Housing PILOT Program
Helen Burns Sharp for ATM
On September 20, 2016, the Chattanooga City Council approved a new housing PILOT program (Resolution 28783). The vote followed several weeks of discussion, some prompted by questions and suggested changes from the citizens' group, Accountability for Taxpayer Money (ATM). The Resolution that the Council adopted included the following recommendations supported by ATM :
Thanks to Mayor Berke for proposing changes to the "old" Downtown Housing PILOT program, including a requirement that at least 50 percent of the units be set aside for low and moderate income people. Thanks to the Council for all the time they spent in making the program better. ATM's major remaining concerns relate to affordability, size of units, transparency, and the long-term funding of the program.
I. ATM Recommended Additions to Housing PILOT Program
ATM recommends that units be set aside for persons with an annual income that does not exceed 60 percent (or 70 percent as a compromise) of area median income (AMI) as defined by HUD. The AMI percentage in the previous PILOT and in the new (2016) program is 80 percent, which allows a rent in 2017 of $834 per month for a single person and $1190 for a family of four. ATM believes that these rents are not affordable to low-moderate income people in many of Chattanooga's urban neighborhoods. The non-profit Green Spaces reports that $25,957 is the average income in Chattanooga's most burdened neighborhoods. That would mean that $648--which is 30 percent of total income--is the maximum affordable monthly housing cost for both rent and all utilities.
ATM believes that the allowable rents based on the current 80 percent AMI might approach or exceed market rent in many locations, thus making it difficult for most taxpayers to see the "public benefit" of the large PILOT tax break.
ATM also recommends that the City make clear that the basic rent for these units must include water, sewer, and basic internet. It currently is not clear whether rent is inclusive of basic utilities or can be added to the rent. We agree that tenants can be responsible for electricity but believe that the City should adopt an energy efficiency ordinance like Memphis has done and set minimum standards for rental units.
SIZE OF UNITS.
Most of the units the housing PILOT program has subsidized over the years are small one bedroom and studio units, some about 400 square feet in size. What about families? Should the program require a certain percentage of one and two bedroom units?
ATM recommends that the City Council and County Commission hold public hearings on PILOT applications so members of the public would, for the first time, have a designated time to comment. Current practice is to allow PILOT applicants, but not the public, to speak before the Council's Economic and Community Development (ECD) committee. ATM asks that a public hearing requirement be added, either at ECD or at the regular Council meeting. It would help with public trust. Many of us perceived the previous program as a tool to help developers get a tax break rather than to provide public benefit. Not having a public hearing perpetuates this perception.
ATM hopes that the City will establish a "home" on the city website for all information about the new housing PILOT program. This would include the resolution with policies and procedures, the application, and the project review criteria.
COMMUNITY BENEFITS AGREEMENTS.
A Community Benefits Agreement (CBA) is a project-specific agreement between a developer and the local government (or a broad community coalition) that details the project’s contributions to the community and helps with community support for the project. CBAs allow a win-win approach to development: meaningful, up-front communication between the developer and a broad community coalition decreases developers’ risk while maximizing the positive impact of development on local residents and economies. The developer benefits from active community support of the project, and community members gain when the project responds to their needs.
The community benefits terms from a CBA may be incorporated into an agreement between the local government and the developer, such as the Payment-in-Lieu-of-Tax (PILOT) agreement or lease. That arrangement gives the local government the power to enforce the community benefits terms. (ATM recommends we begin with this approach, since there is already a template for the agreement and lease.)
The terms of the CBA would be project specific, depending on the neighborhood. Here are some possible examples of what developers might be ask to do:
FEE AT CLOSING.
In 2002, River City (Ken Hays) told the Health, Education and Housing Facilities Board (HEB) that incentives were needed to encourage downtown housing. Mr. Hays said that the City of Memphis had success by using a tax freeze tool (PILOT). Mr. Hays said that River City hired the law firm of Miller & Martin (Alfred Smith) to develop a program to encourage downtown housing in Chattanooga. It was to be modeled on the Memphis program. The City Council and County Commission passed resolutions prepared by Mr. Smith to establish the Downtown Housing Initiative.
Several months after passage of the original 2002 resolutions, Mr. Smith asked the city and county to delete Section 6, which had provided the funding source, a fee at closing, that would enable the bond board to hire staff to administer an effective affordable housing program. In explaining why he was proposing this amendment to the County Commission, the minutes reflect Mr. Smith gave as a reason that his private clients objected to paying a fee at closing. Click on this link to watch Section 6 disappear. 2002 City Housing Resolutions
The Memphis bond board has continued to collect this fee. It has enabled them to hire staff to run a program that has assisted thousands of low and moderate-income persons with their housing needs. From 2002 through 2012, there is no documentation that any low and moderate income persons benefited from Chattanooga's program.
