Tax Abatements Find Fresh Momentum

Although the Low Income Housing Tax Credit (LIHTC) remains a primary driver of housing production in the United States, fierce competition for credits and sustained regulatory challenges have prompted developers to seek alternative funding sources in recent years.

One increasingly popular alternative is property tax-based incentive programs. This diverse set of policies offers certain property tax breaks to buildings that meet affordability requirements, thereby lowering long-term operating costs for building owners without requiring any upfront public investment. In recent years, tax incentives have gained momentum as an affordable housing strategy, and a growing number of municipalities—such as Cincinnati, Pittsburgh, and Fort Worth—have enacted new programs or strengthened old programs aimed at providing tax relief to affordable housing developers.

These programs can vary widely depending on the demographic makeup and housing needs of the municipality, but generally fall into three buckets: abatements, which directly reduces real estate taxes from a project’s fully assessed value; exemptions, which reduces a property’s overall assessed value and thereby exempt them from real estate taxes; and Payment In Lieu Of Tax (PILOT) programs, which allows projects to make alternative payments at a small percentage of their traditionally assessed value, rather than a real estate tax.

The growing appetite for such tax incentive programs was highlighted in a recent report published by the National Multifamily Housing Council (NMHC).

“We’re very focused on the affordability problem for renters,” says Caitlin Sugrue Walter, NMHC’s senior vice president for research. When asking NMHC’s developer members “what is the most effective way to get these units built, they were—more and more—saying, ‘tax abatements.’ It’s the easiest way to make a project pencil.”

Thus, NMHC contracted with RCLCO—a real estate consulting and analytics firm—to build out the report, which uses eight diverse case studies to explore the effects of these tax incentive programs on housing supply and municipal budgets. In general, the study found that no matter the flavor of the tax incentive program deployed, each provided benefit to the taxpayer beyond the dollar amount lost to the tax abatement. “At the end of the day, they all have the same benefit,” says Walter.

To that end, the report shows that in each of the case studies, tax incentives provided benefits ranging from $1.83 up to $39.82 for every dollar spent on the program. Rather than claiming that one tax incentive structure might work better than others, Walter emphasizes that jurisdictions should analyze local needs and craft a program that fits. “You look at Manhattan, Buffalo, St. Louis, San Antonio – part of what makes America, America, is that every locality is different. And this solution allows local officials to look at the market conditions, work with local developers, and determine what solution works best for them.” No matter the resulting initiative, Walter stresses that “at the end of the day, the practice works.”

For municipalities and local developers looking to implement a tax incentive program, Walter recommends NMHC’s Housing Affordability Toolkit, which enables individuals to compare similar cities to see which exact flavor of tax incentive works best for them. Walter says that a new toolkit is likely to be published within the next two months.

Among all the types of tax incentive structures, Walter stresses that simplicity is the best recipe for success. “Density bonuses are a good example of that. With inclusionary zoning, when you make it so convoluted, it makes it less attractive to the developer. If they’re looking at a variety of sites around the country, and they know that it’s easier to build in one jurisdiction than another, then they will build there.”

Atlanta Urban Development Charts a Novel Course
One unique approach to leveraging tax incentives comes from the relatively young Atlanta Urban Development Corporation (AUD), a two-year-old organization that serves as a nonprofit subsidiary of Atlanta Housing (AH) to lead housing development on publicly owned land. A product of the energetic initiatives of Mayor Andre Dickens, AUD has already helped spur a significant number of affordable housing units, all in service of Mayor Dickens’ bold pledge to bring 20,000 new units of affordable housing to Atlanta by the end of his tenure.

Critically, AUD has a non-LIHTC focused strategy, foregoing federal dollars to instead home in on underutilized public land and local resources to create efficient pathways to deep affordability. “We recognized that LIHTC has a lot of restrictions, and it was getting more and more competitive every year,” says Karen Patten, AUD’s chief operating officer. Thus, when AH created AUD, they wanted to shape a “social housing model” that “de-emphasized federal subsidies and emphasized the use of local subsidies.”

This reorientation from federal to local dollars turned out to be “very timely,” Patten says.

One of AUD’s major tools has been leveraging what they call the Private Enterprise Agreement (PEA). The PEA is a relatively novel structure, granted to AUD by the Georgia State Code, which allows up to 100 percent tax exemption for a project depending on income restrictions. To be eligible for the exemption, buildings must reserve a minimum of 20 percent of units for renters at 50 percent area median income (AMI) or below, and ten percent of units for renters at 80 percent AMI or below; beyond that, all units where the household is at or below 140 percent AMI will receive a property tax exemption.

The savings are potentially significant, as taxes on a typical multifamily property in urban Atlanta can run over $500,000 annually.

Additionally, by leveraging public land, AUD can eliminate or significantly reduce land acquisition costs. In conjunction with the long-term operational savings afforded by the PEA, this makes collaboration with the AUD relatively attractive for local developers. “It’s been really popular,” Patten says.

One “surprising” result of AUD’s work has been that the appetite for the tax breaks afforded by the PEAs seems to be almost stronger than for the land acquisition savings coming from public land deals. “Operating costs are on the rise, with everything from materials, construction, property management, insurance – pricing is out of control,” Patten says. “We found that bringing down operational costs was just as important for our developer partners as acquisition costs.”

One project that Patten highlights is Midtown Fire Station 15. This unique development, located just blocks away from downtown Atlanta’s lush Piedmont Park, will situate a mixed-use high-rise on top of a still active fire station, transforming unused vertical space above a critical public resource into permanently affordable apartments. Midtown Fire Station 15 is currently in predevelopment, with AUD serving as a co-developer alongside Healthcare Heroes Housing (HHH) and Integral Group. Patten says that groundbreaking will likely begin in early 2026.

The project will benefit from some amount of direct subsidy from the state’s Housing Production Fund (HPF), seeded by the city’s 2023 Housing Opportunity Bond. However, Patten says that without the help of a public development partner and the tax benefits of PEA in addition to the publicly sourced, low-cost HPF financing, “I don’t think that deal would have gotten done.”

Though there is some local pushback to the idea of tax dollars going to developers, Patten says that once the public is educated about the benefits of the development, community members generally are enthusiastic about the program. “Obviously, you deal with the question of some people’s perception that you’re reducing the tax base. But we have not found that to be the case with the projects that we have participated in because all of them have been value added anyways.” Since the fire station was already tax-exempt, Atlanta’s tax rolls won’t diminish due to the exemption. And any commercial space built into these buildings will still generate tax revenue since those spaces can’t be eligible for the PEA tax exemption.

Patten further emphasizes AUD’s focus on building more two- and three-bedroom units to serve families. “As we’re bringing communities together, we’re expecting that the perceived loss in tax revenue will be more than offset by the redevelopment of these sites that have, frankly, been underutilized.”