We need to have an honest discussion about PILOTs

Berkeley Heights, NJ - There seems to be more than meets the eye with the major tax breaks all of the new condos and apartments are getting in town. The entire story does not seem to be being presented. Here is what I found out about PILOTs and why I believe that it is urgent for the residents to be filled in immediately on the details.

What is a PILOT?

You’ve probably heard the term mentioned in our town lately. PILOT stands for ‘Payment-In-Lieu-Of-Taxes’ and is basically a fancy way of saying ‘tax break’. The PILOT agreements are up to 30 years. The idea behind a PILOT agreement is to incentivize developers to redevelop a piece of property that perhaps otherwise would not be improved. In return, instead of property taxes the developer pays a PILOT.

PILOTs do not work the same way as conventional taxes
In order to understand how the revenue is shared when it comes to conventional taxes and PILOTs, you need to appreciate how our local government is set up. Conventional property taxes are shared between the local school district, the local municipal government and the county government. Currently the revenue generated by your property taxes is shared between these three government units with about 56% going to the schools, 19% going to the municipality and 25% going to the county. When a PILOT is instead applied, the developer now does not pay the schools anything, only pays the county 5% and pays 95% to the municipal government. Remember, though, this is 95% of a much smaller amount.

Kings Development
For instance, we’ve heard a lot about the Kings redevelopment lately which will be turned into 150 apartment rentals. It is estimated by the town that the conventional property tax payment on this development would be about $970,000 per year, of this about $540,000 would have gone to the schools, and about $180,000 would have gone to the municipality. Instead of this, the developer is projected to pay only a total of $427,000 per year as part of a PILOT agreement, with $406,000 going to the municipality. It seems like a good deal for the municipality as it is making $226,000 more out of the deal, but this comes at a high price to our school district which loses out on potentially $540,000 of funding. Including the county, this adds up to about $17 million in tax breaks for the developer over the 30 years of the agreement.

Effect on the schools and other taxpayers

On the surface it seems PILOTs shortchange our schools. In fact, it’s worse than that - PILOTs shortchange the taxpayer and are in effect a stealth tax on the rest of us. You see, our school district can collect the same amount in taxes plus 2% every year regardless of whether there are developments in town that are not paying conventional taxes and are instead paying a PILOT. Therefore, lost school district revenue from PILOTs in fact is just paid by the remaining taxpayers - the residents lose out on potential tax relief. The same process applies for the county and even the municipality itself - they can tax us as much as they did before and the extra revenue collected from the PILOT is just more money they can spend.

Are the PILOTs good for our town?

We’re being told by the Mayor that PILOTs are ‘good for the town.’ This depends on your perspective. If your aim is to be able to tax residents the maximum amount legally permissible and still increase municipal revenues to have even more money to spend, PILOTs are an ideal vehicle to sidestep tax levy caps. If your aim is to provide tax relief to our already overtaxed residents, PILOTS work against that end.

Aren’t these being forced on us?

Another argument I hear is that we are “forced” to do this because of Affordable Housing. Without getting into the details of Affordable Housing, I can categorically state that while Affordable Housing is mandated, tax breaks for developers are not and are at the total discretion of our town government.

The Tradeoff

In the case of the Kings redevelopment I mentioned above, the developer will provide 23 affordable units for rent in exchange for the $17 million in tax breaks over the next 30 years. This seems like a very bad deal for the taxpayer. It’s even worse when you consider the development will have some school-age children but will be providing zero revenue to the school district. In essence some people will be sending their children to school for free. There are several other developments like this also in the works which will be receiving a PILOT.

Another example is the Hamilton Avenue property the town recently agreed to sell to a developer. The town council claimed they would receive about $10 million for this property, and it appears they will actually receive $10.5 million. However, they have not yet released the terms of any associated tax breaks to the developer, and therefore it’s impossible to know if it is a good deal. Will it be a case of receiving with one hand and giving more away with the other? Aside from that, there were many bids on this property so why is a PILOT even necessary?

Why not the whole truth?
If we truly are being forced to do this then why are the mayor and some members of the town council saying that these new developments and the tax breaks that they bring are so wonderful? It is time for the town government to be honest with us, the residents, about the positives and the negatives these new developments and the associated PILOTs will bring to town, and the impact on us - the existing taxpayers.