PILOT Approved for Supreme Court Site

State Supreme Court site development

PILOT Approved for Supreme Court Site

City Council signed off on a tax incentive plan that allows the redevelopment of a downtown block to move forward.

by scott barker • May 22, 2019
Rendering of the proposed redevelopment of the state Supreme Court site.

Two years after reaching a sales agreement on the state Supreme Court site in downtown Knoxville, City Council unanimously voted on Tuesday to approve a tax incentive package for the project.

The agreement would freeze property taxes based on the $2.6 million purchase price for up to 25 years.

Council authorized the city’s Industrial Development Board to negotiate two tin-lieu-of-tax payment (PILOT) agreements with developers Rick Dover and Bristol Development, who formed a company called Knoxville Supreme Court LLC for the project.

The PILOTs would freeze property taxes on the development based on a value of $2.6 million for 25 years, following a construction period of up to three years.

“This is a full city block that’s been dead and needs to be developed,” Councilwoman Lauren Rider said.

The development would divide the block containing the former State Supreme Court building at the corner of Locust Street and Church Avenue into two parcels and two distinct projects.

The Supreme Court building and the adjacent office building would be renovated to house a 27-room, extended stay boutique hotel with no franchise affiliation. Dover said a penthouse and/or a rooftop bar could be part of the final plan.  The two- and three-bedroom units would come with kitchens and be marketed through a specialty website, possibly Airbnb or other short-term rental service.

“What we’re trying to do is create something this market doesn’t have,” Dover said.

On the surface parking lot that covers the rest of the block, Dover and Bristol would build a 237-apartment residential development and a parking garage. Dover said Tuesday space at street level on Locust could be built out as retail space, depending on the market.

Dover and Bristol reduced the number of hotel rooms from earlier plans because downtown’s hotel market has grown more crowded in recent years. In addition to Dover’s Hyatt Place at the historic Farragut Hotel Building, a dual-branded Marriott opened this year at the former News Sentinel site on State Street and the Tennessean opened next to the Holiday Inn World’s Fair. The Conley Building on South Gay Street is being renovated for an Embassy Suites Hotel.

The total private investment in the Supreme Court property, including the purchase price, would amount to about $73 million.

Though the final numbers are subject to negotiation, Knoxville Supreme Court LLC would pay a combined $47,682 per year in lieu of taxes on the parcels (Central Business Improvement District assessments aren’t included in the PILOT). At the end of the 25-year PILOT period, combined city and county taxes are estimated to jump to $1.17 million. The government-owned block hasn’t generated any property taxes for decades.

“As I’ve told my children, a little bit of something is better than a whole lot of nothing,” observed Councilwoman Gwen McKenzie, who represents downtown.

Councilwoman Seema Singh-Perez said she doesn’t think downtown needs public assistance anymore, but that the Supreme Court site needs to be developed and she is satisfied the developers’ rate of return isn’t excessive.

“This is something I’ve really struggled with because my feelings on PILOTs are really mixed,” she said, adding “I would like to see these PILOTs somehow do more for working class people in Knoxville.”

Councilman George Wallace, who has expressed frustration over the lack of progress on the site, said the city had to make sure the property didn’t remain vacant and needed to have some control of the development. “We’re getting more than we made before,” he said. “We’re being made whole on our investment.”

The city purchased the property from the state in 2015, after two previous attempts to find a private developer for the site fell through.

Deputy to the Mayor Bill Lyons, the city’s chief policy officer, said the 25-year PILOT term is the longest offered by the city. The Knox County Commission and the state Comptroller of the Treasury also need to approve the deal. The development would still have to pay an annual assessment to the Central Business Improvement District.

PILOTs are used as gap funding on projects that are too difficult to completely finance otherwise. As with all PILOT agreements, the city hired a third-party to conduct an analysis of the project to determine if the PILOTs are necessary to provide a reasonable return for the developers.

MuniCap Inc., the third-party analyst, found the PILOT would be needed to finance the apartment complex based on similar apartment developments downtown, and that the rate of return on the investment would not be excessive.

The hotel portion of the project was more difficult to determine, according to MuniCap, because the business model is unique among downtown Knoxville hotels.

MuniCap used assumptions provided by the developers that estimated 70 percent occupancy at a $199 average daily rate. The occupancy rate is lower than hotels that have received PILOTs in the past, and the average daily rate is lower than those reported by overnight rentals, the closest match to the Knoxville Supreme Court LLC business plan. Still, MuniCap determined the rate of return on the project would not be excessive.

The PILOT arrangement is the final hurdle to starting the project. Closing on the sale is targeted for July 1.

“We’re very grateful that City Council voted unanimously tonight for the project to move forward,” Dover said. “It’s the full transformation of a city block downtown.”