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How PILOTS Steer Municipalities, Developers into New Waters

Photo of Jerry Lombardo Jerry Lombardo is chairman of the Main Street Business Alliance.

HACKENSACK, NJ—As more once-distressed or undervalued areas and aging downtowns are being redeveloped, PILOTS (payments in lieu of taxes) have become a critical tool of local government to encourage the needed improvements. Not only do they serve as a valuable incentive for real estate investment that enables developers to attain financing and move forward with more certainty on projects, they also allow municipalities to revive neighborhoods and provide public benefit, while continuing to generate revenue. Such is the case in Hackensack, NJ, the county seat of Bergen County in northeast New Jersey, which had been home to a thriving business district for bustling department stores and service merchants for the better part of the 20th century, until the 1970s.

In an effort to revitalize Hackensack’s flailing downtown area, the Hackensack Main Street Business Alliance was formed in 2004 with the primary goal of attracting new retail and residential projects to the Special Improvement District now designated along Main Street. While there are currently 153 commercial properties and over 375 businesses within the district, there is room for more. To that end, in combination with the governing body and City planners, the Alliance is helping to create a series of mixed-use neighborhoods where people can live, work, play and dine in a vibrant, relevant downtown with the help of PILOTs.

So what is a PILOT? Municipalities typically offer myriad incentives for developers to embark on a redevelopment project such as favorable zoning and an accelerated application review process.  While these tactics are currently utilized as part of Hackensack’s redevelopment effort, it’s also essential to help a developer project the financial stability of a project as he calculates all the anticipated costs, including land price, approval costs, infrastructure costs, utility costs, market value of the project upon completion, cost of financing and, most importantly, what the future taxes will be.

This incentive called a PILOT program for qualified redevelopment projects helps mitigate the uncertainty of project costs that can often deter developers. This, in turn, encourages development of properties that are vital to a successful downtown, as envisioned in the Smart Growth plan guidelines set by the State of New Jersey.

Specifically, taxes on traditionally taxed properties are based on an assessment of what a property is worth today and can vary widely from year to year depending upon market conditions and the current tax rate. However, payments under a PILOT are designed to be stable over time.

Generally, PILOTs are based on a percentage of the 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 (as generated by rental income, for example), the City shares in the success of the project as the property’s occupancy rates and rents increase over time. PILOTs can have a term of no more than 30 years, but terms can vary depending upon the size of the project. Further, PILOT payments escalate over time; as the income of the project increases, so do the payments to the municipality.

Photo of Patricia Foresman Patrice Foresman is executive director of the Main Street Business Alliance.

PILOTs, by law, will 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. First, the new development that takes place generates new sources of revenue from the day the project begins through fees associated with the development. Second, this new development helps increase property values by bringing people back to the city’s center to support local businesses. While property taxes rarely go down, the City has every expectation that development will stabilize taxes in the long term so that property owners will not see unexpected increases from one year to the next.

How PILOTs Are Working in Hackensack

In Hackensack specifically, the City sees PILOTs as real estate tax which is “time released” over an interval, with the taxing of the asset phased in as income increases. PILOTS remove some of the uncertainty that a developer faces when contemplating a risk-based venture such as downtown development poses, making financing more available. By not holding a developer liable for property taxes based on a property’s future appraised (and uncertain) value, but rather, contract for set payments over time, it is a win-win for both the developer and the City. Lower risk yields more access to financing, while stable revenue from PILOT payments means predictable cash flow for the City.

This strategy is used successfully in downtown urban renewal districts nationwide and locally—in places like Jersey City, Morristown, Red Bank and Rahway, all of which have benefitted greatly from PILOTS. In Hackensack, all approved projects have been able to negotiate fair PILOTS which have helped get several “out of the ground,” including the Metro Merida Project at 94 State St. and the Bank America redevelopment at 210 Main St. In fact, developers of more than half a dozen ventures have availed themselves of the PILOT program here in Hackensack already. As a result, we are attracting serious interest from regional developers that are new to the City, while at the same time, starting to see a revival in property values in our downtown.

Simply put, it is unlikely that any large projects would be underway in Hackensack, or any other downtowns for that matter, without the use of PILOTS. They are one of the most useful tools in the arsenal of any municipality 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. Vacant or underutilized properties only place a burden on city services and diminish property values. These economic incentives are helping to create a thriving downtown, increase property values for all in the community and produce revenue where little or none existed before. In the end, PILOTs benefit the entire community, homeowners, developers and residents, alike.

Jerry Lombardo and Patrice Foresman are chairman of the board and executive director, respectively, of the Hackensack Main Street Business Alliance. The views expressed here are the authors’ own.

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