A Primer On PILOT - Payment In Lieu Of Taxes

At the Township Committee meeting on Tuesday, Aug. 4, Township Attorney Joseph Sordillo gave a brief lesson on PILOT, a way for developers to pay for municipal services and avoid paying property taxes for a limited time. Credits: Barbara Rybolt

BERKELEY HEIGHTS, N.J. - The topic of Payment in Lieu of Taxes, better known as PILOT, has been raised throughout the discussion on what was formerly known as "The Swap."

At the Township Committee meeting on Tuesday, Aug. 4, Township Attorney Joseph Sordillo gave a brief lesson on PILOT, a way for developers to pay for municipal services and avoid paying property taxes for a limited time.

For Berkeley Heights, a PILOT may make sense, because the property on Hamilton Avenue is currently tax exempt and does not pay taxes. If Scenario #1 is followed, the new owner of the property, presumably a developer doing business under a different name, would have to begin paying the township a negotiated service charge, even before any actual construction takes place. It "starts with a lump sum payment ... Right now the property is not paying taxes," Sordillo said.

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PILOT agreements are generally used during community redevelopment projects. The question is, will Berkeley Heights benefit from offering a developer of the property the opportunity to enter into a PILOT agreement or not.  At this point, no decision has been made.

A PILOT could come into play only under Scenario #1, which includes the construction of a 100-unit townhouse development on Hamilton Avenue.  The property would have a redevelopment plan in place and, after the property bids are in, the town and developer could negotiate a PILOT agreement and either come to terms or not.

Under such an agreement, all improvements and land in the project which the developer plans to build, would be exempt from property taxes for a specific period of time.  The developer is, however, obligated to make payments for municipal services, which is called an "annual service charge," Sordillo said.  An additional administrative fee, two percent of the service charge, can be charged each year.

There are limits to how long the PILOT agreement can last, "no more than 30 years from the completion of the entire project or unit of the project (if the project is to be undertaken in units)." Or, no longer than 35 years after the PILOT agreement was signed, according to the handout he gave during the meeting.

The tax exemption period can be divided into five stages - the first of which "cannot be no less than six years and no more than 15 years," according to the handout. During this period the entire annual charge must be paid.

The next three stages "cannot be less than one year nor more than six years." During this period the developer pays "the greater of an annual service charge" or, in Stage Two, 20 percent, Stage Three, 40 percent and Stage Four, 60 percent of the amount of taxes otherwise due on the value of the land and improvement.

During the final stage, which also can't be less than a year, the developer pays the greater of the annual service charge or 80 percent of the value of the land and improvement.

The municipality will send five percent of the service charge to the county. The Board of Education will get nothing, at first, but as units start to be occupied and another stage of the agreement is started, "taxes will come on line," Sordillo said. See the diagram.

Councilman Marc Faecher said, "This would benefit the municipality" especially because of the special circumstances that this is owned now "by a non-tax paying entity." The initial payment would be a big one.

There will be more discussion of the PILOT agreement as time goes on. "The Township still needs to conduct its financial investigation as to whether a PILOT would be appropriate for the Hamilton Avenue site development," the handout read.

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