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001_TIF Cover

Innovating project finance in Latin American cities through Tax Increment Financing

September 14, 2020 por Ramiro López Ghio - Carlos Salazar - Luis Schloeter Leave a Comment


Would it be possible for Tax Increment Financing (TIF) to work in Latin American and Caribbean (LAC) cities to expand local governments’ investment capacity in infrastructure?

The short answer is yes.
Although there are many factors to consider. The Urban area of the IDB’s research found that a handful of cities in the region could meet most of the critical factors needed to successfully implement TIF programs. This article summarizes the findings in the publication Tax Increment Financing for Urban Projects and presents a framework that discusses what cities need to do in order to implement a TIF and allow them to unlock land values to finance municipal infrastructure and spur economic development.

002_TIF Book Cover Horizontal
Tax Increment Financing (TIF) for Urban Projects

What exactly is a TIF?

Under a TIF program, anticipated increases in property taxes within a designated TIF district are earmarked against the repayment of a project loan, usually as a municipal bond. The loan is used to deliver a critical infrastructure project, such as a metro station, that, in turn, will likely appreciate real estate property values within its area of influence and lead to new development, which also creates additional property tax revenue. In other words, TIF allows cities to defray capital investment costs by partially capturing the economic benefits that public infrastructure investments generate.

What factors determine the successful development of a TIF?

In our research, based on an extensive literature review, we identified over 20 critical success factors that can be used to explain the likelihood of a TIF program being successfully rolled out by public authorities in LAC. We divided the factors into two groups. The first group covers a local government’s capacity to design and deliver a TIF program based on regulatory and institutional aspects. The second group focuses on the health of the economy and public finances. Together, these factors create a check list that municipal authorities can use to assess where they are and what they need to do to use TIF for infrastructure delivery.

Municipalities’ capacity to design and deliver TIF programsEconomic and Financial Factors
Municipal control of land use planning, laws, and regulationsSovereign credit rating
Multiyear investment program developed in accord with a long-term municipal development plan that is effectively communicated to stakeholdersInflation rate
Protection of property rights, including the provision of adequate registration of property titles and legal ways for effectively resolving disputes over ownershipConsolidated fiscal balance of the national central government
Modern real estate cadaster with reliable, timely data on market values and other variables needed to estimate themDegree of fiscal autonomy of the municipality
Legal right to define a special district for TIFFinancial management standards and reporting policies
Legal right to earmark municipal revenue from real estate property tax or other sources for specific use in the TIF districtLegal authority of the municipality to borrow
Legal right to adequately control and administer the real estate property tax and other municipal revenues to be used by the TIF districtCredit options: sources and currency
Develop plausible scenarios supported by reliable data concerning the increment of real estate property values in the TIF districtSurplus or operating deficit
Legal authority to use the value capture instruments needed to implement the financial strategyTax coverage and collection rate
 Debt history
 Favorable economic outlook on the municipality’s real estate market cycle
Table 1. Critical Success Factors for TIF Programs. BID

Medellin’s Carrera 80 Tram Project

After identifying and categorizing the critical success factors for TIF, we created benchmarks and assessed a group of LAC cities against them. We tested our framework in Mexico City, Montevideo, and Medellin. This allowed us to analyze where could TIF potentially work. Our findings, which are detailed in the full report, indicated that Medellin, Colombia was particularly in a strong position to deliver the region’s first TIF program. To validate our results, we conducted a feasibility assessment on the first phase of the planned Carrera 80 tram project.

Project Scope

The Carrera 80 tram project originally consisted of a new transit line which would be served by a tram system of approximately 14 km long with 20 stations along the way.

Extensión del tranvía de la Carrera 80. Fuente BID
Carrera 80 Tram Study Area. IDB

The tram line was planned as a state-of-the-art public transit system, which would transform the west corridor of Medellin with a compact and sustainable real estate development for a wide range of income groups. It would deliver new open spaces, public amenities, and pedestrian and bike lines. The nature of the intervention presented unprecedented opportunities for the use of value capture mechanisms to relieve the public sector financial burden and establish a self-sustaining operating scheme, making it an ideal project to test against the TIF criteria.

We first conducted a real estate market scan to determine how the tram project would likely transform the real estate market within its area of influence (a 500-meter radius). Our findings suggested that the project would accommodate at least 3.1 million m2 of new development between 2020-2044.

We then modelled how much additional property tax revenue would the city receive from new and appreciated real estate properties. We estimated that the Municipality of Medellin would effectively collect approximately US$571 million in incremental property tax revenue between 2020 and 2044. Depending on credit conditions, we estimated that the increment from property tax revenue could support between US$88 million and US$224 million in debt, which would cover between 21% and 55% of the CAPEX of the first phase of the tram project.

Total Property Tax Revenue. Fuente BID
Total Property Tax Revenue. IDB

Areas for future research

Our research provides strong evidence that supports the claim that LAC cities can bring innovation into project finance by testing new instruments such as TIF. However, we acknowledge that getting the financials right is only part of the equation. There needs to a solid institutional and governance framework in place for cities to manage an efficient and transparent TIF program.

In early 2019, the Government of Colombia was the first in Latin America to allow local authorities to use TIF. However, many questions remain unanswered. For instance, what is the process for designing and approving TIF districts? How can municipal authorities earmark property taxes to repay TIF bonds? How will local authorities engage with property owners affected by TIF districts?

