For more than two decades, Chattanooga has used payment-in-lieu-of-taxes agreements to reshape its downtown.

But the tax-break tool that once helped fill the Tennessee River city with market-rate apartments has been retooled for a different purpose: mixing affordable and market-rate units. City officials say seven of every 10 renters are either rent-burdened or severely rent-burdened.

With a change in state law, Chattanooga housing and finance officials crafted a voluntary PILOT – an acronym for Payment in Lieu of Taxes – program for individual units in a market-rate building. The 15-year abatement is pegged directly to the cost of lowering rent from a modeled market level to an affordable one.

The program does not appear to copy any other affordable housing incentive in the country. Hanneke van Deursen, Chattanooga’s housing finance director, told The Builder’s Daily that incentives in Chattanooga and nationwide tend to be “blunt instruments” that do not prove to work well, especially over time.

“I saw the limitations of the structure that most cities use, and we needed something different,” van Deursen said. “That’s what really drove us to come up with a creative solution, to be more precise about how we use this incentive.”

The goal was to expand the pool of potential developers beyond those focused specifically on affordable – low-income or supportive – housing.

Chattanooga’s approach has earned national recognition for innovation in housing. It was named a co-winner of the 2026 Ivory Prize for Housing Affordability in the policy and regulatory reform category.

An early adopter

Van Deursen said she did not create the program with a particular development in mind, but one quickly emerged.

Atlanta-based The Atlantic Companies is the first to use the new PILOT for a 278-unit apartment community. The project is under construction along the river near the Moon Pie plant in the city’s North Shore neighborhood. Forty-two units will be affordable for residents earning 60% to 80% of the area median income.

“With this program, the city is focused on placing affordable housing not 30 minutes outside of town, but right in the heart of the city — close to jobs and amenities,” Frank Reese, a principal in the firm, said in a December statement announcing an equity investment from American South Capital Partners.

Mixed-income appeal

Affordable housing developers typically use federal Low-Income Housing Tax Credits as part of the capital stack to finance their projects. Those deals usually produce only affordable housing, separate from market-rate units.

Affordable housing advocates view mixed-income developments as superior because market-rate units can cross-subsidize affordable ones. They promote economic integration and improve access to amenities. They also tend to be more politically palatable.

“There’s so much research that shows that leads to better neighborhoods, better outcomes for tenants,” van Deursen said. “I believe very strongly that mixed-income housing development is the future, and we need ways to get that, and a lot of cities require it. We’re not allowed to do that.”

Having to get creative

Since 1996, state law has prohibited municipalities from requiring that a percentage of private residential or commercial rental units be set aside as affordable or workforce housing. A 2018 amendment tightened that restriction by prohibiting the use of voluntary incentives.

Then the COVID-19 pandemic arrived. Tennessee’s population grew as people left Northeastern and Midwestern cities. Housing costs quickly rose, creating a major affordability problem.

Nashville felt that pressure and still does. Chattanooga’s housing costs rose as well.

The city also benefited from domestic in-migration. Being named one of Urban Land Institute‘s boutique cities for growth in its annual Emerging Trends in Real Estate report helped burnish Chattanooga’s image.

Backed by old Coca-Cola bottling family money, the city has been transitioning away from its industrial past for decades.

Chattanooga launched its original downtown housing PILOT in 2002. It used the Health, Educational and Housing Facility Board to approve abatements for developers willing to invest in a then-struggling urban core.

The program worked. Six projects took shape under it before the framework expired in January 2012. A 2014 revival revived the approach, and more downtown development followed.

But affordability was never the point. The original PILOTs were broad tax breaks tied to downtown investment, not to what a teacher, hospital worker or restaurant manager could afford to pay in rent.

That changed last January when the Chattanooga City Council approved the new structure. Chattanooga became the first Tennessee city to create such a program after state lawmakers amended the law in 2024 to permit voluntary attainable housing incentive programs.

The city opened the program to applications in June 2024. By September 2025, Chattanooga had approved its first project under the new framework.

Though PILOTs are not new in Chattanooga, the math behind this one is.