ATM recommends that the City and County return to the fee that Memphis did and does collect, a closing fee of one percent of the total project cost, plus applicable attorney fees and filing fees.
II. Housing PILOT--Past History
The Downtown Housing PILOT Program (2002-September 2016) succeeded in rewarding certain downtown apartment developers by providing tax breaks that total about $15 million in lost revenue to city and county government. The old program was a corporate welfare tool rather than the affordable housing tool authorized by state law. It raised issues of tax equity, social justice, conflicts-of-interest and government transparency and accountability.
THE AFFORDABLE HOUSING DISCONNECT.
Cities and counties are not required to have housing PILOT programs. But if they choose to have them, they must conform to the enabling legislation in state law regarding the definition of a "project." In an analysis of tax incentives in Tennessee, attorney Mark Mamantov (Bass, Berry & Sims) writes that "Health, Education, and Housing Facilities Boards are authorized to own and lease only certain specified types of projects....HEHBs generally are permitted to own, lease, and finance facilities used by educational institutions, hospital facilities, and housing facilities to be occupied by persons of low or moderate income."
From the time that HUD established the CDBG program in 1974, the generally accepted "low-mod" income definition in the housing world is persons whose incomes fall at least below 80 percent of the median income for the area based on HUD data that is updated annually.
In research done by a bond board committee in 2016 for an annual report, no documentation surfaced to demonstrate that any low or moderate-income persons benefited from the 2002-2102 program. At the March 1, 2016, City Council meeting, a citizen asked several specific questions about the program, including whether the city held past PILOT beneficiaries accountable for meeting the low-mod requirement. A year has passed without answers from city staff.
State law allows local governments to use the PILOT housing tool to help low and moderate income citizens with housing costs. This is the "public purpose" enabling the tax break. In Chattanooga, this program turned into a tool to give tax breaks to developers.
In presentations before the City Council, County Commission, and bond board since 2002, neither the River City Company nor their attorney mentioned the requirement that low and moderate income persons must benefit from the program.
River City (Kim White) told the County Commission in 2012: "We are not creating low and moderate income housing downtown." Attorney Alfred Smith represented River City (and almost all of the private clients that received PILOTs). While he acknowledged that a project must qualify under the state (low- mod) statute for the bond board to take title to the property, Mr. Smith said that prospective tenants do not have to provide their income. He told the County Commission that the role of the bond board or River City is to "look at the proposed rent to see if it is appropriate." He did not elaborate on how they determine an appropriate rent. How did the City and County know if low and moderate income persons were benefiting if no one asked for and verified income?
As recently as February 22, 2017, when he represented the Bread Factory Lofts at an HEB meeting about their 2002 PILOT, Mr. Smith again asserted that there was no low-mod or "80/20" requirement for the early PILOTs. He said the HEB could determine compliance with the state statute, (even though they were never presented with any income data.) As the author of the 2002-2012 program he patterned after Memphis, he apparently removed the Memphis income specificity. That has made obfuscation easier on projects like the Bread Factory and Walnut Commons.
The reason this requirement matters goes beyond compliance with state law. It affects people. Housing affordability is a very real issue in Chattanooga. A study by the Brookings Institute says that city poverty has grown faster here than the national average. Our city’s poor and working families bear the brunt of skyrocketing housing costs. Housing PILOTs could have been an important component of an affordable housing program.
2002-2012 (January)--The HEB approved six housing PILOTs from 2002 until the program expired in January 2012. Four involved rehabilitation of existing buildings. Two involved new construction (Walnut Commons and Frazier Place.) None of these PILOT had to go to the City Council or County Commission for a vote. See Walnut Commons section below to learn why ATM views it as the poster child for how badly this program failed.
2012 February--2014 (July)--The “original” downtown housing PILOT program expired in January 2012. River City was not able to persuade the City Council to reauthorize in 2012. Councilors raised questions about the impact of PILOTs on the city’s revenue base. When the Council did reauthorize in 2014, their resolution contained a recital acknowledging that the old program expired in January 2012.
