Tax Increment Financing in North Carolina

Project development financing is a debt financing mechanism that allows local governments to borrow money to fund certain public improvements with the purpose of attracting private investment in a designated area. The debt incurred by funding the public improvements is both secured by and repaid from the additional property tax revenue resulting from the area’s new private development.

No. North Carolina’s project development financing mechanism is commonly known nationally as tax increment financing. Currently 49 states have enabling legislation for some form of tax increment financing, in which local units use future gains in property taxes to finance the current improvements that will create those gains, although the specific provisions and titles often vary

Counties and municipalities (including cities, towns, and villages) may issue project development bonds.

Project development bond proceeds may be used only to finance the capital costs of specified purposes that enable, facilitate, or benefit private development within the development financing district.

The following chart details the purposes for which project development bonds may be issued, as specified in G.S. 159-103(a). Note that both counties and municipalities may issue project development bonds to fund all of the specified purposes, regardless of whether the unit of local government may issue general obligation bonds to fund the specified projects or activities.

¹ G.S. 159-103(a), as amended by S.L. 2007-395 (SB 1196), specifically exempts certain types of parks and recreation facilities - stadiums, arenas, golf courses, swimming pools, wading pools, and marinas.

Capital costs are defined by G.S. 159-48(h) and G.S. 159-103. They include:

• The costs of all property, both real and personal and both improved and unimproved, plants, works, appurtenances, structures, facilities, furnishings, machinery, equipment, vehicles, easements, water rights, franchises, and licenses used or useful in connection with the purpose authorized;
• The costs of demolishing or moving structures from land acquired and acquiring any lands to which such structures are to be moved;
• The costs of plants, specifications, studies and reports, surveys, and estimates of costs and revenues;
• The costs of bond printing and insurance;
• The administrative and legal expenses;
• The interest on the debt instruments being issued or on notes issued in anticipation of the instruments during construction and for a period not exceeding seven years after the estimated date of completion of construction;
• The establishment of debt service reserves and any other reserves reasonably required by the financing documents; and
• Any other services, costs, and expenses necessary or incidental to the purpose authorized.

Yes. A local unit may capitalize the interest on the project development bonds during construction, and for up to seven years after the estimated date of completion of construction, of the project that is funded with the bonds. Capitalizing interest payments in the early years of a project development financing often is necessary because the project development financing district will not generate enough increment revenue to meet debt service requirements.

A project development financing district (project development district) is the area targeted by the local government for private investment. Project development bond proceeds are used to finance the capital costs of certain public projects that enable, facilitate, or benefit the private development within the project development district.

Yes. The total land area within all county or municipal project development districts may not exceed 5 percent of the total land area in the taxing unit that establishes the district.

Note that if a municipality establishes a project development district, the land included in the municipality’s district does not count against the 5 percent of unincorporated land in that county that may be included in a project development district established by the county. Also, land in a county district that is subsequently annexed by a municipality does not count against the municipality’s 5 percent limit unless the county and municipality have entered into an increment agreement—whereby the municipality agrees that the municipality’s property taxes collected on part or all of the incremental valuation in the district will be paid into the reserve increment fund for the district.

G.S. 158-7.3 authorizes a county to create a project development district and fund public improvements that are part of a development project within the district.

A development project is a capital project that includes capital expenditures by both private entities and one or more units of local government and that increases net employment opportunities for residents of the development district or within a two-mile radius of the project, whichever is larger, and increases the local government’s tax base.

The project development district is comprised of property that meets at least one of the following criteria:

• Blighted, deteriorated, deteriorating, undeveloped, or inappropriately developed from the standpoint of sound community development and growth;
• Appropriate for rehabilitation or conservation activities; or
• Appropriate for the economic development of the community.

A county may not include any land that is inside the limits of a municipality in a development district unless it enters into an interlocal agreement with the municipality to allow a multi-unit undertaking. An additional limitation applies to a plan for a project development district established pursuant to G.S. 158-7.3 and located outside a municipality’s central business district. A maximum of 20 percent of the plan’s estimated square footage of floor space of private development forecast may be proposed for use in retail sales, hotels, banking, and financial services offered directly to consumers, and other commercial uses other than office space. The 20 percent limitation does not apply to a project development district located in a development tier one area that is created primarily for tourism-related economic development.

No, unless the municipality jointly agrees with the county to create such a district.

There are two different kinds of project development district options available to municipalities.

