The Art of the Deal: PILOTs & Redevelopment Agreements

In New Jersey redevelopment, the Long Term Tax Exemption (PILOT) is the most powerful tool for stabilizing operating expenses and boosting NOI. But it's not a handout—it's a negotiation. And when you introduce Redevelopment Area Bonds (RABs), the math changes entirely.

What is a PILOT?

A Payment in Lieu of Taxes (PILOT) is a financial agreement where the developer pays an Annual Service Charge (ASC) directly to the municipality instead of traditional property taxes.

• Benefit to Developer: Predictable, lower operating costs (often 10-15% of gross revenue vs. 25-30% for full taxes). Increases project value and debt capacity.
• Benefit to Municipality: They keep 95% of the PILOT payment (vs. sharing ~50% of regular taxes with the school district and county).

Standard PILOT Structure

Under the Long Term Tax Exemption Law, the ASC is typically calculated as:

• Percentage of Gross Revenue: Usually 10% to 15% of Annual Gross Revenue (AGR).
• Percentage of Project Cost: Or 2% of Total Project Cost (TPC), whichever is greater.
• Term: Up to 30 years from completion.

The RAB Twist: Debt-Service Driven PILOTs

When a project has a massive financing gap, a Redevelopment Area Bond (RAB) can be issued. This is a bond backed by the PILOT payments.

Key Difference: In a RAB scenario, the "minimums" (10% of revenue) go out the window. The ASC is negotiated to specifically cover:

1. Bond Debt Service: Principal and interest on the RAB.
2. Administrative Fees: Trustee and municipal fees.
3. Base Charge: A small portion for municipal services.

This allows for a highly customized payment stream that perfectly matches the project's cash flow needs while satisfying the bondholders.

The Redevelopment Agreement (RDA)

The PILOT is just one exhibit in the broader Redevelopment Agreement (RDA). This contract governs the entire relationship between the developer and the town.