In December 2012, the City Council approved two in-lieu agreements abating city taxes, even though there was no authority for the City to grant a housing PILOT. The projects were UTC Two and UTC Three. The applications stated that the average rent would be over $1,000 per month, an amount well above what a low or moderate income person could be asked to pay.
In August 2014, the City Council reauthorized the Downtown Housing Initiative, which had expired in January 2012. The County Commission had reauthorized it in August 2012. Five projects were approved in 2015, representing about $10 million in property tax revenue to be forgiven over the duration of the agreements. Two involve rehabilitation (the Maclellan Building on Broad Street and a hotel building at the Choo Choo); the others are new construction on Market, Chestnut, and Lindsay Streets.
2016, Under the "new" program, the City and County approved ECG Chestnut, the Jaycee Towers (Wishrock), and Standard Coosa Lofts.
2017, Flats at 58 has been approved by the City.
III. Walnut Commons PILOT-- A Failure in Public Policy
The Walnut Commons apartment complex is the poster child for how the 2002-2015 housing PILOT program failed and how our city government remains unwilling to address non-compliance. Who is looking out for the public interest?
In 2016 and 2017 the Health Education and Housing Facilities Board (HEB) and the Chattanooga Downtown Redevelopment Corporation (CDRC) passed on opportunities that could have resulted in about $1.5 million more money for the public by getting the apartment complex back on the tax rolls for future years when the land sold. The developer's decision in 2016 to exercise the option to purchase the property from the CDRC (rather than make lease payments) re-opened the 2010 PILOT deal.
On June 19, 2017, the CDRC passed a resolution approving the purchase price of the Walnut Street property at $970,000. At its April 10 meeting, members saw a draft escrow agreement stating that the purchase price "as calculated by the CDRC" was $1,119,456.96. Section 22 of the 2007 Land Lease Agreement provides a formula spelling out how the purchase price is to be calculated should the company decide to exercise the option to purchase. One assumes that this formula is what the City Finance Director used to calculate the $1.1 million figure.
Walnut Commons LLC apparently did not want to pay the $1.1 million amount. At the June meeting, CDRC members were told that the owner's initial offer was $650,000. The parties agreed on $970,000. Why? No city staff member or board member gave a reason why it was in the public interest to accept $150,000 less. Did they back down because the company did not want to pay the amount due or because they disagreed with the city's calculation? This is a particularly difficult pill for ATM to swallow because a similarly sized property right across the street from Walnut Commons sold in January of 2015 for a reported $2.4 million. (It is the site of a new boutique hotel.)
Members of the CDRC are Finance Director Daisy Madison, Mayor's Senior Policy Advisor Stacy Richardson, City Council Chair Jerry Mitchell, and developers David Dalton and Julian Bell, III . Councilman Mitchell abstained from the June 19 vote.
On March 22, 2017, the Health Education and Housing Facilities Board (HEB) once again had the opportunity to get Walnut Commons on the tax rolls for future years. Sadly but predictably, they did not do so. How many times to you get a chance to say no and and still say yes? ATM speculates that the lender may have insisted on the resolution because they wanted affirmation that the board was going to continue the PILOT. Even the bank may be surprised by the board's "generosity."
At the March meeting, ATM again referenced the commitment to a (never built) parking structure in the PILOT agreements and a representation by the original developers about a set-aside for low and moderate income. ATM again requested a special work session to get all of the facts and perspectives on the table: the board did not acknowledge that request. Fascinating dynamics in this meeting. It became even more clear that Alfred Smith, the local private attorney representing the developers, continues to hold sway with the city attorneys and thus with the board.
Members of the Health and Ed board (HEB) are Hicks Armor, Gregg Gentry, Richard Johnson, Lloyd Longnion, Nicole Osborne, and Dana Perry. Mr. Longnion frequently casts the lone dissenting vote.
In early 2017, ATM learned that the membership interest in Walnut Commons LLC is about to be flipped--again. Developers continue to use our tax dollars as a bargaining chip to increase their profits when they sell.
On November 16, 2016, the HEB had the opportunity to take action that could have lead to placing this property on the tax rolls. They chose not to do so. With little discussion and no written staff report, the Board followed the lead of Walnut Commons LLC attorney Alfred Smith and Deputy City Attorney Phil Noblett, the two attorneys who presented the PILOT application to the Board in 2010. The Board voted to execute a special warranty deed for the Walnut Commons (WC) project to give the HEB fee simple title, thus enabling WC LLC to continue the PILOT tax break another nine years. Approximately $1 million in taxes has already been waived. Their November action meant an additional $1.4 million tax break, including no taxes for schools.
