Fact check: A primer on how Payments in Lieu of Taxes deals work in New Jersey

Municipalities sometimes use Payment in Lieu of Taxes (PILOTs) to encourage the development of a project that might not otherwise be financially viable.

Payment in lieu of taxes agreements are also sometimes used when nonprofit entities like universities make voluntary payments to municipalities, but that is a separate issue from residential and commercial PILOT agreements and will not be addressed here in detail.

If local officials determine that the redevelopment of a certain area would benefit the town, they can incentivize development in that area through the PILOT program, giving the developer a break on property taxes. Municipalities are not required to give developers a PILOT under New Jersey law, even if a percentage of the development is affordable housing.

Under PILOT agreements, the developer still pays taxes on the land, but all property improvements including buildings (and the revenue they generate, which is normally calculated for commercial assessments) are exempt.

Residential and commercial taxpayers in New Jersey are required to pay property taxes to the municipality in which they are located. In New Jersey, the property tax bill is generated by the municipality, but the taxes are collected on behalf of various taxing entities, including the municipality, school district, and county government. Library and open space taxes may also be collected by the municipality.

The municipality is the pass-through entity for the collection of the taxes owed to the school district and the county. Following the receipt of the tax revenue from taxpayers in the municipality, the municipality in turn pays the county, school district, and other taxing entities the tax revenues owed to them.

When a PILOT is used, the municipality receives 95 percent of the revenue, which goes into the municipal spending coffers, and the county government receives 5 percent. The structure of the PILOT payments is the result of a negotiation between the developer and the municipality. Only municipalities and counties are entitled to collect their respective portions of PILOT payments. School districts are not legally entitled to share in these payments, but that doesn’t mean that they are not permitted to participate.

“For certain redevelopment projects, school districts can endeavor to get a seat at the table’ to come to terms with the local leaders and to attempt to share in a portion of the payments,” according to Robbi S. Acampora of The New Jersey School Boards Association. “This is especially important if the new development generates children that will be enrolled in the school district.”

The School Boards Association recommends that school boards try to get a seat at the negotiating table during PILOT negotiations with developers and that the boards strive to negotiate their fair share of the PILOTS during the negotiation phase for the agreement.

State statute allows a maximum tax relief of 30 years from the completion of a development project, or 35 years from the execution of the financial agreement. The portion of a development that is affordable housing only has to be affordable housing for 30 years.

There are two types of PILOT structures in New Jersey, the Long-Term Tax Exemption Law (LTTE) and the Five-Year Tax Abatement Law.

If the developer uses the LTTE option, the agreement is structured in one of two ways: Not less than 10 percent of the project’s gross annual revenue would be paid; or, not less than 2 percent of the project costs would be paid annually. If the PILOT is based on the percentage of annual gross revenue, rental income as well as other fees paid by the tenant, such as insurance and parking amenities should also be considered when calculating the agreement. If the percentage of project cost method is used, all associated costs must be captured in the calculation. These include the cost of land acquisition and preparation, surveying, legal, engineering, and other professional fees as well as the fair-market value of direct labor, the cost of all construction materials, and entrepreneurial profit.

The Five-Year Tax Abatement option is used for an area in need of rehabilitation. The first year is tax-exempt. Years two through five are phased in at 20%, 40%, 60%, then 80% of conventional taxes.

The payments that the developer makes in lieu of taxes is called the Annual Service Charge (ASC). Both options are subject to annual minimum payments. Verification of the basis for the LTTE option payment (either 10 percent of gross annual revenue or 2 percent of project costs) is calculated periodically for accuracy.

After 15 years, there is a minimum step-up of traditional taxes paid. For example, if the PILOT is structured for 20 years, after 15 years, the payment would revert to 20%, 40%, 60%, then 80% percent of traditional taxes until the 100% level is reached.

A property assessment is based on two factors: land and improvements. If the town completes a revaluation during the term of the PILOT agreement and the land portion of the property increases, the payment of taxes based on the land would increase.

PILOT payments are made in accordance with the financial agreement and in quarterly installments according to the property tax payment schedule.

A developer can request additional financial assistance from a municipality. For example, if infrastructure improvements are needed, the municipality can issue bonds to finance those improvements. If there is a demonstrated need, Special Redevelopment Area Bonds can also be issued.

PILOT agreements are meant to spur the development of a property or area that is not otherwise generating its maximum contribution to a town’s tax base.

“Because state laws do not require that the local school districts receive a direct portion of the PILOT, local officials should take the opportunity during the negotiating process (with the developer) to ensure that if the new property directly affects the school district, accommodations should be made to include the school district with compensation or appropriate credit,” Acampora writes.

“For long-term tax abatements, there is a significant tax loss to the school district and county,” writes Keith S. Balla, a partner at PKF O’Connor Davies Accountants and Advisors, writes in the post “Benefits and pitfalls of PILOT agreements for NJ Municipalities.”

Payments in Lieu of Taxes arrangements are such a bad deal for school districts and the taxpayers that the New Jersey Education Association, the statewide union for educators, has called for support for a bill sponsored by Senator Troy Singleton that would require municipalities to share payments received in lieu of property taxes with school districts.

“A State Comptroller report from several years ago noted that New Jersey’s municipal tax abatement program is pulling critical funding away from school districts and leaving taxpayers to pick up the costs,” said Singleton (D-Burlington) in a statement about the bill. The bill cleared a Senate subcommittee in May but has not advanced in the Senate yet because of opposition from municipalities.

“Specifically, the report noted municipalities often receive more funds by granting tax abatements because they arrange for payments in lieu of taxes,” Singleton wrote. “School districts, however, receive no share of those payments and therefore lose out on the municipality’s new wealth. In some cases, the result is schools’ increased reliance on state aid. This bill seeks to change that.”

The NJEA says the bill is a step in the right direction toward ensuring that governmental entities whose actions can impact the operation, financing, and student enrollment of school districts are communicating with their school district and considering how their actions will impact the children, employees, and finances of the local school district.

“For far too long, local governmental entities have been able to approve development projects without considering how these projects would impact the public school system,” reads the NJEA post regarding the bill.

If a project generates more students and the school district is not receiving a portion of PILOT money or a fair share of PILOT money, it means school taxes for the other taxpayers in the municipality will go up to pay for educating the additional students. Yes, the school district will still get its money from the school tax levy, but the other taxpayers will be paying more to foot the bill and/or programs will be cut. There is no magical way that any deficit will be covered. Either the state will approve tax cap waivers because of the growing student population or the school district will have to make cuts to programs. And when the district runs out of space because of the increase in students, voters will have to approve referendums for expansions or new buildings. This is not disinformation, it is fact. To claim otherwise as elected officials or opinion bloggers is nothing short of an attempt to gaslight the public.