PILOTS (Payments In Lieu Of Taxes)

PILOT Fact Sheet

The Borough of Rutherford is looking to promote smart development in order to attract new residents and businesses. This is a necessity as vacant or underutilized properties have become a burden on borough services and resulted in years of residential taxpayers supporting our tax burden. A thriving main thoroughfare can go a long way towards increasing revenue needed to run the borough, stabilizing taxes and maintaining the quality of life for all residents. Responsible redevelopment takes into account the long and short term impacts on municipal services and infrastructure. As part of its ongoing effort to revitalize and redevelop Rutherford, the Borough may offer PILOTs on qualified redevelopment projects as an incentive for developers to bring their projects to Rutherford.

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. 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. PILOTs are an attempt by the municipality to reduce the myriad of risks developers and their banks take in financing projects.

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 borough 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 Borough offer PILOTs?

As development takes root and more projects are built, the borough’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 area.

What happens if we do not offer PILOTs?

First, the Borough will not be competitive in the marketplace. In the past decade, surrounding municipalities have redeveloped by offering PILOTs to developers. If Rutherford desires to attract new developments, to help offset the tax burden from our residential taxpayers, we simply must use this negotiating leverage to attract redevelopment. Furthermore, without PILOTs right now redevelopers may not be able secure financing for any large scale project in Rutherford, which will leave marketable properties vacant and deteriorating.

How will this bring in more revenue?

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 borough. If they exceed 12%, the borough 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 Borough’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 and supports local businesses. While it is rare for property taxes to ever go down, the borough 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.