Walnut Commons is the only PILOT since 2008 to be exempt from school property taxes. Why?
Over 40 other PILOT agreements were approved during this period.
The HEB approved this PILOT in 2010. It was not voted on by the City Council or County ￼Commission. The public assumes the board made its original decision to waive $2.4 million in property taxes based on representations from the developers. They did not honor their commitments.
Public benefit had to relate to low and moderate income housing because that is what the state statute requires for an HEB housing PILOT. A newspaper reporter covered the CDRC meeting when the project was originally announced. He reported that officials stated that 20 percent of the units would be affordable to those at 80 percent of median income. Minutes of an HEB meeting quote Walnut Commons attorney Alfred Smith as saying “there is no 20% set-aside.” The 2010 HEB Resolution approving the PILOT states: "The board hereby finds that the Project constitutes "Housing" as that term is defined in T.C.A. 48-101-301, in that the Project will be a multi-family housing facility to be occupied by persons of low and/or moderate income, and/or elderly, and/or handicapped persons, based on information supplied by the Company in the Application."
No documentation evidences any compliance with the 80/20 standard for affordable housing and no one claims such compliance.
A parking structure was the other “public benefit” aspect. The apartment complex is located in an area where parking is extremely limited. The original concept envisioned that WC would build a structure for their residents, with extra spaces that would be made available to members of the public. The developers later decided to do a surface parking lot for just their residents. The land lease with the CDRC and the HEB PILOT lease require a parking structure. Nothing in HEB minutes indicates that Walnut Commons ever sought an amendment to remove the requirement of the parking garage, although there were at least seven amendments to the documents. ATM considers this a breach. A local developer recently wrote that he had considered submitting a proposal in response to CDRC’s RFP to be the developer on the project. He hesitated because of the parking structure. He read it, correctly, as a requirement.
In addition to the PILOT for the apartments, the developer was also allowed to lease a prime piece of property near the Tennessee River from another tax-exempt city entity, the CDRC. It is unclear if this transaction conformed to any applicable state or city requirements on procurement, such as competitive bidding and referral to the Planning Commission. The 2007 Lease Agreement recites Lessee's agreement to construct a parking garage. The 2010 PILOT Agreement also references a parking garage. The parking garage was never built.
The developer's decision in 2016 to exercise the option to purchase the property from the CDRC re-opened the 2010 PILOT deal. ATM hired an attorney to examine the land lease and PILOT documents dating back to 2007 and to provide an opinion. Attorney John Konvalinka gave legal reasons to support ATM's contention that what the HEB Board was asked to do in 2016/2017 was a “new deal.” It was not one they were obligated to do. They had a choice. Here is his conclusion:
"What the HEB and CDRC are being asked to do by Walnut Commons LLC is another transaction not contemplated by existing documents in order to prolong the PILOT and continue to be exempt from property taxes. This is a choice and not an obligation. ATM is requesting the HEB to exercise the right choice and place the Property on the tax rolls. "
The ATM attorney found examples of non-compliance with language in the lease. The CDRC as Lessor did not provide the required written consent for assignment of the lease. Also, the exercise of the option to purchase was dated January 20, 2016, by Hicks Armor, HEB Chair. The lease requires that closing shall take place no more than 14 business days after the exercise of the option. (Well into 2017, closing still had not occurred.)
"Similarly, the Lease grants Lessee (Walnut Commons) the right to use the Leased Premises for the construction, development, and operation ...of an adjacent parking garage...." There is no parking garage. This appears to be a breach of the Lease. The PILOT Agreement also references that "the Company shall make In Lieu Payments with respect to...the garage...." Apparently, this agreement has also been breached since there is no garage.
The attorney concluded that--due to these breaches--there appears to be no enforceable obligation which obligates the HEB to sign the Lease Termination and Release of Memorandum of Lease. (That is what was on the HEB agenda as a resolution on October 12.) We have heard that "a deal is a deal." Whoever subscribes to this theory must believes only the HEB is bound to anything by these documents and not Walnut Commons LLC."
He went on to raise the question of "what was the original deal" based upon the documents. It is apparent that Walnut Commons, LLC was to make rent payments unless the company chose to exercise the option to purchase and terminate the lease. This choice would require Walnut Commons to pay taxes rather than rent. In 2016 they decided to purchase the land and quit paying the rent payments. But they do not want to pay property taxes either. This is a different deal than the original deal in that there is no payment of rent or taxes.
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