Authored by Hanneke van Deursen, Bloomberg City Hall Fellow, City of Chattanooga and Nicole Heyman, Chief Housing Officer, City of Chattanooga
With limited federal resources and state preemption on regulations, what can a mid-size city do to expand its impact on affordable housing?
This is the question faced by Chattanooga, Tennessee.
Many of the regulatory “sticks” other cities use — like inclusionary zoning, impact fees and renter protections — are preempted by the state of Tennessee.
Moreover, we are in a low-tax state, so there are limited resources available for affordable housing with which to fashion attractive “carrots.” With no regulatory “sticks” available to compel private sector participation and scant resources to create “carrots,” we have to be creative with what we have locally.
What is a PILOT?
One such innovation is the new affordable housing Payment in Lieu of Taxes (PILOT) program. PILOT gives private developers a discount on their property taxes in exchange for affordable rental units. The property tax discount (or abatement) lowers the development’s operating expenses to help offset the impact of reduced rents. Tax abatement for Low Income Housing Tax Credit (LIHTC) projects is a commonly used and important tool in many states. Some cities also have mixed-income PILOT programs that require a fixed percentage of affordable units. What distinguishes Chattanooga’s PILOT from these traditional programs is that it targets market-rate transactions and directly ties the tax abatement to the cost of providing the affordable housing unit. By changing how the tax abatement is calculated, the program is transformed from a LIHTC gap-filler into a standalone incentive for mixed-income housing development. Fine-tuning the PILOT tool opens up a local source of subsidy for affordable housing that leverages private sector development activity without depending on oversubscribed federal housing resources.
For context, Payments in Lieu of Taxes are the mechanism for granting a property tax discount to a private property owner. Like many states, the Tennessee constitution prevents local governments from directly abating property taxes. However, property owned by the government is exempt from taxation. We are able to grant tax abatements by transferring the title of a property to a governmental entity and then leasing it back to the owner.
The PILOT Agreement is the lease between the governmental entity and the property owner, where the property owner agrees to make a “payment” to the governmental entity “in lieu of” the “taxes” they would normally pay on the property. The PILOT Agreement specifies the affordability requirements and how the annual payment will be calculated. This is where the program design comes in; policymakers must determine how much affordability is required to merit tax abatement.
Chattanooga already had an affordable housing PILOT program on the books. It was similar to those in other cities, requiring a fixed percentage of units (50%) to be made affordable to households at a specific income level (80% Area Median Income). Projects that met this affordability threshold received a full tax abatement, and those that didn’t received none. The problem with this all-or-nothing approach was the tax abatement itself was not enough to compensate for the revenue lost from holding units at the required affordability level. This meant that only projects that layered in other subsidies like LIHTC — maybe 10% at 50% AMI or 20% at 60% AMI would be the magic threshold? However, we quickly realized that there was no one-size-fits-all solution. We considered how a developer would approach the program: perform a feasibility analysis, calculating the lost revenue from the below-market rents, adding back the property tax savings and seeing where they land. And they land all over the place: too little subsidy in strong markets, too much in weaker ones. The fixed percentage was too blunt of an instrument. However, we quickly realized that there was no one-size-fits-all solution. We considered how a developer would approach the program: perform a feasibility analysis, calculating the lost revenue from the below-market rents, adding back the property tax savings and seeing where they land. And they land all over the place: too little subsidy in strong markets, too much in weaker ones. The fixed percentage was too blunt of an instrument.
Chattanooga’s PILOT Reimagined
Because PILOT was one of the few tools we had available, we needed to hone it into an attractive, but fair, carrot. So we started with the feasibility analysis. The tax abatement had to be greater than the rent revenue lost. Accordingly, we set the tax abatement to equal the lost revenue: “market rent” minus “affordable rent” plus two percent.
Chattanooga’s PILOT’s Formula: (market rent – affordable rent) x 102%
We generated a schedule of tax abatements for units of different sizes (0, 1, 2, 3, and 4 bedrooms) and affordability levels (50%, 60%, 70%, and 80% AMI). Each affordable unit type has a “price” that is adjusted depending on the project’s ZIP code. By downloading our PILOT calculator spreadsheet, developers can approximate their project’s tax liability and go shopping for affordable units. They have the flexibility to mix and match different unit sizes and levels of affordability. If they only want to provide a few affordable units, they can qualify for a partial tax abatement. If they want to max out their available abatement, they can configure the project to do so. Changing the ZIP code changes the price schedule. In strong markets with high rents, a few affordable units are enough to hit 100% abatement. In weaker markets where rents are close to 80% AMI, deeper levels of affordability are needed to earn tax abatement. In any configuration, the tax abatement is directly tied to the cost of providing the affordable housing units. The PILOT calculator lets developers experiment with the program and cuts straight to the point: how much tax abatement will they get for providing affordable units.
Chattanooga’s reimagined PILOT program highlights how cities can think creatively to overcome constraints and expand affordable housing opportunities. By tailoring tax abatements to the actual cost of providing affordable units, the program achieves a balance between attracting private-sector participation and delivering clear public benefits. Cities can appreciate this transparent and fair approach.
In a policy landscape defined by limited resources and regulatory preemptions, innovation isn’t optional — it’s essential.
Chattanooga’s PILOT is a testament to how thoughtful design and local ingenuity can transform existing tools into powerful levers for change, fostering growth that is both equitable and sustainable.
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