polls here 3069More than 90 hotel rooms at the Chattanooga Choo Choo are going to be repurposed and made into affordable apartments starting early next year, as the historic downtown attraction revamps its image and goes forward with an $8 million makeover.

The Choo Choo is dedicating 97 rooms in the building immediately behind the iconic Market Street lobby for apartments, but will otherwise continue operating as a 267-room hotel.

Two of the new apartments will be 650 square feet in size, and the other 95 each will include 350 square feet. The redevelopment includes building facade upgrades and sprinkler system additions.

In July, the Choo Choo's owners unveiled a major revitalization plan that includes the installation of two new restaurants (Nashville-based Sam's Sports Grill and Jacksonville, Fla.-based Blue Fish Oyster Bar) in the lobby, the introduction of a new 500-person, on-site music venue and the relocation of the Comedy Catch from Brainerd to the Choo Choo campus. Track 29 will remain at the Choo Choo.

The residential redevelopment is estimated to cost about $4.1 million, and CapitalMark Bank is handling financing for the project.

Jon Kinsey, part owner of the Choo Choo and former mayor of Chattanooga, said Tuesday that the Choo Choo's owners are responding to calls from city leaders for more affordable downtown housing options. "I think it's really important that downtown has options for people of all income levels," he said.

Consequently, affordability was the determining factor in offering the 350-square-foot apartments, rather than knock out walls between hotel rooms and create larger floor plans, he said.

The 300, a complex of smaller floor-plan apartments at the corner of Sixth and Pine streets downtown, has been successful following the small-but-affordable model, Kinsey said.

A year ago, Chattanooga's downtown development agency River City Co. released a survey detailing the downtown housing shortfall and encouraging builders to meet it by starting residential projects.

According to that River City survey, downtown can support 250-350 new rental units and 200 new student housing units being added every year.

"The city and county and River City have been talking actually for decades about the need for some affordable apartments downtown, and we think this is a great way to fit that niche," said Kinsey. "They've asked people to come do this, and we're trying to do what the local government's requested."

The Chattanooga Choo Choo basks in the setting sun in Chattanooga, Tenn., in this file photo.

To help incentivize the downtown residential development they've asked for, city officials agreed in August to offer property tax breaks -- good for the next decade -- for any new downtown residential project (new construction or remodel) with affordable rent.

The payment-in-lieu-of-tax (PILOT) offer stipulates that 20 percent of a new development's units must be affordable to moderate- or low-income families to qualify for a reduced tax rate on the new investment made downtown. The improvements eligible for the tax breaks must be worth at least 60 percent of the existing structure's value.

In exchange for offering new, affordable downtown housing options, the PILOT program freezes property taxes, and the owner pays only a portion of those pre-development taxes back to the city over a determined period of time, usually 10 years but maybe more depending on the project.

Because 100 percent of the Choo Choo's new apartments are considered affordable, with rent between $680 and $730 a month, the redevelopment qualifies for the downtown residential tax breaks.

Amy Donahue, communication manager at River City Co., said Tuesday that none of the commercial work at the Choo Choo will be eligible for the tax breaks. Increased property value caused by the commercial work will have to be paid each year like normal.

"The PILOT only goes toward residential development that meets the requirements," she said. "The commercial space, if there's any commercial space either in the building or associated with it in any way, that is not eligible for the PILOT."

Members of the city's Health, Educational and Housing Facility Board will make a decision whether to award the Choo Choo project the property tax breaks at a meeting at noon Friday.

River City Co. recommends approval for the Choo Choo PILOT, for a 12-year term and a four-year phase-in period following, in which the Choo Choo will pay 20 percent of its new property taxes.

Kinsey said Tuesday that construction is set to begin on the apartments next month, and the hope is that the new units will be ready within six months.

Rent will include utilities, parking and Wi-Fi service.

Contact staff writer Alex Green at agreen@timesfreepress.com or 423-757-6480.