How Chattanooga Boosted Affordable Housing Without Direct Subsidies

With its corner of Southeast Tennessee growing, Chattanooga has developed a new tool to encourage more housing, without making taxpayers foot the bill.

The city has secured the first set of new housing developments using a first-of-its-kind tool, which incentivizes the construction of below-market housing without direct subsidies. Chattanooga's Payment in Lieu of Taxes (PILOT) program offers developers a property tax discount if they include affordable units in new housing developments.

The program is a new tool in the push to boost housing supply and keep housing costs down, said Hanneke van Deursen, Chattanooga's director of housing finance.

The program was just honored as a winner of the Ivory Prize, a national housing innovation competition by the University of Utah's affiliate, Ivory Innovations.

"Chattanooga has demonstrated that cities don't have to wait for federal dollars to produce affordable housing. They can unlock it through smarter local policy design," said Chris Herbert, managing director of the Harvard Joint Center for Housing Studies and an Ivory Innovations advisory board member.

The Scenic City's dilemma

Like many small cities, Chattanooga's seen a lot of change this decade. The city's population grew by 24,000 from 2010 to 2024, including 10,000 in the past five years, thanks in part to digital nomads seeking cheaper living after the COVID-19 pandemic.

Housing costs have grown across the metro of a half-million as a result. The Chattanooga metro's median listing price grew from $215,000 in early 2017 to $400,000 now, Realtor.com® data shows.

The state-by-state housing affordability report card from Realtor.com gives Tennessee a C, lower than almost every state around it. The state's housing issues emanate from Nashville, whose booming economic fortunes have now left many residents feeling like owning a home is out of reach.

Tennessee, though, allows its local governments relatively few levers to pull from a tax standpoint.

"COVID really just put us in the pressure cooker, where we saw rapid rent growth and we suddenly saw a need for more housing," van Deursen said. "So the city was really caught on its heels to see how to respond to this suddenly difficult market, and without a robust set of policies to react."

New tool for building

The PILOT program is a way to make new housing development more achievable by rewarding developers for creating affordable housing units. In exchange, they receive a 15-year property tax abatement tied to the affordability level of the housing they've provided.

Chattanooga has an interactive calculator for developers to predict the tax breaks they'd get from certain projects. Offering many units at 80% of the area's median income, also known as "workforce" housing, conveys smaller benefits than more deeply affordable units. But deeply affordable housing also digs deeper below market-rate rents.

So, the developer has lower operating costs in the development in exchange for lower rents. That makes building more financially feasible, and it allows Chattanooga to grow its housing stock. The city isn't stuck with a one-size tool that doesn't adapt to the market conditions, van Deursen said.

Chattanooga approved its first 278-unit housing project downtown in October. When completed, it'll have 42 units at 80% or 60% of the area's median income. And the city still wins, because the property's going to go from generating $9,000 in taxes a year to $363,000, even with the abatement.

"You usually need federal dollars to hit that kind of target," van Deursen said.

The program is limited to rental housing projects of 10 or more units. But the city sees it as a strategy to lower the cost of housing overall. Especially in Chattanooga's urban center, where home development was previously expensive.

In a state where housing affordability is a crucial question, the program is "a very innovative tool that any city with tax abatement authority can replicate,” Herbert said.