Despite being widely used throughout New Jersey, PILOTs often generate significant public opposition. In many cases, the debate surrounding a PILOT becomes more prominent than the discussion of the redevelopment project itself. In my experience, much of that opposition stems from misconceptions about what a PILOT is and how it functions.

Perhaps the misunderstanding begins with the acronym itself. PILOT stands for Payment In Lieu Of Taxes, a term that often leads people to believe a developer makes a one-time payment and is then exempt from paying taxes on the property indefinitely. That perception is simply incorrect.

In reality, a PILOT is an ongoing annual payment structure that can remain in place for as long as thirty years. Many PILOT agreements are structured so that as a project’s financial performance improves, the municipality shares that success through increased annual PILOT payments. This creates an opportunity for municipalities to realize additional revenue when a development outperforms expectations. More importantly, the purpose of a PILOT is to generate economic development.  This includes increasing municipal revenue.   t A municipality cannot enter into a PILOT agreement that produces less revenue than the site was generating previously.

To understand why PILOTs exist, it is important to understand where they are used. Under New Jersey law, PILOTs are generally reserved for properties located within areas designated as being in need of redevelopment or rehabilitation. These are often sites that have suffered from years of disinvestment, deteriorating infrastructure, environmental contamination, obsolete buildings, unsafe conditions, or other factors that prevent them from reaching their full economic potential.

The purpose of a PILOT is to incentivize investment in these areas and encourage redevelopment that might not otherwise occur. In fact, New Jersey law requires what is commonly referred to as a “but for” test, meaning the project would not proceed “but for” the existence of the PILOT. If the project could be built without the incentive, the rationale for the incentive no longer exists.

This is especially important in the context of affordable housing. Many affordable housing and inclusionary housing projects would not be financially feasible without the use of a PILOT. As New Jersey municipalities work to satisfy their Fourth-Round affordable housing obligations, many communities are relying on redevelopment projects that include affordable set-asides to help meet those requirements. When municipalities fail to satisfy these obligations, they may be exposed to builder’s remedy litigation and other legal challenges. In that context, PILOTs can be an important tool for helping communities advance required housing goals while making otherwise difficult projects financially achievable.

Another common criticism is that PILOTs somehow deprive school districts of tax revenue. To understand that concern, it is important to understand how traditional property taxes work in New Jersey.

Under a conventional tax structure, property taxes are distributed among three governmental entities: the municipality, the local school district, and the county. The exact percentages vary by community, but school districts often receive the largest share.

When a PILOT is implemented, the distribution changes. The municipality retains approximately ninety-five percent of the annual payment, while the county receives the remaining five percent. School districts do not directly receive PILOT revenue from the improvements constructed as part of the redevelopment project, which often fuels criticism of the program.

However, that criticism does not always reflect the complete picture. School districts continue to receive revenue from the land assessment itself, and because school boards establish their own tax levies, future increases in land value can still generate additional revenue for the school board. In addition, municipalities have the ability to share a portion of the PILOT revenue with the school district if they choose to do so. There have also been ongoing discussions in Trenton about amending the law to require that a percentage of PILOT revenue be allocated directly to school districts. Municipalities may also require developers to fund off-site improvements that benefit the broader community, including infrastructure and public facilities that support local schools and residents. It is also important to recognize that not every development places the same demand for public services. Industrial, warehouse, data center and retail developments, for example, generate significant tax revenue while creating little to no impact on school enrollment. Similarly, many multifamily developments designed for seniors or other demographic groups generate far fewer school-aged children than traditional family housing. In these cases, PILOTs can be particularly effective because they create new municipal revenue while placing relatively limited additional demand on school districts.

Most importantly, the alternative is often overlooked. The comparison is frequently framed as a PILOT versus traditional property taxes. In many cases, the more realistic comparison is a PILOT versus no development at all and no increase in municipal rateables. .

Without redevelopment, many of these properties remain vacant, underutilized, or economically stagnant. With redevelopment comes new investment, increased economic activity, construction jobs, permanent employment opportunities, support for local businesses, and an expanded tax base. The benefits often extend far beyond the boundaries of the project itself.

Like any public policy tool, PILOTs should be evaluated carefully and applied thoughtfully. They are not appropriate in every circumstance. However, when used properly, they can serve as powerful economic engines that help transform distressed properties into productive assets, stimulate broader economic growth, and create long-term value for municipalities and their residents.

Ultimately, the question should not be whether a project includes a PILOT. The question should be whether the PILOT helps create a project that otherwise would not exist and whether that project delivers lasting benefits to the community. In many cases, the answer is yes.

About the Author:

Matthew B. Jarmel, AIA, MBA is an architect and real estate developer.  He is President and CEO of Jarmel Kizel Architects and Engineers, Inc.  He has extensive experience and expertise in land entailments, testifying before 100’s of municipal planning and zoning boards throughout the region, in this capacity he has advised clients and their development teams in developing entitlement strategies.

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