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This story was updated Wednesday, Oct. 23, 2019, at 11 p.m. with more information.

The developer of one of Chattanooga's biggest downtown apartment complexes plans to fight a city and county attempt to limit the tax breaks granted for the $30 million project after nearly half of the apartments were converted to vacation rental units.

The Market City Court, the 10-story apartment and commercial building erected three years ago by the Atlanta-based Simpson Organization in the 700 block of Market Street, switched 53 of its 125 apartments to Stay Alfred vacation rentals in July. That change, according to city officials, should limit the property tax exemptions originally granted for apartments but now used on three floors for new hotel rooms.

Simpson was granted property tax breaks by the city and county to encourage the development of the vacant block and to ensure that some of the apartments remained at affordable rental rates for low- and moderate-income residents.

Among the 72 remaining apartments in Market City Court, 25 have been designated as affordable units with rental rates targeted at those making 80% or less of the adjusted median income in Chattanooga. Michael Alston, an attorney for the Simpson Organization, said 21 of the apartments set aside for low- and moderate- income residents are now occupied, but far fewer of the remaining 72 market-rate apartments are now leased.

Alston said he has met with city attorneys and contends that Simpson is in full compliance with the original tax agreement spelled out in a payment in lieu of tax (PILOT) agreement approved by the Chattanooga Health, Educational and Housing Facility Board.

"We believe that we are in full compliance with the PILOT," said Alston, who said his client plans to contest any attempt to limit the tax breaks previously authorized for the project. "We have reserved and will continue to reserve 20% of the apartments as affordable units."

Alston said the Stay Alfred rooms are paying city and county hotel room taxes and are helping to generate more economic activity in the central city.

But Donna Williams, administrator of the Office of Economic and Community Development for the city of Chattanooga, said the city does not grant property tax breaks for hotels so the portion of the building used as hotel rooms must be removed from the PILOT agreement.

"We do not have PILOTs for hotels and we would not have brought a hotel project to this board," Williams told the Health, Educational and Housing Facility Board Wednesday.

Allowing Market City Court to convert apartments to hotel rooms while still qualifying for property tax abatements could set the wrong precedent and be duplicated by other apartment owners, Williams said.

"There are other opportunities for other projects with PILOTs to also do this, but the greater concern is that we have other hotels that are not receiving tax abatements and we want to be equitable to all properties," she said.

Under city ordinances, developers of apartments and downtown facilities are allowed to use two units of any apartment building for short-term vacation rental units in the downtown area, even if the projects are included in PILOT agreement, Williams said.

The Maclellan Building plans to convert two of its 90 apartments to short term vacation rentals in an agreement with the Mint House, a New York-based hotel booking firm that caters to business travelers looking for apartment-style accommodations with the reliability found in top-tier hotels.

Williams said converting two units in the Maclellan Building for short-term vacation rentals is allowable, but no more units may be changed for hotel rooms or short-term vacation rentals. The Maclellan Building also has set aside 20% of its apartments as affordable units to qualify for property tax breaks from the city and county.

The head of a local taxpayer group objected to allowing property tax breaks for either the Maclellan Building or the Market City Court after the buildings added hotel rooms or short-term vacation rentals.

"I wish that both developers would acknowledge that their business model has changed and ask to terminate the PILOTs," said Helen Burns Sharp, president of the Accountability for Taxpayer Money (ATM).

But the apartments being converted for hotels or vacation rental units have struggled to find enough tenants for their market rate units. Simpson has yet to fill many of the apartments and much of the commercial space in Market City Center and the developers of the Maclellan Building,

Heritage Land and Development Co. of Memphis, has had trouble keeping all of the Maclellan units occupied. As a result, the Memphis company is holding off on plans for apartments or condominiums on the 14 top floors of the First Tennessee Bank building which Heritage Land and Development acquired four years ago.

Contact Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340.

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