A tale of commercial development and PILOTs gone awry
5/15/2014 | Real Estate Blog
A case from Massachusetts caught our attention recently. The issue is payments in lieu of taxes, or PILOTs, and the confusion that can result from long-term PILOT agreements. Our readers may be familiar with the term, but they may not realize that PILOTs in Pennsylvania differ from PILOTs in other states.
In Pennsylvania, PILOTs are not available to all commercial property owners. Only charitable organizations qualify, and public discourse has focused on what exactly qualifies as a charitable organization. (A state Supreme Court decision spurred a high-profile debate in 2012.)
Other states, however, use PILOTs as development tools. It works, in theory, as follows.
A commercial real estate mogul expresses interest in a large parcel of land that City A is anxious to have developed. The project will bring in jobs, and the business or businesses that occupy the building will generate jobs and tax revenue. But the developer has his eye on a similar parcel in nearby OtherCity, where property taxes are lower. How does City A sweeten the pot and lure all that economic development to its own parcel?
City A offers or the developer suggests a PILOT. The parties agree that the property is exempt from property taxes but, instead, will pay Amount 1 for the first five years of the project. Then, the payment will increase to Amount 1+ for the next few years, or payments will increase according to some external measure, like the Consumer Price Index.
If they think of it, City A and the developer may agree that the contract will end in 20 years, after which the property will fall back onto the tax rolls. They may also stipulate that the contract will continue even if the property changes hands. Then they will file the contract with the city or county recorder or registrar of titles.
In a perfect world, everything would play out that way. We all know, however, that it is not a perfect world.
To be continued.
Wicked Local Marlborough, “Judge tells Marlborough: ‘In lieu of taxes’ payments were ‘illegal’,” Kendall Hatch (Daily News), May. 9, 2014
Pennsylvania Association of Nonprofit Organizations, “PILOTS and Property Tax,” accessed at www.PANO.org on May 14, 2014