Citizen watchdog group asks Chattanooga to halt further tax breaks to private developers

Offering tax breaks to residential developers has not helped address Chattanooga's growing affordable housing deficit, say a number of downtown property owners who have recently joined in an effort to pressure officials to suspend one of the city's longtime development programs.

"There is a housing crisis in this city," said Tresa McCallie, who lives on the Southside with her husband. "To date I have found no evidence that developers are being held accountable for the commitments they made."

PILOTs, or payment-in-lieu-of-taxes agreements, have been used by city and Hamilton County officials to lure businesses to the area for decades. But it wasn't until 2002, when then real-estate mogul Bob Corker was mayor, that tax incentives were offered to real estate developers, who, in turn, were told to include affordable housing in their plans.

Under Corker, the program was approved for a decade of use, and when it lapsed in 2012 elected officials chose not to reinstate it. A year later, however, newly elected Mayor Andy Berke promised to create more affordable housing, in part by reviving PILOT agreements for housing projects.

Still, there is no proof that any of the deals made over the last 14 years have produced a single affordable rental unit and no one has been held accountable, said Helen Burns Sharp, a retired city planner who recently founded Accountability for Taxpayer Money. Sharp spent more than a year studying the fine print of the local PILOT agreements and culling through many other public records.

Nine agreements were made between 2002 and 2012, and since Berke and the Chattanooga City Council reinstated the program in 2014, five more deals have been struck, records show. At the time, Berke's staff called the housing PILOT program "a crucial step" toward lowering rents downtown.

But on Friday, Berke said he and his staff have been "actively discouraging" developers for months from applying for the tax break to build development downtown. His statement came days after residents criticized the mayor's state of the city speech for failing to acknowledge the desperation of families being squeezed by housing costs, crime, joblessness and a lack of educational opportunities.

Housing downtown is on track to double by the end of next year, Berke added, and it's too early to gauge how many low- or moderate-income residents will benefit from the program, since most of the five developments that received a tax break in 2015 aren't complete.

"Circumstances change," he said. "We continue to look at whether [the tax break program] is something to change or something to end altogether."

Still, the ineffectiveness of the city's affordable housing program is hurting the growing share of families in the city who are being squeezed financially by rising costs and stagnant pay, Sharp, McCallie and others argue.

Despite the influx of high-paying, tech-oriented jobs, median earnings in Chattanooga have fallen from almost $45,500 a year in 1999 to about $39,700 a year in 2014, the U.S. Census Bureau reports. Those are the most recent census numbers available. In that same time period, the average gross rent in the city rose from $669 to $743 per month.

In 2014, an online consumer publication reported that Chattanooga was among the top ten cities with the fastest growing rents in the country.

The percentage of families considered rent burdened - those paying more than 30 percent of their income toward housing costs - increased from 35 percent in 2000 to 48 percent in 2014. The significant spikes in poverty among white, black and Hispanic families in recent years in the city, Hamilton County and the metro area reflect the need for affordable housing.

"When the government is picking winners there should be good reasons, and that reason should be the public benefits," Sharp said.

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Residential developers have not always flocked to the Scenic City, which was a big reason to utilize PILOTs for downtown development, said Kim White, president of River City Co., a nonprofit organization created to promote economic development downtown.

Under the first PILOT resolution passed in 2002 developers were required to set aside units for low- to moderate-income, disabled or elderly renters, based on state law. But no specific requirements were spelled out in the city code.

However, when Berke reinstated the program in 2012, the city did spell out what was expected of developers who signed on. Twenty percent of the units being built had to offer lower rents at 80 percent of the area's median income, records show, a guideline determined by the U.S. Department of Housing and Urban Development.

Yet, the amounts considered affordable by the standards of the PILOT agreements are not affordable for working- and middle-class Chattanooga families, experts and locals say.

River City Co. even states on its website that, while the residential PILOT program it oversees for the city is meant to secure affordable housing for the city, the program "is not geared toward creating low-income housing."

"There are other entities and programs working to meet those needs," River City states.

Frustration with the city's PILOT program for affordable housing began to boil in late 2014 when Jon Kinsey, part owner of the Chattanooga Choo Choo and former mayor, applied for a PILOT agreement under the new agreement hoping to convert more than 90 of his hotel rooms at the Choo Choo into 350-square-foot apartments.