These questions, and others, will be addressed in a second study that is currently being implemented by Housing and Urban Development Division in another potential TIF district in Barranquilla, Colombia.


Special thank you to HR&A Advisors and David Vetter for their contributions to the publication.


Filed Under: Uncategorized Tagged With: Finance, infrastructure, Investment, Medellin, Property, Tax, Tax Increment Financing, TIF, Tram

Ramiro López Ghio

Es economista de la Universidad Nacional de La Plata (Ar), con Postgrado en Economía de la Universidad Torcuato di Tella (Ar), Master en International Political Economy de la Universidad de Warwick (UK), y PhD del Institute of Governance and Public Management de la Escuela de Negocios de Warwick (UK). Antes de llegar al BID, fue consultor del Banco Mundial en la Unidad de Sector Público para Latinoamérica y el Caribe. Previamente, trabajó en la Jefatura de Gabinete de Ministros y en la Presidencia de la Nación de la Argentina en proyectos financiados por el Banco Mundial tendientes a fortalecer la gestión pública en distintos niveles de gobierno. En Argentina realizó trabajos de investigación en el Consejo Federal de Inversiones y en el Consejo Nacional de Investigaciones Científicas y Técnicas. Ha dictado cursos en diversas universidades y publicado trabajos de investigación en revistas académicas y editoriales, incluyendo “Interdependencia municipal en regiones metropolitanas. El caso de la Sabana de Bogotá” (BID, 2018). Desde 2008 se desempeñó como especialista de la División de Gestión Fiscal y Municipal en Bolivia y Colombia, liderando operaciones de préstamo de inversión para gobiernos subnacionales y como Coordinador del Programa Ciudades Emergentes y Sostenibles en Colombia. Desde 2018 asumió como Jefe de Operaciones dela Representación del BID en Colombia.

Carlos Salazar

Carlos Salazar Echavarría es arquitecto de la Universidad Javeriana con especialización en Planificación Regional y magíster en Desarrollo Regional de la Universidad de los Andes, y maestría en Asuntos Internacionales con énfasis en Políticas Urbanas y Sociales de la Universidad de Columbia en Nueva York. Sus intereses de investigación están relacionados con el desarrollo de soluciones innovadoras y sostenibles a las problemáticas inherentes al desarrollo territorial y los vínculos entre las áreas rurales y las siempre crecientes aglomeraciones urbanas. Ha sido consultor de programas del PNUD, el Banco Mundial, The Earth Institute y USAID, en países como México, Kenia, Ghana, Bélgica y Estados Unidos, y de organizaciones como el Departamento Nacional de Planeación, el Centro Latinoamericano para el Desarrollo Rural – RIMISP, el Ministerio Federal de Medio Ambiente de Alemania y empresas privadas del sector de la construcción. Adicionalmente, fue el Gerente de Sostenibilidad de Findeter, liderando la implementación de los programas de Ciudades Sostenibles y Competitivas, director operativo de la Estrategia de Superación de Pobreza Extrema del Gobierno Nacional (ANSPE - Red Unidos), Director de Planeación Urbana de AECOM Technical Services, Asesor de la Presidencia de la República, Banco de la República y Pax Christi International, entre otros. En la actualidad es el Especialista Senior de Sostenibilidad para la Representación de Colombia del Banco Interamericano de Desarrollo.

Luis Schloeter

Luis Schloeter es economista urbano con más de 8 años de experiencia. Se especializa en infraestructura municipal, bienes raíces y desarrollo económico local con un enfoque en planificación estratégica y financiamiento. Tiene una trayectoria probada en la originación y gestión de proyectos de infraestructura urbana. Ha publicado estudios sobre infraestructura y finanzas municipales, descentralización y gobernanza urbana. Luis también tiene experiencia en la evaluación económica de proyectos de infraestructura y Asociaciones Público-Privadas. En América Latina, Luis gestionó un estudio de desarrollo orientado al tránsito y captura de plusvalías para el proyecto de tranvía de la Carrera 80 en Medellín, Colombia. En Costa Rica, brindó asesoramiento técnico para un estudio de project finance para una importante iniciativa de regeneración urbana e inmobiliaria en San José. En Panamá, apoyó actividades de planificación estratégica para proyectos de inversión en infraestructura en varias ciudades intermedias. En el Reino Unido, Luis lidera un estudio de evaluación económica para el desarrollo de un proyecto de vivienda verde que entregará 2,350 unidades en Manchester. También está trabajando en una propuesta para la designación de un área de puerto libre en East Midlands. Recientemente, Luis apoyó el desarrollo de un caso estratégico y económico para la regeneración de un sitio industrial en desuso en el norte de Inglaterra, que atraerá inversiones y creará nuevos empleos en sectores de alto valor. Actualmente, Luis es Economista Senior en el equipo de Ciudades e Infraestructura de Vivid Economics. Anteriormente fue Consultor en la División de Vivienda y Desarrollo Urbano del Banco Interamericano de Desarrollo en Washington, D.C. Luis tiene una Maestría en Desarrollo Económico Urbano de University College London y una Maestría en Planificación Urbana de la Universidad de Nueva York. También es un Analista Certificado en Modelaje y Valuación Financiera.

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