A downtown Chattanooga apartment complex that recently was sold at a $3 million profit is exempt from most property taxes through 2022 under a PILOT (payment in lieu of taxes) agreement.
No payment of school taxes was included in the deal for Walnut Commons at Walnut Street and Aquarium Way.
The only taxes due on the property for the next eight years are on a single commercial suite that was included in the project by developers John Clark, David Hudson and Bob McKenzie.
They spent about $12 million on the long-delayed project and recently sold their interest to an Omaha-based national real estate firm for $15 million.
No property tax is due on the 100 apartments - which were quickly filled when the building opened last year - until a payment of 20 percent of value in 2022. The rate goes to 40 percent in 2023, 60 percent in 2024 and 80 percent in 2025 - the final year of the agreement.
The tax bill for the $15 million Walnut Commons for 2014 is $1,919.05 for the county and $1,602.45 for the city.
The property value under the deal is based on the 2010 status of it being zero because of its ownership by the city.
Officials said the deal was worked out by attorney Alfred Smith with the assessor's office.
The PILOT for Walnut Commons was approved by the County Commission, the City Council and a city board, developer Clark said.
It was under a 10-year tax incentive program aimed at developing housing in downtown Chattanooga. River City officials argued that the tax breaks were necessary because of the difficulty of developing downtown housing.
Under a new downtown housing tax incentive program, 20 percent of the units have to be set aside for those making 80 percent or below of the median income. The school taxes have to be paid. The deals have to be approved by the County Commission and City Council.
Trustee Bill Hullander said he did not see the PILOT agreement until after it was signed. He said, "The way it has been done, it comes to our office and the assessor after everything is already signed. Then they throw it down on our desks."
He said he is asking that his office be included in reviewing future PILOTs before they have been completed and approved.
"There have been several times we have gotten them and we raised questions about them when we read them," he said.
Mr. Hullander, when he was on the County Commission, started insisting that PILOT agreements coming before the county include payment of school taxes. He said, "We had industries wanting to come in and they were asking how good our schools were. They wanted good schools, but not to pay the school tax." Volkswagen was among industries that wound up paying school taxes under the new county requirement.
The Chattanooga Downtown Redevelopment Corporation on Thursday delayed action on approvals involving the transfer of ownership of Walnut Commons to the national firm.
Valerie Malueg, assistant city attorney, said issues remaining included getting the operating manual for the stormwater retention system as well as the status of rents owed and paid.
Representatives of the buyer, America First Real Estate Corporation, said those items are being sought from the three original developers.
A called meeting will be held later when those items are in place, it was decided.
The city board, which holds title to the property where the apartments sit, was told that the sale of stock to the new owners has already been completed. There will be no deed transfer involved, attorney Malueg said.
The project took five years to develop as it wound its way through HUD loan backing and other complexities, including folding the adjacent Little Miss Mag Child Care Center into the development.
Attorney Malueg said the arrangement for payment of the lease is "extremely complex" and is related to paying down the debt.
She said the city's Health, Educational and Housing Facility Board is also intertwined in the project, and is involved in the tax breaks granted the developers.
Mr. Clark said, "All taxes due have been paid. Rent is calculated as a formula based on income and expenses. The agreement calls for rent to begin to accrue once a certificate of occupancy is issued and then paid annually. We are now at the anniversary and that's why the CDRC is calculating rent. It's a complicated process but one I'm sure we will work through in the next couple of weeks.
"With regard to stormwater, our systems have been designed, constructed and inspected per code. As I understand it at this point we need to deliver a management and maintenance manual to the CDRC. We are working on this now.
"On the commercial portion we paid taxes from the beginning."
John Sons, who said he is "the local guy" on the project for America First, said, "We will abide by every agreement that has been signed." Mr. Sons is from Murfreesboro.