Are tax breaks for developers good for you?

Tax abatement programs used to entice developers to build in blighted areas have been successfully used to breathe new life into many New Jersey towns and cities, including Jersey City, Long Branch, Asbury Park and Hoboken. But in communities that have been reborn, questions have been raised about whether the tax breaks are still necessary to attract new development, and whether the continued use of the tax advantages have disadvantaged the average taxpayer. We turned to Peter S. Reinhart, director of the Kislak Real Estate Institute at Monmouth University and chairman of New Jersey Future. for some answers. 

What is the purpose of the so-called PILOT (Payment in Lieu of Taxes) or tax abatement programs in New Jersey?

The primary purpose of tax abatement programs, sometimes referred to as a Payment in Lieu of Taxes (“PILOT”) program, is to encourage the development of property in blighted or distressed areas of the municipality. The program was created by statute in New Jersey pursuant to the state Constitution authorizing a municipality to grant tax exemptions to improve blighted areas.

Can you briefly describe how they work?

The process is relatively straightforward. A town would examine areas in the town that could be considered “blighted” or “in need of rehabilitation or redevelopment.” The town then adopts an ordinance that authorizes entering into an agreement with a redeveloper for a PILOT. The amount of payments is based upon a percentage of the costs of the project.

There are two types of tax abatement programs. One is a short-term program for "rehabilitation” of particular buildings or structures that lasts no more than five years. This “short-term” tax abatement reduces the property tax bill by excluding all or part of the improvement value.

The second type is the Long Term Tax Exemption which can last up to 30 years. This is focused more on broader areas of redevelopment in the town. The town declares the designated area as an area "in need of redevelopment.”

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The municipality begins with a resolution for the planning board to study the need for the designation of an “area in need of redevelopment.” The governing body approves the recommendations of the planning board, then adopts a redevelopment plan and can authorize long-term tax abatements. Ultimately, there is an ordinance adopted that authorizes the PILOT agreement with a redeveloper.

How widespread are these programs in the Shore area and throughout the state?

It is somewhat difficult to determine this. But a study done in 2010 by the state comptroller found that 20 municipalities had significant use of tax abatements. These were typically the more urban, older municipalities with higher poverty rates and below average median household incomes. In the Shore area, Asbury Park, Long Branch and Atlantic City were included. Jersey City is one of the greatest user of tax abatements.

The in-lieu payments go directly to the municipality, which keeps 95 percent of them and gives 5 percent to the county.   Why don’t any of the payments go to the school district? What is the justification? And what impact does that have on school districts like Asbury Park and Long Branch?

Under the Local Redevelopment and Housing Law, the PILOT program calls for 95 percent of the payments to go the town, and 5 percent to the county. The school district gets nothing. This is in contrast to a typical tax bill where often 50 percent or more of the total goes to the school district.

The impact of this reallocation of PILOT payments is complex. On the one hand, a blighted property with a PILOT gets developed and brings in municipal revenue that would not happen without the development. When the statute was amended in the early 1990’s, New Jersey was experiencing a recession and redevelopment of the urban areas was very slow. I suspect the legislature was addressing this problem and intended to incentivize the cities as well as the potential redevelopers to use tax abatement to advance the redevelopment of the cities.

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Cities like Asbury Park and Long Branch that use PILOTs will also not get the school district property tax portion. But they continue to get state aid since they are considered “Abbott” districts under the long-standing New Jersey Supreme Court Abbott v. Burke decisions.

How do towns go about determining whether offering developers’ payments in lieu of taxes are even necessary to attract them to the community?

This becomes a negotiation. A potential redeveloper will make the case that the project does not make financial sense without the PILOT. The town does its own costs/benefits analysis on that information. In the early days of the PILOTs, urban redevelopment in New Jersey was not nearly as desirable as it is today. So, it is very likely that those earlier projects would not have happened without a PILOT. Given today’s demographic shifts towards the more urban, walkable markets, it can legitimately be argued that a PILOT is not as essential.