G.S. 160A-515.1 allows a municipality’s governing body to establish a project development district which is comprised of all or part of one or more redevelopment areas. A municipality’s planning commission, as established by municipal ordinance, may designate the following types of property as a redevelopment area:

• Property that is blighted because of dilapidated, deteriorated, aged, or obsolete buildings; inadequate ventilation, light, air, sanitation, or open spaces; high density of population or overcrowding; or unsanitary or unsafe conditions;
• A nonresidential redevelopment area with dilapidated, deteriorated, aged, or obsolete buildings; inadequate ventilation, light, air, sanitation, or open spaces; defective or inadequate street layout of faulty lot layout; tax or special assessment delinquency exceeding the value of the property; or unsanitary or unsafe conditions;
• A rehabilitation, conservation, and reconditioning area in present danger of becoming a blighted or nonresidential redevelopment area; or
• Any combination of the above types of areas.

Alternatively, G.S. 158-7.3 authorizes a municipality to create a project development district and fund public improvements that are part of a development project within the district.

A development project is a capital project that includes capital expenditures by both private entities and one or more units of local government and that increases net employment opportunities for residents of the development district or within a two-mile radius of the project, whichever is larger, and increases the local government’s tax base.

The project development district is comprised of property that meets at least one of the following criteria:

• Blighted, deteriorated, deteriorating, undeveloped, or inappropriately developed from the standpoint of sound community development and growth;
• Appropriate for rehabilitation or conservation activities; or
• Appropriate for the economic development of the community.

An additional limitation applies to a plan for a project development district established pursuant to G.S. 158-7.3 and located outside a city’s central business district. A maximum of 20 percent of the plan’s estimated square footage of floor space of private development forecast may be proposed for use in retail sales, hotels, banking, and financial services offered directly to consumers, and other commercial uses other than office space. The 20 percent limitation does not apply to a project development district located in a development tier one area that is created primarily for tourism-related economic development.

Yes. G.S. 158-7.3(b) and G.S. 160A-515.1(a) authorize a county to act jointly with a municipality located within the county to finance a project, define a project development district that is within the municipality, and adopt a project development financing plan for the district.

If a county and municipality jointly create a project development district, the district may not exceed 5 percent of the total land area in the county and 5 percent of the total land area in the municipality.

Yes. A county may enter into an interlocal agreement with a municipality located within the county to jointly finance a project within a project development district located within the municipality. Either unit may issue the project development bonds. The unit that does not issue the project development bonds may pledge all or any part of the taxes received or to be received by the non-issuing unit on the incremental valuation accruing to the project development district to the repayment of the bonds issued by the other unit, pursuant to the terms of the interlocal agreement.

Yes. A municipality must send notice of a proposed project development financing plan to the board of county commissioners of the county or counties in which the project development district will be located before adopting the plan. The board(s) of county commissioners has 28 days from the date the notice is mailed to disapprove the plan. If the board(s) disapproves the plan the municipality may not proceed. If the board(s) does not disapprove the plan, the municipality may proceed to adopt the project development financing plan if the other statutory requirements are met.

A project development financing plan must include the following:

• A description of the boundaries of the project development district;
• A description of the proposed development, both public and private components;
• The costs of the proposed public activities;
• The sources and amounts of funds to pay for the proposed public activities;
• The base valuation of the project development district;
• The projected increase in the assessed valuation of property in the district;
• The estimated duration of the project development district;
• A description of how the proposed public and private development of the district will benefit district residents and business owners in terms of jobs, affordable housing, or services;
• A description of appropriate ameliorative activities if the proposed projects negatively impact district residents of business owners in terms of jobs, affordable housing, services, or displacement; and
• A statement that the initial users of any new manufacturing facilities included in the plan will be required to pay an average wage that is above the average manufacturing wage paid in the county or is not less than 10 percent above the average weekly manufacturing wage statewide, unless an exemption to such requirements is approved by the Secretary of Commerce.

The basic security for the project development bonds is the unit’s property taxes levied on the incremental value of property in the project development district. If a county and municipality jointly agree to finance a public improvement project in a project development district, the non-issuing unit also may pledge all or any part of the taxes received or to be received by it on the incremental valuation accruing to the project development district to the repayment of the bonds issued by the other unit.

Additionally, a local government may pledge any other revenues from sources other than the issuing unit’s taxing power. A unit also may enter into covenants to take action to generate pledged revenues, and may pledge, mortgage, or grant a security interest in the real and personal property financed or improved with the proceeds of the project development bonds.

