All about PILOTs (Payments in Lieu of Taxes)

Hackensack is redeveloping its aging downtown to attract new residents and businesses. This is a necessity as vacant or underutilized properties have become a burden on City services and resulted in years of devastating tax appeal judgments and diminishing property values.

A thriving downtown can go a long way towards increasing revenue needed to run the city, stabilizing taxes and maintaining the quality of life for all residents. Responsible redevelopment takes into account the long and short term impacts on city services and infrastructure including traffic, schools and sewer usage. Policies are in place to ensure responsible redevelopment, such as requiring all redevelopers to submit to a financial impact analysis conducted by professionals retained by the City.

As part of its ongoing effort to revitalize and redevelop downtown Hackensack, the city is offering PILOTs on qualified redevelopment projects as an incentive for developers to bring their projects to Hackensack’s downtown.

What are PILOTs and why are they important?

There are many incentives by which a municipality can encourage a redevelopment project to go forward, such as favorable zoning and an accelerated application review process, which are currently in place in Hackensack. Financial incentives for a developer are essential because prior to engaging in any project, a developer must examine all of its anticipated costs for the entire scope of the project, including land price, approval costs, infrastructure costs, utility costs, market value of the project upon completion, cost of financing and carrying costs including future taxes. Many of these costs are uncertain and such uncertainty may scare potential developers away. Many redevelopers look to negotiate PILOTs as a mechanism to eliminate some of the uncertainty in taking on larger projects in Hackensack where little significant private development has taken place in decades. PILOTs are an attempt by the municipality to reduce the myriad of risks developers and their banks take in financing projects. Simply put, it is unlikely that any large projects would be financed in Hackensack at this time in the absence of a PILOT.

How is a PILOT different from the taxes I pay on my property?

Taxes on traditionally taxed properties are based on an assessment of what that property is worth today and can vary widely from year to year depending upon that assessment and the current tax rate. Payments under a PILOT are designed to be stable over time. Generally, PILOTs are based on a percentage of the cost of the project, or more 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 project as rents increase over time. PILOTs can have a term of no more than 30 years, but often a shorter term is negotiated depending upon the size of the project. Further, PILOT payments escalate over time, usually starting in the 11th or 16th year depending upon the term of the PILOT.

How long will the City offer PILOTs?
As development takes root and more projects are built, the city’s need to offer PILOTs will likely diminish as redevelopers and their banks will know what the marketplace can sustain based on rents and "comparables" achieved by similar new projects. At that point, redevelopers and their banks will need fewer assurances once it is clear that projects can succeed in a revitalized downtown.

What happens if we do not offer PILOTs?
There is simply no record of a large scale project succeeding in Hackensack’s downtown for decades. Accordingly, without PILOTs right now redevelopers cannot secure financing for any large scale project in Hackensack’s downtown, which will leaves properties marketable under the right circumstances vacant and deteriorating. Further, Hackensack competes with other cities for developer dollars including but not limited to Englewood, Teaneck, Hoboken and Jersey City.

How is this not “Giving Away the Farm”?
PILOTs, by law, will always generate more revenue than the current property generates. Much more. The amount of the PILOT is negotiated with an Urban Renewal Entity that must be formed by a redeveloper seeking any PILOT in excess of five years in duration. These entities are known as limited dividend entities that are restricted to a maximum profit of 12% while under a PILOT, and are required to annually file audited financial statements with the City. If they exceed 12%, the city recaptures those excess proceeds. Eventually, they all revert back to payment of traditional property taxes after stepping up towards full traditional taxation in the latter years of the PILOT.

How can I learn more about a given project’s PILOT application?
Tax abatements must be approved by ordinance, after a public hearing on the topic. Public notice of the hearing must be published in the municipality’s official newspaper. They are fully discussed in meetings open to the public.

How do PILOTs effect my property tax burden?
PILOTs 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 projects begin 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 it is rare for property taxes to ever 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.