New Payment in Lieu of Taxes program would allow for more participation from more developers, even lower rents in affordable units, and program adjustments by ZIP code.
Chattanooga, Tenn. (March 12, 2024) — Today, City of Chattanooga Chief Housing Officer Nicole Heyman proposed a package of reforms to Chattanooga’s Payment In Lieu Of Taxes (PILOT) program for affordable housing projects. The new PILOT rules, if adopted, will allow the city to incentivize individual affordable housing units, offer incentives for units with lower rents than currently allowed, and better reflect the difference in rents in different areas of the city.
“It just makes sense: we can’t use the old one-size-fits-all solution for a problem that changes block-by-block, and we need the freedom to incentivize affordable housing any way we can get it, not just in big blocks in large developments,” said Chattanooga Mayor Tim Kelly. “Almost every city in America is facing a shortage of affordable housing, and solving this crisis here at home is one of the goals of my One Chattanooga plan. I want to thank our Chief Housing Officer Nicole Heyman and her team for developing a series of innovative reforms that will allow us to take our affordable housing work to the next level.”
The existing city PILOT program is limited. It has only one option: half of the units in the development must rent at or below 80% area median income (AMI), which qualifies the developer for a full tax abatement. This one-size-fits-all approach needs reform for two reasons: 1) Rents vary across the city. As a result, the tax incentive in a high-rent area of Chattanooga is not enough to justify the rent lost by developers, while in a low-rent area the tax incentive is overly generous. 2) The rigid requirement that half of the units rent for 80% of AMI prevents the PILOT from incentivizing even lower rents at the 50%, 60%, and 70% AMI levels. It also stops the city from incentivizing market-rate developers to add some affordable units to their developments.
Instead of the old all-or-nothing approach, the new proposed PILOT framework sets a per-unit tax incentive based on the difference between market-rate rent and the affordable rent offered by the developer. Market-rate rents are based on the U.S. Department of Housing and Urban Development’s Small Area Fair Market Rent, are updated annually, and vary by zip-code, allowing the program to better reflect the reality of the market.
The proposed new PILOT program compensates developers for rent revenue lost by developers who offer affordable housing, and offers an additional 2% participation incentive that helps cover the administrative costs of compliance. For each zip code, there is a set of tax abatements for studio, 1, 2, 3, and 4 bedroom units at 50%, 60%, 70%, and 80% AMI. A developer can add affordable units to their project of varying sizes and affordability levels, and receive a corresponding tax abatement.
The proposed rules include stringent compliance measures, including interior code enforcement inspections and penalties for non-compliance, ensuring that developers live up to affordability commitments.
The proposed new rules for the PILOT program also lowers the minimum size of projects to 10 units, encouraging smaller and local developers to participate.
To see Nicole Heyman’s presentation to council, click here.
About Chattanooga Affordable Housing Initiative:
The Chattanooga Affordable Housing Initiative is dedicated to promoting equitable access to safe, affordable housing for all residents of Chattanooga. Through strategic partnerships, innovative programs, and community engagement, we are working to address housing challenges and build vibrant, inclusive neighborhoods.
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