NJ PILOT Program
June 07, 2021
By Christopher Stoop
New Jersey’s Payment in Lieu of Taxes (“PILOT”) program, (N.J.S.A 40A:20-1) was originally designed – as a mutual benefit to both developers and municipalities – to entice development in areas in need of either redevelopment or rehabilitation. The goal of the program is to help with redevelopment of local municipalities, whether it be in commercial, residential, office, or industrial development, by providing updates to underutilized or dilapidated properties, and therefore increase the ratable base within the municipalities. The developers benefit by receiving a property tax exemption during the life of the agreement on the overall improvements to the property (land value is still subject to property taxes). In lieu of this, the developer would be responsible for paying an annual service charge/PILOT payment, which is defined in the agreement. This PILOT payment is generally lower than the property tax amounts, helping to improve the net operating income of the developer and, in turn, encouraging them to enhance the property and raise its fair value. The municipalities also benefit as these payments received go directly to the municipality and do not have to be shared with other local taxes (school, local, etc.), although 5% of the payments received go directly to the county budgets. If the redevelopment project relates to industrial, office, or retail space, this generally does not impact school budgets or resources as there are no permanent residents attached to this space, and therefore no impact on resources for schools, busing, police, fire, etc. In addition to the municipalities receiving fees from the PILOT payments, the municipalities also benefit from employment, permit, and construction fees during the development stage of the overall project.
In order to participate in the long-term tax abatement program, the municipality must have already pre-determined an area to be in need of redevelopment. These programs last over a long period, generally anywhere from 10 to 30 years upon completion of the development, with the PILOT agreement between the municipality and developer providing relevant payment provisions over the life of the agreement. Payments are generally either a set percentage of revenue or a set percentage of total construction costs, with payments ranging generally anywhere from 10% to 15% of revenue or generally up to 2% of total project costs to be paid annually. In addition, the agreements call for an allowable net profit calculation, which will be defined in the agreement and which the developer must monitor over the life of the agreement, designed to limit the amount of profits an entity can generate. While the allowable profit percentage will vary depending on the contract, it is generally based off yearly gross revenues less operating and non-operating expenses such as interest. One of the benefits to the developer in the calculation is that the allowable net profit calculation is cumulative, so if an entity generates losses early on in the project as they work to increase occupancy, these losses in earlier periods can offset income in future years. Upon the completion of the term of the agreement, the property than reverts to being subject to overall property taxes.
If the developer is considering participating in a PILOT program, the developer should first engage an experienced attorney to help with drafting of the PILOT agreement as well as work with a consultant to help establish the rates that will be included in the applicable agreement. In addition, the developer will be subject to certain reporting provisions within the PILOT agreement. This will include:
- Submission of long-term tax exemption application including financial pro-forma which would include detailed construction costs, estimates, site plans, etc.
- Once the agreement is negotiated, the State department of community affairs must provide overall final approval.
- Annual audited financial statements in accordance with U.S. Generally Accepted Accounting Principles audited by a licensed CPA, due within 90 days of year-end.
- Upon completion of the development project, a certified cost audit to quantify the dollar amounts of overall project costs.
These items are relevant, as the municipality will rely on this information from the audited financial statements to ensure the gross revenue test and allowable net profit calculation and related payments made by the developer are appropriate.
The developer and the municipality should ensure they have a full understanding of all of the reporting provisions within the applicable PILOT agreement, as these arrangements can be mutually beneficial to both parties.