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District Improvement Financing (DIF) - Recent Amendments May Re-invigorate Funding Program

August 2010Advisories

The District Improvement Financing (DIF) statute (at G.L. c. 42, § 1 et seq.) allows a Massachusetts municipality to pledge future increases in property taxes generated by private commercial and residential investments in a specified section of a community (a “Development District”) to the repayment of a bond issue used to finance capital improvements benefiting the Development District. For a developer, DIF means not having to cover the infrastructure costs associated with a project. For a municipality, it means being able to fund needed infrastructure and consequently being able to entice private development. The recently enacted Economic Development Act (Sections 99 through 104 of Chapter 240 of the Acts of 2010) changes the way municipalities calculate the increase in property taxes for purposes of DIF, and extends the period during which incremental tax revenue can be used to support bonds.

Background: To participate in DIF, a municipality must designate a Development District and create a Development Program. The designation of the district must be approved by the Economic Assistance Coordinating Council (“EACC”). The EACC must find that the designation of the district would encourage “increased residential, industrial and commercial activity in the commonwealth.” G.L. c. 42, § 2. Pursuant to the Development Program, a municipality can acquire and clear land, build infrastructure, promote development, etc. The Development Program should outline the means and objectives to “improve the quality of life, the physical facilities and structures and the quality of pedestrian and vehicular traffic control and transportation within a development district” and also to increase or improve affordable and market rate housing.

To calculate the increase in taxes resulting from private commercial and residential investments in a Development District, a baseline valuation is computed for the land and existing properties in the Development District. The baseline valuation, or “original assessed value,” equals the aggregate assessed value of the Development District as of the date the district was created. Previously, this baseline valuation had to be increased by an “adjustment factor” for a particular fiscal year, to adjust for inflation. Under the Economic Development Act, municipalities may now elect not to account for inflation, thereby increasing the revenue available to support bonds. The Act also eliminates from the computation of “original assessed value” annual increases or decreases due to changes in the tax-exempt status of parcels in the Development District. Once the baseline valuation is established, a percentage of any increased taxes generated by the additional property valuation resulting from new private commercial and residential investments are escrowed for the payment of the debt service on the bonds financing the infrastructure improvements.

Only a handful of projects have used DIF since the program was originally created in 2003. The recent amendments offer hope that this program will now become a more frequently-used source of financing to support important development projects.

This G&S Advisory was co-authored by Peter Corbett and Yuanshu Deng, members of the firm's Real Estate group.

For questions about the information contained in this advisory, please contact your usual Goulston & Storrs attorney or any of the following attorneys:

Peter D. Corbett
(617) 574-4124
[email protected]

Douglas M. Husid
(617) 574-4139
[email protected]

This G&S Advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

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