PILOTs (payments in lieu of taxes) have become a critical tool of local government to encourage the needed improvements in distressed, undervalued and aging downtowns.As envisioned in the Smart Growth plan guidelines set by the State of New Jersey, PILOTs are a valuable incentive for real estate investment that …
Such is the case in Hackensack, which formerly had been home to a thriving business community until the 1970s.
In an effort to revitalize Hackensack’s struggling downtown, the Hackensack Main Street Business Alliance was formed in 2004 to attract new retail and residential projects to the Special Improvement District now designated along Main Street. In partnership with the City, the Alliance retained planners and other professionals to make significant zoning changes which will enable the creation of mixed-use neighborhoods where people can live/work/play in a vibrant downtown with the help of PILOTs.
How PILOTS Work
A PILOT helps a developer anticipate the financial stability of a development project, taking into account all the expected costs: land price, approvals, infrastructure, utilities, market value upon completion, cost of financing and most important future tax liability.
Property taxes are traditionally based on an assessment of the property’s current value and can vary widely from year to year (depending upon market conditions and fluctuating tax rates). However, payments under a PILOT program are stable over time because generally, they are based on a percentage of the (rental or sales) income of the project, commonly 10% to 15% of the project’s annual gross revenue.
By basing the PILOT payments on the project’s revenues the City shares in the success of the development as the property’s occupancy rates and rents increase over time. PILOTs have a maximum term of 30 years, but terms can vary depending upon the size of the project. As stated, PILOT payments escalate over time; as the project’s income increases, so do the payments to the municipality.
Another positive is that by law, PILOTs always generate more revenue than the current property generates, and they help reduce the property tax burden on all of the City’s taxpayers by generating new revenue that would otherwise not exist. Plus, the new development brings people back to the city’s center to support and grow surrounding local businesses.
How PILOTs Are Working in Hackensack
In Hackensack, the City sees PILOTs as a “time-released” real estate tax that’s phased in over time, as project income increases. Contracting for set payments over time vs. taxing the property based on the future appraised (and uncertain) value is a win-win for both parties. The ensuing lower risk yields more access to developer financing, while stable revenue brings in predictable cash flow for the City.
So far, approved projects in Hackensack have negotiated fair PILOTS which have helped launch the initial Metro Merida Project at 94 State Street and the Bank America redevelopment site at 210 Main Street, among others. As a result, millions of dollars are being invested and the City is attracting serious interest from regional developers that are new to Hackensack. As a byproduct, property values in the downtown have risen significantly. For Hackensack and other urban renewal districts, PILOTS are one of the most useful tools for municipalities wishing to foster redevelopment.
The best part of PILOTs in Hackensack is that they produce increased revenue for the City from day one and continue to grow that revenue over time. These economic incentives are helping to attract developers to the City, revive the downtown, increase property values for all in the community and produce revenue where little or none existed before.
Jerry Lombardo, chairman of the board, and Patrice Foresman, executive director, of the Hackensack Main Street Business Alliance