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VOL. 11 | NO. 26 | Saturday, June 30, 2018

Taking Flight

With a newly extended bounty, EDGE’s Residential PILOT hopes to help make Memphis the next ‘it city’

By Patrick Lantrip

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In the past 20 years, there has been little to no new multifamily housing growth in Memphis outside of Downtown and Midtown. 

So around this time last year, the Economic Development Growth Engine for Memphis and Shelby County, at the behest of both mayors, introduced a tax incentive designed to encourage a new wave of multifamily development with the hopes of growing Memphis’ stagnant population. 

REID DULBERGER

“Mayor Strickland’s vision for the city is to increase population density within Memphis,” said Reid Dulberger, EDGE president and CEO. “But, with the limited stock of available housing choices within the city’s core combined with the area’s low rental rates, it would be difficult and financially prohibitive for new construction or even substantial renovation.” 

However, unbeknownst at the time, there was a catch. Due to the wording of the TCA, industrial development boards were not permitted to offer tax abatements, such as the Residential PILOT, to developers building hotels, motels and apartment buildings outside of a center city area or central business improvement district, which in Memphis is essentially bound by the Parkways.

BRIAN KELSEY

KEVIN VAUGHAN

LEA HEILIG

This prompted local development officials to seek the help of State Sen. Brian Kelsey of Germantown and state Rep. Kevin Vaughan to sponsor a narrowly focused bill (SB 1736 and HB 2064, respectively) to amend TCA Section 7-53-302 to authorize such incentives outside of the city’s core, but only in Shelby County. 

“Through the assistance of State Senator Kelsey and Representative Vaughan, EDGE is able to broaden the use of our economic development tools beyond the Parkways to encourage new multifamily residential throughout the community,” Dulberger said. 

Multifamily investment specialist with Woodyard Realty Corp. Lea Heilig said it is important to view the impetus for this type of incentive through a historical lens.

“Since the 1980s, Memphis’ core outside of the CBID has seen very little apartment construction,” she said. “This fact seems to bear out that the cost of new multifamily construction has essentially been deemed too high to make projects economically viable. Unable to generate yields that could be financed, developers in effect had to scale back activity over the past several decades.”

Heilig said that many considerations go into the economic analysis of a new development including the cost of the project, the fixed expenses, and the rental income necessary to achieve a yield that can be financed. 

“It’s challenging to trace back to a date or specific event, but growth in nearby suburbs and associated opportunities for developers may have been a contributing factor,” she said. “What remains as the bottom line are the unwelcome effects of a missing incentive mechanism in the core.” 

In turn, the outdated and inadequate housing stock in the city has had several negative effects. 

“The efforts of select operators that have repositioned older properties are commendable, but can only go so far,” Heilig said. “On a more macro scale, the adverse impact of halted construction extends to the city as a collective in terms of its ability to keep the quality of housing in step with competing metropolitan areas. Cities across the nation have experienced a renaissance of urban living and those that want to draw young people have to be mindful of the quality of their housing stock.” 

The latter sentiment echoes Strickland’s reasoning behind his push for the PILOT’s creation last year. 

“EDGE does a good job of creating jobs, but that’s only part of the growth we need in Memphis,” Strickland said at the May 17, 2017, EDGE board meeting. “We need population growth.”

Since millennials generally prefer to live within urban areas, Strickland said, Memphis needs to do a better job at providing them a place to live.

“We need to become the next ‘it city,’ ” Strickland said. “Nashville is growing by 81 people a day, and I think that we have that potential.”  

Heilig agrees. 

“More professionals desire to live, work, play in New Urbanist walkable areas that offer an urban lifestyle, proximity to restaurants and entertainment venues, and short commutes,” she said. “Up until the recently approved legislation, the only submarket locally that was positioned to respond to these demographic shifts, has been Memphis’ Downtown within the boundaries of the CBID. Due to the existence of the DMC PILOT, Downtown had the mechanics in place to grow its repertoire of multifamily offerings by incentivizing both adaptive reuse and ground-up development.” 

Heilig cited a recent study by the National Multi-Housing Council that concluded Memphis will need to develop 12,000 new residential units, or 1,000 units annually, by 2030 to meet the city’s pent-up demand for multifamily housing. 

“Judging by Downtown’s lease-up velocity and unwavering occupancy levels, Memphians seem to have an appetite for urban rental housing and demand remains robust,” she said. “Multifamily projects that have broken ground or are in the pipeline within the expanded boundaries are anticipated to be well received by apartment dwellers in the local community.”

The early feedback she has gotten from the industry indicates that in the short term the newly approved legislation is expected to spur additional new multifamily development outside of the Parkways.

“Projects in North and South Memphis could eventually catch on, too” Heilig said. “The legislation has only recently been approved and site selection and/or assembly is never an overnight affair, so conceivably it may take a while for applications to be submitted.” 

On Wednesday, June 20, the first two projects seeking the Residential PILOT were approved by the EDGE board. 

New business venture, 3D Realty, was awarded a 15-year Residential PILOT for a $51 million, 414-unit mixed-use multifamily project on Broad Avenue, while  Makowsky Ringel Greenberg was awarded a 15-year Residential PILOT to bring 176 apartment units to the intersection of East Parkway and Sam Cooper Boulevard with a $22.2 million price tag. 

To mark the occasion, Rep. Vaughan personally attended the meeting to see his legislation come to fruition. 

“On behalf of Senator Kelsey and myself, anything we can do to assist this board in moving this county forward economically in Nashville, we're here for you,” Vaughn told the EDGE board. “We’ll do what we can, and if that’s not enough, we will get some friends and do some more.”

Vaughn said that while this tool may not be needed in every county, he hopes it can be used as a spark in Shelby County. 

“We think this will be a real kickstarter for some projects that will overall enhance the community,” he said. 

Since other PILOTs focus on job creation or retention, to be considered Residential PILOT at least 60 percent of the project costs have to be real property improvements and construction. 

So far the two recently approved projects have exceeded that threshold, with 3D Realty’s project’s devoting 76 percent of the cost to improving the property and Makowsky Ringel Greenberg’s boasting an 86 percent mark, according to EDGE data. 

In the end, Heilig, ultimately believes that the adoption of the new PILOT boundaries will have a positive effect on the city. 

“So long as parking and necessary road improvements are adequately addressed to accommodate higher density, residents and stakeholders alike welcome these developments,” she said. 

“Opportunities to address underutilized or blighted buildings in the city’s eclectic mix of neighborhoods are abound. The expanded PILOT now provides the framework to elevate the use of those structures and by extension raise surrounding property values. A proverbial rising tide that lifts all boats.” 

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 57 280 1,209
MORTGAGES 55 244 916
FORECLOSURE NOTICES 8 52 151
BUILDING PERMITS 158 699 2,751
BANKRUPTCIES 37 157 618
BUSINESS LICENSES 12 77 276
UTILITY CONNECTIONS 0 0 0
MARRIAGE LICENSES 0 0 0