as new roads and sewers, to attract business without tapping into general funds or raising taxes. Instead, they use all or a portion of the expected increase in property tax revenues for a specific time period to make the improvements.

---

Speakers also extolled the benefits of for-profit and nonprofit CDCs. With more than 8,000 CDCs across the country, “wonderful things” have been accomplished, one speaker said.

Important points to remember:

• A CDC must focus on the needs of the community.
• It must have a framework to succeed.
• It should involve community leaders.
• It should involve banks. (“It’s where the money is.”)
• It must have a competent administer.
• Marketing the CDCs products is essential.
• A loan-loss reserve is essential.
• What if you are successful? Will you have enough money for borrowers?
• Keep investors informed.

Definition
Community Development Corporation (CDC) — a community-based legal entity usually initiated, led and controlled by residents or a bank or group of banks. It is structured as a nonprofit, IRS 501(c)3 designation or as a for-profit business. Its primary mission is housing production, job creation, business development and community services.

---

CDFIs can include banks, credit unions, loan funds, venture capital funds, community development corporations and microenterprise loan funds.

Important points to remember:

• Investors are attracted to CDFIs by the double bottom line, combining a financial return with a social return. All are interested in community development.
• Investors are primarily individuals, banks and thrifts, nondepository financial institutions and corporations.
• The Treasury Department created the CDFI Fund, a federal program to expand the availability of credit, capital and financial services in low-income urban and rural communities.

Definition
Community Development Financial Institution (CDFI) — a mission-driven financial institution that provides financial products and services to people and communities underserved by traditional financial institutions. It may or may not be part of the Treasury’s CDFI program.