Looking at Redevelopment: PILOT Programs and What They Mean

By KATIE MOEN
For Union County HAWK

WESTFIELD — New Jersey’s Payment in Lieu of Taxes (PILOT) program (N.J.S.A. 40A:20-1) has a long and often complicated history. In Westfield, where growth and redevelopment remain major focal points for the community, the use of such incentives has often led to some debate.

“The PILOT is, without question, the single largest available tool to municipalities for redevelopment in the state of New Jersey,” said Steven Melnak, co-chair of Redevelopment and Land Use for Greenbaum, Rowe Smith & Davis, LLP. “There are a lot of benefits to it, but that doesn’t mean it isn’t cumbersome to navigate.”

The PILOT program was created in 1971 to help breathe new life into communities that would otherwise not be as likely to attract developers to necessary projects such as residential, commercial, office or industrial development spaces.

“The reason the PILOT program in New Jersey is so successful is because it takes into account both the municipality and the private entity (developers) and gives both of them incentives. If the municipality didn’t get any incentive from a PILOT, they would never use it,” Mr. Melnak explained.

Under the terms of a PILOT agreement, the developers benefit by receiving a property-tax exemption during the life of the agreement (typically defined as periods of five to 30 years) on the overall improvements to the property.

Though the land value for these projects is still subject to traditional property taxes, the improvements made are not and this exemption allows developers to pursue better financing options through partnerships with commercial lenders.

“Rehabilitation projects are inherently riskier than traditional construction projects because they can only occur in areas that have already been designated as in need of special attention,” Mr. Melnak said. Typically, these projects occur in underutilized or dilapidated sections of a community that are not as likely to attract residents or commercial tenants.

“When construction and permanent lenders look at a project and underwrite it, they factor in the unknowns — taxes fluctuate; PILOT payments don’t. These programs give the developer, and, by proxy, their lenders, a stronger sense of stability,” Mr. Melnak said.

In lieu of traditional tax payments, PILOT programs require developers to pay a fixed annual service charge directly to the municipality. PILOT payments are generally lower than whatever the property-tax amount would be, which helps to improve the developer’s net operating income and, in turn, encourages them to enhance the property and raise its fair value through improvements.

According to information provided by the state of New Jersey, PILOT payments are generally established as a set percentage of revenue or as a set percentage of total construction costs, with payments ranging anywhere from 10 to 15 percent of the total revenue generated by the project or 2 percent of the total construction costs.

In addition to neighborhood revitalization, PILOT programs provide financial incentives to the municipalities that choose to utilize them.

These payments received go directly to the municipality and do not have to be shared with other local taxes (school, local, etc.), although 5 percent 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 benefit from employment, permit and construction fees during the development stage of the overall project.

According to information provided by the Town of Westfield, the opportunity for new revenue is far greater to the municipality under a PILOT because the town is entitled to collect a larger percentage of the annual payment than it would from traditional taxation.

To date, the Westfield Crossings project (located in the Southside Redevelopment zone and handled under the direction of Elite Properties) remains the town’s only commercial 30-year PILOT program.

“There has been a lot of confusion over this,” Mr. Melnak said. “There are some other projects in town that were developed using language from the PILOT laws without actually falling under the legal definition of the program.

The other thing that we’ve had to clarify is that even though there are two separate buildings at the Westfield Crossing, they fall under the same PILOT agreement.”

The Westfield Crossing PILOT agreement stipulates that the town will keep 95 percent of the annual payment made by the developer while the remaining 5 percent will be allocated to Union County.

Under traditional taxation, Westfield only keeps 16 percent of its annual tax revenue plus 1.49 percent for library taxes. The school district gets the lion’s share, at 60 percent, and the county gets the remaining 23 percent.

In the case of the Westfield Crossing PILOT, Westfield will receive $422,750 in the first year of its agreement with the developer versus the $135,637 it would take in if the project were to be taxed along conventional lines. As was previously reported in Union County HAWK, the agreement would require Elite Properties to pay the town 10 percent of its total revenues for the first six years, with incremental percentage increases beyond that. Year seven will see an 11-percent payout; year 13, a 12-percent payout, and year 21, a 13-percent payout to the town.

Over the 30-year term of the PILOT, the project will generate approximately $20 million for the town.

Though PILOT programs provide clear incentives to both the municipalities and the developers that choose to partner with them, opponents say that these projects, especially residential ones like Westfield Crossing, can often lead to heavy burdens on the school system, a problem which is further exacerbated by the fact that the developer is not responsible for contributing to the district’s expense.

“People worry that they will have to pay more in taxes in order to offset the cost, and there have been cases where there is some truth to that, but Westfield Crossing is not one of those cases,” Mr. Melnak said, noting that the Westfield Crossings building is only projected to add about 25 schoolchildren to the community at large and will not impact the district enough to warrant additional staff or facilities. ”In most redevelopments, and certainly with the Westfield Crossing project, the estimated number of schoolchildren that will be generated by the project is not going to make one iota of difference to the budget.”

According to the Westfield Crossing PILOT agreement, “the anticipated number of school children that come from new residential units is dependent on numerous factors, including the rental costs, number of bedrooms available, construction quality, level of amenities and more. Studies conducted by the Center for Urban Policy Research at Rutgers University, the Joint Center for Housing Studies at Harvard University, and current demographic information from existing Westfield projects have shown that the number of school-age children in multi-family housing is dramatically lower than that which comes from a detached single-family dwelling.”

In other words, Mr. Melnak said, families with school-aged children are not likely to move into a high-rent apartment or condo when the same amount of money could easily be applied to a mortgage on a single-family dwelling.

In addition, the Westfield Crossing PILOT notes that changes in municipal receipts do not impact the district’s ability to meet its annual budgetary needs. The agreement states “that the school district receives 100 percent of its budget (with annual increases capped at two percent) through traditional taxation. The Board of Education is guaranteed its budget regardless of what the municipality collects.”

The important thing to keep in mind as Westfield continues to explore its redevelopment options, Mr. Melnak said, is that each PILOT is its own agreement.

“There are times when it makes sense to bring the schools in early. It’s possible to include stipulations that require the developer to make direct payments to the district if that is what the municipality thinks it will need based on the demographic projections,” he said. “There are options available. The elected officials in Westfield have put together a stellar team dedicated to protecting the town and are going through each project individually and are carefully shaping what they want for the future of this community.”

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