Long-Term vs. Short-Term Abatements: A Developer's Guide

Property taxes in New Jersey are among the highest in the nation, often killing the feasibility of new development. To combat this, the state offers two primary tax incentive structures: the Long-Term Tax Exemption (PILOT) and the Five-Year Exemption/Abatement. Knowing which one to pursue is critical.

1. Long-Term Tax Exemption (The PILOT)

A Payment in Lieu of Taxes (PILOT) is a financial agreement where the developer pays an annual service charge instead of standard property taxes.

• Duration: Up to 30 years from completion (or 35 years from execution).
• Calculation: Typically based on a percentage of Annual Gross Revenue (AGR), usually between 10% and 15%.
• Eligibility: Requires the property to be in a designated "Area in Need of Redevelopment" (or owned by a non-profit URE).
• Benefit: Provides long-term certainty and significantly lower operating costs, boosting NOI and valuation.

2. Five-Year Exemption/Abatement

This is a statutory short-term incentive authorized by municipal ordinance.

• Duration: Exactly 5 years.
• Structure: Phase-in of taxes on the improvement value. You always pay full taxes on the land.
  • Year 1: 0% of taxes on improvements.
  • Year 2: 20% of taxes on improvements.
  • Year 3: 40% of taxes on improvements.
  • Year 4: 60% of taxes on improvements.
  • Year 5: 80% of taxes on improvements.
• Eligibility: Available in "Areas in Need of Rehabilitation" or if the town has a general ordinance.
• Benefit: Helps with lease-up, but the "cliff" at Year 6 can be painful.

Negotiation Strategy

Municipalities prefer PILOTs because they get to keep 95% of the revenue (only 5% goes to the County, and 0% to the School District). This creates a misalignment of incentives with the School Board, but it gives the Mayor a powerful tool to balance the municipal budget.

Key Deal Point: The "Annual Service Charge" percentage. Every 1% drop in the AGR rate (e.g., from 12% to 11%) goes straight to your bottom line.