Yes. A unit that issues project development bonds may enter into an agreement with the owners of property located in the project development district whereby the owners agree to a minimum assessed value of the property located within the district. The minimum assessed value ensures that there will be incremental value and, accordingly, incremental revenues, even if no new private development occurs in the district or the new private development does not increase the value of the property in the district as expected.

Yes. The minimum assessed value of property located within the project development district applies to all property taxes assessed against the property, including those assessed by taxing units that did not establish the district.

No. Section 14 of Article V of the North Carolina Constitution authorizes counties and municipalities to issue debt instruments secured by proceeds from a tax increment and by revenues available to the taxing unit from sources other than its taxing power without voter approval.

Yes. A local government must receive LGC approval before issuing project development bonds. The application for approval must include all statements of fact and documents required by the Secretary of the LGC concerning the proposed bonds, the project development district, the project development financing plan, and the financial condition of the taxing unit.

According to G.S. 159-105(a), the LGC may consider any matters it deems relevant to whether the bond issuance should be approved, including:

• Whether the projects to be financed from the bonds are necessary to secure significant new project development for the district;
• Whether the proposed projects are feasible;
• The county’s or municipality’s debt management procedures and policies;
• Whether the county or municipality is in default in any debt service obligation;
• Whether the private development forecast in the development financing plan is likely to occur without the public project or projects to be financed by the bonds;
• Whether taxes on the incremental valuation accruing to the development financing district, together with any other allowable revenue sources, will be sufficient to service the proposed project development financing debt instruments;
• Whether the LGC can market the proposed project development financing debt instruments at reasonable rates of interest.

According to G.S. 159-105(b), the LGC must make the following findings in order to approve a project development bond issuance:

• The proposed project development bond issue is necessary to secure significant new economic development for a project development district;
• The amount of the proposed project development debt is adequate and not excessive for the proposed purpose of the issue;
• The proposed projects are feasible (considering any additional security such as credit enhancement, insurance, or guaranties);
• The unit of local government’s debt management procedures and policies are good, or reasonable assurances have been given that its debt will be managed in strict compliance with all legal requirements;
• The private development forecast in the project development financing plan would not be likely to occur without the public projects to be financed by the project development bonds;
• The proposed project development bonds can be marketed at reasonable interest cost to the issuing unit;
• The issuing unit has adopted a valid development financing plan for the project development district for which the instruments are to be issued.

Yes, if the financing development plan involves the construction and operation a new manufacturing facility, the unit must submit the plan to the Secretary of the NC Department of Environment and Natural Resources for approval. In order to approve the plan, the Secretary must determine that the manufacturing facility will not have a materially adverse effect on the environment and that the company that will operate the facility has operated its other facilities in substantial compliance with federal and state laws, regulations, and rules for the protection of the environment.

Additionally, if the plan involves a new manufacturing facility, the unit must submit the plan to the NC Secretary of Commerce for certification that the average weekly manufacturing wages proposed by the initial users the facility are either above the average manufacturing wage paid in the county in which the district will be located or are not less than ten percent (10%) above the average weekly manufacturing wage paid in the state, unless the plan is exempt from the requirements. The NC Secretary of Commerce may exempt a plan from this requirement if the Secretary receives a resolution from the issuing unit's governing body requesting an exemption and a letter from an appropriate State official, selected by the Secretary, finding that unemployment in the county in which the proposed district is to be located is especially severe.

For purposes of these requirements, the term "manufacturing facility" means any facility that is used in the manufacturing or production of tangible personal property, including the processing resulting in a change in the condition of the property.

The following sets forth a rough timeline for issuing project development bonds:

