Chattanooga's PILOT Program Case Study
“Right-Sizing” Property Tax Incentives to Increase Housing Affordability
Chattanooga recently instituted a Payment in Lieu of Taxes (PILOT) program to offer developers a 15-year tax abatement commensurate to the number of affordable units created. Similar to Atlanta and Texas, the PILOT is enacted through a ground lease between a public entity, the Health Education and Housing Facilities Board, and a private or nonprofit real estate operator. The program differentiates itself by offering developers flexibility in determining their desired level of tax abatement and applying a performance standard rather than prescriptive requirements, which gives developers the flexibility to choose how they allocate the abatement amongst affordable households and unit types. The abatement stays with the property and can be transferred to another owner upon a sale event and has the option to be renewed for a second 15-year term.
To incentivize developers to apply for the PILOT, the program offers a tax abatement that is 2% greater than the projected revenue loss from converting market-rate units to affordable housing. To create consistency across the market, rents are provided and updated by the city on an annual basis. Market rents are calculated at 130% of the HUD Small Area Fair Market Rent (SAFMR). The 130% figure serves as a proxy to estimate the value of new construction.
The Chattanooga model provides several advantages compared to alternative programs. Its open-source, flexible calculator ensures complete transparency regarding maximum available abatements and potential outcomes. Additionally, the abatement directly correlates with public benefit since developers receive only a 2% premium on abated cash flows, making it difficult to claim excessive subsidization.
It is important to stress that this recently ratified PILOT has not yet been adopted by any developers; however, several developers have begun applying for the PILOT. Given the challenging capital markets environment, it remains to be seen whether the 2% spread is sufficient to incentivize developers and their capital sources to build. If the abatement is used for half of the units, it may only increase net operating income by one to two percent, which may be insufficient given friction costs. Chattanooga is actively monitoring the market’s response to this incentive and may adjust its parameters going forward, if necessary.’