Is tax break strategy allowing developers to build now, pay more later overused?

City and county tax breaks are a widely accepted development tool, but do they actually help provide affordable housing for low-income people as they claim?

That question came up recently on the Madison @ McLean proposed $14 million high-end apartment building in Midtown. The developer, Makowsky Ringel Greenberg, was awarded a 14-year tax incentive called a PILOT (payment in lieu of tax). Today that means $25,368 in annual taxes and would grow to $91,000 annually during the 14-year PILOT, according to officials at Economic Development Growth Engine (EDGE), the Memphis and Shelby County entity that greenlit the PILOT, its first for a residential project. When the tax break ends, the property would be taxed at full price — $364,000 per year for city coffers.

“Without the PILOT, the project would not have been built at this site in the community,” according to Nora Boone, EDGE marketing and communications director.

For some critics, however, the problem lies in the money left on the table during the tax break, and whether “affordable” included units actually are and PILOTs are overused in a city that desperately needs the tax proceeds right now.

“They actually stopped the bleeding of taxes,” Tom Jones, editor of Smart City Memphis told MLK50 about residential PILOTs downtown. “The question is now at what point has the market recovered enough that these are now being used as profits developers put in their pocket?”

PILOTs originally encouraged developers to help keep downtown Memphis from going to into a real estate freefall as buildings became more decrepit, according to Jones. Today, the civic development incentive for corporations to move to Memphis and build inside city limits has devolved into an entitlement, he said.

The question of who the city serves has grown louder since the 1970s when white flight began in earnest due to school busing and other factors. Residents at the lowest income levels qualify for federal Section 8 housing. While deemed “affordable,” these these new developments that get city incentives, are not accessible to those thought of as low-income, the truly poor.

“Every 10 years, we’re waiving about $799 million in city and county taxes at a time when residents of Memphis needs services to be upgraded,” said Jones about business and residential tax breaks. “You’re shifting the tax burden almost always owned by Caucasians to an African-American majority city that needs the money.”

Proponents, however, argue this type of tax break creates the opportunity for a vital central city that can attract new residents and potentially jobs, benefiting the city as a whole. Besides, developers view such projects as too risky to undertake without tax breaks.

“Outside of the downtown core, there has been very little new construction of apartments in the city,” according to Reid Dulberger, EDGE CEO. The program “is designed to increase rental housing in the city of Memphis outside of the downtown core.”

Opponents are wary for varying reasons: Even with set asides for low-income renters, they argue many people in Memphis can’t afford the rents in a city where 26 percent of residents live in poverty. Others say PILOTs are overused and deprive the government of potential revenue that could be used in other ways. While PILOTs don’t diminish the amount of current tax rolls, they do cost the city money it would receive from vastly improved property.

Breaking down the tax break

Here are some details about Madison @ McLean to consider when deciding who benefits from PILOT tax breaks.

• The plans call for about 108 apartments with 22 offering reduced rent for low- and moderate-income renters.
• The 86 market-rate apartments will rent for $1,050 for a one bedroom and the two-bedroom apartments will rent for $1,500, according to media reports.
• Apartments set aside for low- and moderate-income tenants will rent for less.

Exact prices for low- to moderate-income renters at Madison @ McLean is unclear. Calls to Makowsky Ringel Greenberg asking if a price range had been determined were not returned.

However, these and similar local projects use guidelines from the U.S. Department of Housing and Urban Development to define low income. The agency currently uses $60,000 median income as a baseline. That figure, higher than median incomes for Memphis ($36,445) and Shelby County ($46,224), is calculated using data from Shelby, Crittenden, DeSoto, Fayette and Tipton counties.

Under these guidelines, “low-income” is defined as 80 percent of the median, which ranges from $33,600 for a single person to $48,000 for a family of four. A family that makes 50 percent of the median income ($30,000 for four people) is considered very low income and eligible for HUD assistance. PILOTs generally target those earning 80 percent of HUD’s median.

Downtown apartments that received PILOT incentives from other agencies use the same HUD income guidelines, confirmed Brett Roler, planning and development vice president for the Downtown Memphis Commission, a partnership between local government and Memphis’ business community. (Click here for a list of active downtown PILOT projects and here for a list of EDGE PILOT projects.)

As PILOTs draw more controversy, officials and residents need to agree on what “affordable” really means, said Dee-Dee Huang, a Princeton University graduate student who spent the summer in Soulsville, researching ways communities handle affordable housing and gentrification issues. She says residents who understand PILOTs could have more say-so in how they’re crafted, making room for more poor people.

“Affordable” can often be a “vague term,” said Huang, who presented her findings to Community LIFT and others in August.

As for affordable apartments included in PILOTs, they’re not affordable at all, if you ask David Upton, an affordable housing consultant and lobbyist who’s worked in Memphis for the past 25 years.

“Those market-rate apartments are built to be market-rate, and they’re not built with any contemplation toward serving poor people,” Upton said. “So it’s not low-income, but affordable. It’s a different kind of standard.”

When the city then began bulldozing housing projects under the thrall of gang and drug violence, residents received vouchers to move into the new units built in their place. These new units are federally designated low-income housing tax credit units, allowing agencies to give tax breaks for the “acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households,” encouraged by the federal government’s Housing Opportunities for People Everywhere program.

The same tax breaks required for replacing the decayed public housing units are also available for the developers building the higher-end apartments like Madison @ McLean and the celebrated Crosstown Concourse development.

The instant gratification of PILOTs now has consequences, according to Jones: “Of course, the tax holidays deprive local government of money for the kinds of public services that contribute to the kind of quality community that attracts companies and jobs in the first place and that invests in the education of the workforce that they need. Keep in mind that every time Shelby County taxes are waived, they include money that would otherwise have gone to schools.”

Affordable housing: What you can do

The foreclosure crisis put a fine point on the fact the United States is becoming a renter nation with an affordability crisis dogging renters in 38 cities, according to PolicyLink and the Homes for All campaign running now through Sept. 14–24.

Renters in 45 cities will participate in demonstrations “to confront corporate landlords, developers and politicians driving the housing crisis,” according to Homes for All. Goals include educating renters about tenants’ rights, community control over land and housing, non-market solutions, ending Wall Street giveaways and pursuing full funding for the U.S. Department of Housing and Urban Development.

“If rents were affordable,” estimated at 30 percent of income, “renters could meet their basic needs like transportation, food, and child care and contribute even more to thriving communities. This would have a positive ripple effect throughout their regions,” according to Angela Glover Blackwell, CEO of PolicyLink. The research and action institute, offers the following facts about renting:

• Renters are the majority in the largest 100 cities
• Renters comprise 35 percent of the U.S. population, an increase of 27 percent since 2000
• 107 million people live in renter households
• $124 billion (or $6,200 per rent-burdened household) is lost in local economies because of lack of affordability
• 57 percent of renters have experienced cost burdens due to an 11 percent drop in incomes
• 61 percent of women of color are affected by this cost burden
• 52 percent of white women are affected by this cost burden
• 49 percent of men of color are affected by this cost burden
• 41 percent of white men are affected by this cost burden

Follow #RenterWeekOfAction and #RenterNation, and find more resources at Homes For All.

Writer Molly Mulroy contributed to this report.

This story is brought to you by MLK50: Justice Through Journalism, a nonprofit reporting project on economic justice in Memphis. Support independent journalism by making a tax-deductible donation today.