• Develop a project development financing plan.
• Apply to the Local Government Commission (LGC) for approval to issue the project development bonds.
  • The LGC may accept an application for issuance of project development bonds before a project development financing plan has been adopted, but it may not approve the issuance of the bonds until after the plan is adopted and after the governing board of the unit issuing the bonds makes the findings prescribed by G.S. 159-105(b)(1) and (5).
• Publish notice of the application to the LGC in a newspaper of general circulation in the unit.
• Attend a preliminary conference with the LGC, if required.
• If the project development district is proposed by a municipality, send notice of the proposed development financing district by first-class mail to the county or counties in which the district is located.
  • If the board of county commissioners does not disapprove the plan by resolution within the 28 days following the date the notice is mailed, the municipality’s governing board may proceed.
• If the proposed development financing plan involves construction and operation of a new manufacturing facility, submit the plan to the NC Department of Environmental and Natural Resources for approval and to the NC Secretary of Commerce for certification of compliance with specified wage requirements.
• Place a copy of the development financing plan in the office of the clerk of the unit that proposes to issue the project development bonds.
• Publish notice between 14 and 30 days before holding a public hearing on the proposed project development district in a newspaper of general circulation in the taxing unit that proposes to issue the project development bonds and mail notice of the public hearing by first-class mail to all property owners and mailing addresses in the proposed project development district and to the governing boards of any special districts in the proposed district.
  • The notice must state the time and place of the public hearing, specify the purpose of the hearing, and state that a copy of the proposed development financing plan is available for inspection in the office or the clerk of the unit.
• Hold public hearing.
• Governing board adopts project development financing plan, with or without amendment.
• LGC approves project development bond issuance.
  • The effective date of the development financing district is the date the LGC enters the order approving the issuance of the project development bonds, unless the debt is for a financing district that is already in place.

Yes. A governing body may, after the effective date of the district, amend a project development financing plan adopted for a project development district. Before making any amendment, the governing body must follow the same procedural requirements prescribed for the adoption of the initial project development financing plan.

The boundaries of the district may be enlarged only during the first five years after the effective date of the district and only if the area to be added has been or is about to be developed and the development is primarily attributable to development that has occurred within the district, as certified by the LGC.

The boundaries of the district may be reduced at any time, but the unit may agree with the holders of any project development financing debt instruments to restrict its power to reduce district boundaries.

The base valuation of a project development financing district is the assessed value of all taxable property located in the district on the January 1 immediately preceding the effective date of the district plus the value of property acquired by the county or municipality or its agent within one year before the effective date of the district.

This base valuation is the frozen assessed value for the life of the district and is used to generate the incremental tax revenues that will repay the project development financing bonds.

Yes, the base valuation of a development financing district may be adjusted if property is added to or removed from the district pursuant to an amendment of the taxing unit’s development financing plan.

Each year the county assessor determines the current assessed value of the property in the project development financing district. Increases in the current assessed value in nonrevaluation years result solely from improvements to property rather than appreciation in market value. Market value appreciation increases the current assessed value in revaluation years.

The incremental value of the project development financing district is the current assessed value in a given year minus the base assessed value of the district.

The proceeds of a unit’s property tax assessed against property in a project development financing district are distributed as follows:

• First, the net proceeds are calculated, which represent the gross proceeds less refunds, releases, and any collection fees.
• Second, the net proceeds of the following taxes are paid to the taxing unit that levied the tax:
  • Taxes levied specifically to repay general obligation debt;
  • Nonschool taxes levied pursuant to a vote of the people;
  • Taxes levied for a municipal or county service district; and
  • Taxes levied by a taxing unit in a development financing district established by a different unit for which no increment agreement exists.
• Third, the remaining taxes are multiplied by a fraction in which the base valuation is the numerator and the current assessed valuation is the denominator. The product of this multiplication is retained by the municipality, county, or special district as if the development financing district did not exist.
• Fourth, the remaining proceeds are turned over to the finance officer for the taxing unit that established the district and issued the financing instruments to be deposited in the revenue increment fund.

Yes, if the use of the project development bond proceeds directly benefits the private development inside the project development district, as determined by the project development financing plan for the district.

Yes. Project development bond proceeds may be used to defray the cost of providing water and sewer utilities to private development in a project development financing district.

A project development district terminates at the earlier of thirty years or the date the project development bonds are fully satisfied.

No. G.S. 159-55 explicitly exempts project development debt from the net debt limitation calculation.

Yes. G.S. 159-103(b) authorizes a unit to issue additional project development bonds to refund existing project development debt, as long as the initial bondholders agree and the refunding bonds do not extend the duration of the project development district beyond the 30 year limit.

Yes. G.S. 159-103(b) authorizes a unit to issue general obligation bonds or revenue bonds to refund outstanding project development debt. The general obligation bonds must be issued in accordance with G.S. 159, Art. 4, and the revenue bonds must be issued in accordance with G.S. 159, Art. 5.

A synthetic project development financing occurs when a local government determines that the projected increment revenue from new development in the unit justifies issuing debt to fund a public investment project in the unit. The unit does not issue project development bonds, however. It uses another form of financing, usually an installment-purchase financing—whereby the unit pledges the financed asset as security for the loan—to fund the public improvement.