Investment or corporate welfare: What is payment in lieu of taxes

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Knoxville City Council opted in a vote, 6 to 3, to help new developers renovate the Holiday Inn downtown, including converting it into a Marriott.

The renovation is projected to cost an Ohio-based company more than $37 million, on top of more than $21 million they’ll pay to buy the Holiday Inn and the Tennessean hotels.

Through a 10-year payment in lieu of taxes (PILOT), developers will only have to pay property taxes on the current value of the properties. 

If you’ve driven down Henley Street, you’ve likely noticed the two prime pieces of real estate. Both the Holiday Inn and the Tennessean are located directly across from the Knoxville Convention Center. At midnight, owner Nicholas Cazana says a sale of his two properties is final. 

Cazana says the decision to sell wasn’t easy, but the decision to hand over the keys was primarily because, he believes, the Holiday Inn requires more than $20 million in investment.

“We’ve been at it for over nine years. It’s time for someone who really has major expertise and their capital, they’re better off than we are,” he said.  

He’s owned the Holiday Inn for more than nine years and the Tennessean, which he refers to as “like a third child” has been open for 22 months. He says the city’s help was essential when he transformed an old state office building into a luxury hotel.

Knoxville, Cazana says, worked with him on improving pedestrian walkways from the hotel to the convention center, improving Cline and Church avenues via a PILOT deal. 

As a developer, he knows how the PILOT will help the new owners of his hotels.

“It allows you to be competitive,” Cazana said.

Because the average cost of a room in Knoxville is typically cheaper than in a larger city like Nashville or Chicago, but the construction costs are typically the same, he explained, an investor needs to save money somewhere. He believes the loss in additional tax revenue on the front end is made up by additional tax dollars and more foot traffic downtown. 

While he’ll still own the condos at the top of the Tennessean, he wanted to thank his customers for their business over the years. 

The city has given PILOT privileges to more than 20 developments in the city. You can go to this site to compare their beginning property values to their current value. To reiterate, once that PILOT is lifted, the owners pay the rate on the most recent assessment. 

Let’s look at a similar property, in walking distance on Henley Street from the Holiday Inn – The Hampton Inn and Suites was granted a PILOT in 2006.

Back then, the building was worth around $300,000. In its most recent valuation assessment, it was appraised at nearly $8 million. This means, in city property taxes alone, the developer went from paying roughly $9,000 in city taxes in 2007 to more than $89,000 last year. 

Kim Bumpass, President of Visit Knoxville, didn’t comment on whether a PILOT is a good idea.

She says their office works with what they have, basically. While Knoxville hasn’t been difficult to sell, she says every investment helps.

“It is huge when an owner puts money into the property and kind of brings it up to whatever that expectation is and the fact that this particular project is right next to the convention center, I think it’s going to be very exciting as we’re looking to recruit meetings and conventions for years to come,” she said. 

A third party firm found the changes to the Holiday Inn will lead to a higher occupancy rate and raise the average cost of a room $70 in 10 years. 

Developers will continue to pay $307,000 a year in property taxes. Once their PILOT is over, they’ll pay nearly $800,000 in property taxes. 

One of the three ‘no’ votes was councilwoman Seema Singh-Perez, who stated:

“I think the Marriott presence adjacent to the Convention Center will be of economic benefit to Knoxville. But, the Marriott could have made a profitable investment without the PILOT. It is standard practice that economic development for a city too often includes corporate welfare. Now that the City Council has approved this public assistance, which could be worth about $4 million in tax relief, I expect Marriott to be a good corporate citizen of Knoxville and pay a living wage of its employees at all levels.” 
 

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