Members of the Economic Development Division met with city staff to discuss their use of Tax Incremental Financing (TIF) to increase housing support in a Housing Policy Committee meeting on Feb. 26.
Madison officials are turning to new housing policies and financing tools as the city works to keep pace with rapid growth and one of the lowest rental vacancy rates in the country.
Launched in 2021, the city’s Housing Forward initiative aims to help create 15,000 new homes by 2030 through expanding housing choice. Some of the completed milestones include renovating rental homes and public housing units, constructing additional affordable housing and creating a transit district that prioritizes walking and biking access to bus lines.
To continue creating affordable housing throughout Madison, the city’s Economic Development Division said their staff has three main focuses: “[Monitor changes in TIF policies, strategically purchase land and provide accessible public transportation].”
At the committee meeting, Madison’s Economic Development Division Director Matt Mikolajewski said lawmakers at the Capitol have been revising state housing laws in recent weeks.
“One of the most exciting is a proposal to change the number of years that the city can use tax increments for affordable housing at the closure of a [Tax Incremental District] from one year to two years,” Mikolajewski said.
A Tax Incremental District (TID) is a designated area in a city targeted for supported economic development. Within a TID, the city uses the new development’s future increase in property tax revenue to fund its development. The upgraded infrastructure within TIDs primarily serves the city’s residents and enhances their quality of life.
“The city is able to [closed] districts open for one additional year [and] direct that additional year’s worth of increment towards affordable housing,” Mikolajewski said. “So at the closure of a TID we would be able to keep it open for two years which would enable us to then have twice as much revenue coming from closed TIDs to the Affordable Housing Fund.”
Mikolajewski said the extra year of housing support will be crucial as several of Madison’s larger TIDs are set to close in the next five years. An additional year of funding directed to the Affordable Housing Fund would allow for more, otherwise unaffordable development.
Another change Mikolakewski said Wisconsin lawmakers are considering is the ability to stack TIF funds with additional city and state housing programs.
“[State law] prevented you from using [housing support programs] along with TIF and/or tax credits, so it really reduced the ability for developers to take advantage of those programs,” Mikolajewski said. “[Legislation] that would allow for developers to stack those new state programs with existing tax credit programs and with tax increment financing [would] be hugely helpful with housing development to be able to provide multiple sources of funding.”
For projects to be eligible for assistance, they must meet the “But For” test, proving the project could not exist without TIF assistance. Cities analyze projects from top to bottom across return rate, rent and construction cost to verify their eligibility.
Mike Tarby, a Resident Relations Coordinator for Steve Brown's Apartments, told The Daily Cardinal TIDs are crucial for city development.
“Candidly, my biggest concern is that we’re under-utilizing this valuable tool,” Tarby said. He added he believes the city’s main concern seems to be around TIDs experiencing shortfalls and straining the city’s budget.
A shortfall occurs when a district fails to generate enough tax increment revenue to cover the project’s development costs.
Dan Rolfs, Madison’s Real Estate Development Manager, said that hasn’t happened during his 21 years serving the city.
To avoid potential shortfalls, Rolfs said the city closely compares a project’s starting capital, return rate and construction costs to city standards. Rolfs said the city also analyzes job sites for future projects, additional tax increment income and how to apply that to benefit the community. The city also measures the districts’ performance over time and adjusts the flow of funding based on if the TID is performing well or not.
One example in Madison is TID 36 along East Washington Avenue.
“We brought in a whole bunch of projects that we thought might happen, [but] weren’t sure about,” Rolfs said. “Over time, they really started to develop and they took off.”
While Rolfs has yet to witness a TID shortfall in Madison, some failing TIDs have been bailed out by other districts.
“[TID 38 closed] and it was never going to recover,” Rolfs said. “We donated money from other districts [TIDs 35 and 41]...but we don’t want to do that.” Borrowing money from other districts ultimately puts those TIDs at risk of shortfall as well.
With thousands of new residents each year and vacancy rates are reaching historic lows, leveraging TIFs may help shape Madison’s housing landscape for the next decade.