The tax break was requested after Kinsey and his partners announced they were investing $8 million to update the aging hotel and build restaurants and a new music venue inside the main lobby. This mobilized unlikely allies - the Chattanooga Tea Party and Chattanooga Organized for Action - to both call for the program to be suspended. Some vocally opposed called the city's arrangement with the former mayor "crony capitalism."

Sharp said the PILOT agreement was inappropriate because, at between $700 and $750 a month, the very small apartments aren't being rented below market value. If anything, they are overpriced.

Right now in Chattanooga, 41 percent of births are to single mothers, and the average mom makes between $20,000 and $24,000 a year. That means developers could charge only between $500 to $600 a month under the city code.

Adam Kinsey, who took over as president of the Choo Choo last year, said the PILOT agreement did what it was intended to do. Many of the tenants are restaurant employees, young entrepreneurs and elderly people looking to downsize, he said.

But in February, anger over the program reached a fever pitch when local developer John Clark, who in 2010 was granted $408,000 in tax breaks to build the Walnut Commons apartment building next to the Walnut Street Bridge, sold the development to a Nebraska-based company for $15 million.

Then, after the sale, the company's attorney asked the city for a continuation of the annual tax break of $200,738, despite the fact that it had spent nothing to develop the property.

"You call it Gig City. African-Americans call it rigged city," Joe Rowe, a longtime community activist, told the bond board in February, before asking for a suspension of the program.

The board voted in favor of transferring the tax break to the new company.

Then last week, multiple people from different interest groups joined Sharp to protest when local developer John Wise asked for permission to use a six-year-old PILOT agreement originally approved for land on Main and Market streets when it was owned by the River City Co. Wise bought the land in 2013 and is developing apartments there. He now wants to get the remainder of the tax break.

The city's Health, Educational and Housing Facility board questioned whether the request was legal, since the board hadn't issued the deed for the PILOT when it was approved in 2010 for a different developer.

Members of Accountability for Taxpayer Money said the unprecedented request showed how far the PILOT agreements have been allowed to go unchecked.

At the same meeting, board members discussed why the previous developers had never been held accountable to rent to low- or moderate-income residents. Housing board member Lloyd Longnion said he researched how to create a one-page report for developers to fill out each year and discovered there had never been a reporting system in place.

In fact, he said, developers who received the old tax breaks couldn't produce any proof to show any low-income residents were renting from their apartment complexes. If those developers were held to today's standards, Longnion said, they would all be out of compliance with the law.

He also said he tried to track how much the city has forgiven in taxes since the program began but only came up with an incomplete number of about $1.5 million. That figure doesn't include the new five developments.

"I think it's horrendous, as a taxpayer," board Chairman Hicks Armor admitted at the end of the meeting.

On Friday, Berke said his staff is researching any avenue the city can take to ensure the developers are held accountable for the benefits they received under previous administrations.

Donna Williams, the city's Economic and Community Development director, said the city is also working on a reporting system to hold developers to their end of the bargain. And River City will request the report each June from the developers, White said.

"Accountability is a good thing," said White. "We would never take a project to the city that we didn't think the developers would meet their obligations."

Critics of the PILOT program say the tax incentive could have been a good program with the changes Berke's staff made, but the requirements aren't stringent enough. In Memphis, the city can point to thousands of low-income residents who have been placed in affordable housing since the program was created in 2002, the same year as Chattanooga, Sharp said.

The Memphis program also has stringent requirements under which developers must show the public benefit for every subsidy they receive.

As part of the process, Memphis' Health, Educational and Housing Facility Board's staff reviews the 16-page application to decide whether the developer meets the initial requirements before the board votes on the PILOT agreement.

If the developer receives the PILOT, the company is required to submit quarterly reports to certify whether 20 percent or 40 percent of its tenants' incomes fall within 50 or 60 percent of the median income, a rate that includes more low-income residents than Chattanooga's program.

"This is a tool, that in Memphis, has supported massive affordable housing investment," said Chattanooga Organized for Action Chairman Michael Gilliland. "That's not what we do here. Chattanooga subsidizes market-rate housing."

Contact staff writer Joy Lukachick Smith at jsmith@timesfreepress.com or 423-757-6659.