What Is A Pilot And How Does A Pilot Agreement Benefit The Borough?
PILOT, which stands for payment-in-lieu-of-taxes, were created by the New Jersey State Legislature to encourage redevelopment and rehabilitation in areas where it otherwise might not occur. The statute provides that a developer and municipality can agree for the developer to make an annual payment for up to thirty (30) years rather than pay traditional taxes on the buildings constructed on the site. While the term PILOT stands for payment-in-lieu-of-taxes, this payment is essentially a ‘replacement tax’ for projects that would not be feasible or be built in these blighted areas. This “replacement tax” is on the improvements only. The original real estate taxes on the assessed value of the land remain and continue to be paid as if there was no development.
The Borough benefits significantly from a PILOT because the ‘replacement tax’ payment being made on the new improvements is apportioned 95% to the Borough, instead of approximately 31%.
According to an independent report issued by the Otteau Group, who was hired by the Borough of Flemington as a third party beneficiary:
Upon completion of the 30-year term, it is estimated that the Borough of Flemington will receive a total of $20,823,786 which represents an annual average of $694,126 as the PILOT payments increase 5% every 5 years. Based on its current use and tax rate for 2017, the Borough receives approximately $62,762 annually from the properties within the Redevelopment area which would equate to $1,882,874 over a 30-year term. This represents an estimated increase of $18,940,912 from what the property would pay based upon its current use.
PILOT payments to a town are like other revenue such as state aid, permit fees, fines, and grants. All these revenues go toward funding the budget. The part of the budget not covered by such revenues becomes the tax levy. It is what the businesses and residents pay to the borough as the municipal portion of the property tax. By increasing the other revenue, the PILOT revenues can be used for general purposes or to reduce the tax levy, which helps both residences and businesses.
Flemington’s 2018 annual budget of $5.6 Million increased 6.9% between 2009 and 2016 and the tax levy has increased 56%. This is why the municipal tax keeps going up. Reducing the tax levy via a PILOT would make a noticeable reduction to the municipal portion of the property tax.
How is a PILOT established?
The municipality and redeveloper negotiate terms of a PILOT, within parameters defined by the state. The PILOT is then adopted by the town as an ordinance. There’s a first reading at a council meeting, followed by a public hearing, then approved by vote at a subsequent meeting.
PILOTs are common for large redevelopment projects in New Jersey areas in need of redevelopment. There are two in our immediate area, the Yale property in Raritan Township which was converted to the Costco store and the Herman E. Kapp Center at 62 Church St. in Flemington
What does a PILOT do for Flemington?
In addition to providing for a vibrant downtown with everything from a college campus to outstanding dining, attractive retail, quality housing designed for millennials and empty nesters, a fabulous hotel and a liquor license…
A PILOT offers substantially increased revenues to Flemington’s municipal government. Here’s how: At the present time, for every dollar property owners in the borough pay in taxes, 58 cents go to schools, 11 cents go to the county and 31 cents goes to the borough. The seven properties in the redevelopment zone currently pay less than $200,000/year in taxes, which means approximately $60,000 goes to the Borough.
By law, with a PILOT, the payout structure is based upon anticipated revenues of the redevelopment for a period of up to 30 years. Revenues are then distributed as follows: for every dollar collected, 95 cents go to the borough and 5 cents goes to the county. In accordance with a PILOT program, schools do not share in the revenues. Flemington’s municipal government would receive the PILOT revenues for up to 30 years to fund its priorities, whether they are to pave streets, provide additional services or, of course, reduce taxes. Per the independent report prepared by the Otteau Group these amounts are estimated to average approximately $694,000 annually as compared to the current tax revenues of approximately $62,000. This amounts to almost $21,0000,000 of revenue to Flemington over the 30-year life of the PILOT.
What impact does the PILOT have on our schools?
If a municipality were to pursue many large-scale PILOT projects that might each reduce support to the schools, one could argue that redevelopment zones are not contributing their fair share. This is not the case with Courthouse Square in Flemington. In fact, the impact would be negligible for many reasons:
Because of its location and density, Courthouse Square has been designed to attract millennials and empty nesters looking to downsize but remain in Hunterdon County. These types of residents have a minimal impact on schools. Undoubtedly, there will be a small number of students added to the school system, but declining enrollment has negatively affected the Flemington-Raritan School District. In 2010-11 enrollment peaked at 3,625 students. This compares to an enrollment of 3,055 in 2017-18 – a decline of 570 students, nearly 16%. Courthouse Square is projected to have a minor impact on school enrollment and Hunterdon Central Regional High School continues to face declining enrollment. Space is more than adequate, so there is no need to build schools as the impact costs are negligible.
What impact does the PILOT have on the County and neighboring communities?
The county formula is simple: each municipality contributes to the county in proportion to its share of property valuation. Let’s take a closer look at how this relates to Courthouse Square:
As stated above, 11% (approximately $20,000) of the approximate $182,000 in real estate taxes now collected by Flemington from the seven properties listed in the redevelopment area go to the county. With a PILOT, 5% would go to the county; however, based on the current PILOT formula, the County would receive approximately $24,000 in the first year. In addition, the County Freeholders have endorsed Courthouse Square and have passed a formal Resolution noting such. To view the Resolution please click here.
The Courthouse Square PILOT program does not create a negative effect to taxpayers in Flemington or its surrounding municipality. As with the county, there would be no increase to the school tax contribution from neighboring communities. The county and Flemington’s neighboring communities would in no way be subsidizing the project.
Let’s address the notion that a PILOT is a tax break - or even a sweetheart deal for the redeveloper: Why shouldn’t a town just insist that a redeveloper pay the full tax load like everyone else? This may sound great, but since PILOTs are a matter of state law, it makes sense for a town like Flemington to employ tools that can make a project become a reality without being a burden to either local or surrounding taxpayers. Developers favor communities that will consider a PILOT for its redevelopment. Without a PILOT, developing Courthouse Square or any other project for that matter – would not be feasible.
The adoption of a PILOT was intended to be a condition to bring the current developer on board. The Borough Council at the time understood that this important tool was needed to avert another false start as they had with two previous redevelopers.
This brings us back to the original premise of the PILOT: it encourages redevelopment that otherwise likely would not occur at all.