Metro Pulse/Insights/Tax Breaks

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by Joe Sullivan

The Knoxville News-Sentinel's prospective new facilities on a 28-acre tract in the city's Center City Business Neighborhood will break new ground in more ways than one.

In addition to becoming the anchor tenant for the city's 90-acre brownfield redevelopment in West View, the News-Sentinel will also become the first local enterprise in memory to get an abatement of its city and county property taxes.

Indeed, under a development tax incentive arrangement known as PILOT, the News-Sentinel won't pay any property taxes at all for a period of 10 years. During that period, the property will nominally be owned by an obscure arm of the city, its Industrial Development Board, and thus kept off the tax rolls. The News-Sentinel will make payments in lieu of taxes—ergo PILOT—to the IDB in an amount equal to the property taxes it's now paying to the city and the county on its present downtown site (which the city will acquire in a land swap for the West View property, whose ownership will revert to the News-Sentinel after 10 years).

Just how much the PILOT arrangement will save the News-Sentinel isn't clear. Combined city and county taxes are about $60,000 on its present State Street site, which has an appraised value for tax purposes of just under $2.5 million. The $45 million reported cost of its new office and production building, when combined with land cost, would seem to suggest a 20-fold increase in taxes. But only about $10 million of the total is understood to be for the building that would be subject to property taxes while taxation of the equipment, furniture and fixtures that account for the balance turns on a separate axis.

What is clear is that the News-Sentinel deal, assuming it goes through, represents a breakthrough toward providing tax incentives as a catalyst for development, especially in center city areas where revitalization is imperative. Memphis' PILOT program is widely credited with having spurred $300 million in downtown redevelopment there, and residential renovation of several of Knoxville's historic downtown buildings could well be dependent on providing such a program here.

Unlike the News-Sentinel, for whom tax abatement was intended to induce them to build in the center city rather than somewhere out west, several downtown projects now on the drawing boards probably won't get built at all without tax abatement—or some other form of governmental assistance—to make them viable. Hence, a PILOT program isn't foregoing any property tax revenues on renovations that wouldn't get made without it.

The Sterchi Building on Gay Street is a prime case in point. An Atlanta-based developer, Leigh Burch, has already invested close to $500,000 in plans for converting that 120,000-square-foot treasure into 99 apartment units at a cost of $9.5 million. A feasibility study by Knoxville-based Woodford & Associates shows a demand for 104 apartment units in the downtown area in each of the next three years in the price range that Burch has targeted: rents averaging $833 per month. A federal income tax credit of 20 percent of the cost of historic building renovation can cover close to $2 million of the total, and Burch has a prospective lender lined up for the balance. But the lender isn't satisfied with the margin by which the projected revenues exceed expenses. Property tax abatement, however, can make the difference in making the proverbial numbers work to the lender's satisfaction, Burch insists.

While he may be leading the pack, Burch is by no means alone in pursuing such endeavors. David Dewhirst, who has a track record of success in downtown commercial development, is now turning his attention to residential. Dewhirst recently acquired the landmark Emporium at the corner of Gay and Jackson with the aim of converting its upper floors into loft apartments. He and Burch are collaborators not competitors in a quest for city support that included a joint meeting last week with Mayor Victor Ashe.

Surely, if tax abatement can be justified to keep the News-Sentinel located in the city where it's got to be, then it's all the more compelling for projects that attract new residents to the city's core. Study after study has concluded that growing downtown's residential population is crucial to any overall downtown revitalization plan. Yet while professing a commitment to provide assistance, city officials appear uncertain what form it should take and who should qualify.

Granted, placing buildings in the nominal ownership of the city's Industrial Development Board in order to get them off the tax rolls for a time smacks of a contrivance. But overt abatement of property taxes is unconstitutional in Tennessee; and direct public payments for private building improvements, while permissible, are hard to justify except for infrastructure such as parking.

Then there's the need to set eligibility criteria for PILOT participation. After all, if any developer could get his project off the tax rolls—albeit only for a few years—the groundswell of demand would be overwhelming. And whatever criteria it selects, the city is bound to be subjected to charges of favoritism and discrimination.

A place to start, however, would be to designate the same historic buildings and districts that qualify for federal tax credits. These are principally in the downtown area, but the needs of the rest of the inner city cannot be ignored. And if any suburban developers come forward with plans for a mixed-use (live, work and shop) complex they are certainly worthy of consideration.

The need to push ahead on this arises at the same time the city is facing crucial decisions on how to proceed with Worsham Watkins International's ambitious plans for mixed-use development downtown. The long awaited recommendations of the Public Building Authority's administrator, Dale Smith, on the WW plan are due next week, and will hopefully lead to resolution of some of the controversies surrounding it.

While the WW plan also includes residential elements, yet more growth in downtown dwellers is needed to support its centerpiece: revitalization of Market Square as a shopping, dining and entertainment zone. The two go hand-in-glove, and the city is very fortunate that developers like Burch and Dewhirst have turned their hand to providing housing. The city should get behind their efforts post-haste.