Knoxville City Council unanimously approved a payment-in-lieu-of-tax (PILOT) agreement for a high-rise apartment building downtown that would overlook the Tennessee River.

The PILOT essentially freezes property taxes on the site for 10 years after its construction.

Origin Development Partners, a subsidiary of South Carolina-based Woodfield Development, plans to build the 18-story, 297-unit building on an L-shaped parcel that extends from Hill Avenue south and down a bluff along Locust Street, then west along Front Avenue toward the Henley Bridge. Front Avenue runs parallel to Neyland Drive.

The PILOT would essentially freeze property taxes on the building during construction and for 10 years after it opens. The goal of the incentive is to make the project more attractive to lenders that would finance construction.

Knoxville Mayor Indya Kincannon told Council members the project would add residents to a long-vacant parcel of downtown property.

“This PILOT would be to support one of the biggest downtown investments we’ve seen in recent years, estimated at $135 million,” she said. “I think it’s good for our city, it’s good for our housing supply.”

Patrick Kassin, vice president of development for Woodfield Development, said the project would promote a vibrant, mixed-income neighborhood. “We are thrilled to bring our high-quality project to this city and are confident it aligns with Knoxville’s key development principles.” he said.

The project has generated opposition from residents of the Overlook condominium building and the Historic Riverhouse on Hill Avenue. The new apartment building would wrap around those residential buildings and obstruct their residents’ views of the river.

Under the terms of the PILOT agreement, Origin Development Partners would make annual payments of $29,819 — $17,327 to the city and $12,492 to the county — for a decade following completion of the building. 

At the end of the PILOT period, Origin Development Partners would pay property taxes at the full rate on the assessed value, estimated to be $1.526 million — $886,731 to the city and $639,398 to the county. Projections indicate the firm would save more than $12 million in property taxes over the course of the PILOT term.

Origin Development Partners also agreed to offer 30 units, about 10 percent of the total, at workforce rates that would be income and rent-restricted at 80 percent of the area’s median household income.

Councilman Andrew Roberto noted that the city’s supply of housing hasn’t kept up with demand, and apartments are needed at all price points.

“We have always been traditionally a very affordable city, and we need to get back there,” he said. “The only way we get back there is increasing supply. These incentives we’re talking about, that’s how we get there.”

According to an independent review of the project’s finances by Water Street Public Finance, rents for the 267 market-rate apartments would average $2,945 per month, while the workforce units are projected to rent for an average of $1,341 per month.

Water Street Public Finance’s review looked at two scenarios — an option with no PILOT and no workforce apartments, and another with a PILOT and including workforce apartments.

Similar real estate projects typically earn an internal rate of return (IRR) of 12-20 percent. The metric can be used by lenders to determine whether to finance a project.

The review found the IRR for the no-PILOT option would be 10.6 percent, while the IRR for the PILOT/workforce housing option would be 11.3 percent. While that’s under the 12 percent threshold, Kassin said Origin Development Partners’ lenders rely on another metric — debt yield ratio — and are comfortable financing the project with workforce housing and a PILOT.

Rebekah Jane Justice, the city’s chief of urban design and development, said the incentive program has evolved over the years and now includes a published list of priorities, including workforce housing and the development of unused property, and shorter incentive periods. For example, PILOTs used to run 20-25 years but now last 10 years or less.

“We’re looking at more specific and strategic projects, contextually, and shorter PILOT time frames,” she said.

The project received support from a nonprofit that promotes connected neighborhoods and a developer who helped pioneer downtown’s renaissance.

Dustin Durham, founder and executive director of Yes! Knoxville, said the organization was in favor of using a PILOT to move the project forward.

“Not only will it provide more homes at a more attainable price in our most dense and walkable neighborhood, but every new home in general that is built helps current renters like myself,” he said.

Mark Heinz, who is partners with David Dewhirst in Dewhirst Properties, said the city’s PILOTs enabled them to complete projects that attracted residents and new businesses, and spurred more development. He pointed to the vibrancy of the 100 block of South Gay Street as an example.

“I’ve seen firsthand how PILOTs can be a game changer for developers, businesses and entire districts of our city,” Heinz said.

Bill Lyons, who is a former top aide to multiple mayors and lives in the Overlook, countered that a PILOT isn’t needed for the project. 

“The area we’re speaking about for the PILOT is not one that is in need to stimulate investment around it,” he said. “The investment, either across the river or proximate to it downtown, is occurring well on its own.”

Lyons said the project could qualify for Opportunity Zone funding, which is a tax benefit for investors who defer capital gains taxes, but Kassin said Origin Development Partners isn’t pursuing that option.

Councilman Charles Thomas said the site is ideal for increased density but has been vacant for years.

“That space there has not been used for a long time,” he said. "Part of it is because of the challenging topography, and to be able to put that many units in that particular place is a real asset to downtown.”

With the PILOT in place, Origin Development Partners plans to start construction in the second quarter of 2025 and complete the project within three years.