PILOT programs have generally benefited developers and towns wanting to redevelop. But has it been good for taxpayers? Don’t the PILOTS deprive residents of tax revenue that could be used to improve municipal services and schools?

The answer to whether PILOT programs have been good for taxpayers depends upon one’s belief that the redevelopment project would not have happened without the PILOT. If the property remained stagnant, then the town would not receive the PILOT payments and would continue only receiving the smaller tax payments on vacant or underused land. It is true that school districts are deprived of tax revenues through a PILOT program, including the school district portion of the non-PILOT tax bill. But one could argue that the school impact is low since most redevelopment produces few children.

What should a town, and a town’s taxpayers, be mindful of when negotiating a PILOT with a developer? What kinds of terms can be created by towns to ensure that the benefits of redevelopment filter down to everyone?

Under the state statutes, the opportunities for the public to have input are limited and may not be at the most important time in the sequence of the process. When the town adopts the ordinance declaring an “area in need of redevelopment” is when the public can weigh in on the geographic area. This typically occurs many months before an actual PILOT application is made. The public does not have a similar opportunity to comment on the proposed tax abatement other than the general opportunity at all governing body meetings. Unlike the Municipal Land Use Law where notice of a proposed development application is required to be given to neighbors, there is no similar requirement for the grant of a PILOT.

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A municipality should carefully evaluate the costs and benefits of a proposed PILOT application. A professional with expertise in real estate development fiscal matters should be consulted. Once a PILOT is implemented, the town and its citizens should be vigilant in monitoring compliance. A town can include more stringent compliance mechanisms and remedies if the terms are not met, including possible termination of the agreement.

What should taxpayers concerned about the possible use of tax abatements in their town be looking for to assess whether they are working in the best possible interest of the entire community?

The current law incentivizes a town to look favorably upon a PILOT since the 95 percent of revenues going to the town can often exceed what it might get from a non-PILOT tax payment. So, in an odd way, a PILOT can be good for the town. But it comes at the expense of the school districts, the county and the other towns in the county. A PILOT can be very advantageous for a town in helping to improve blighted areas of the town, act as a catalyst for the rest of the town and improve the overall perception of the town to the larger community. Taxpayers should look to the entire fiscal requirements of local, county and school district in assessing the tax abatement.

A 2010 assessment of New Jersey’s tax abatement made several recommendations on ways to improve the programs.  Have any of the recommendations been implemented?  Which of the many recommendations do you think deserve the most consideration by the new Murphy administration?

I don’t believe any of the recommendations have been implemented. There was a bill in the past few years to require inclusion of schools in the PILOT payments, but it was not approved.

I think it is appropriate to take a fresh look at the tax abatement programs, particularly given the strong market performance of many of the state’s urban towns. Jersey City and Bayonne are two of the fastest-growing towns in the state and are also two of the highest users of tax abatement programs.

Here are my recommendations: 

►Municipalities should engage in a more rigorous cost/benefit analysis up front, including engagement of fiscal impact professionals, before approving a PILOT.

►Inclusion of school district and county representatives in the discussion should be considered.

►Better, more consistent monitoring for compliance of existing PILOTs should be part of the process. Remedies for failure to comply should be added to agreements and used where appropriate.

►More frequent reviews, perhaps every five years, of the “area in need of rehabilitation” or “area in need of redevelopment” designations should be undertaken. Given the success in some of our urban areas, it can legitimately be argued that the tax abatements are not as essential in a redevelopment project as they once were.

►Better record-keeping of abatements granted should be required and reported to a state agency charged with maintaining the records, like the Department of Community Affairs. This can help in maintaining compliance and provide information for a periodic evaluation of the overall abatement laws.

►A notice requirement for the public when a tax abatement is to be considered by the governing body should be added so the public can be alerted.

Overall, I believe that the tax abatement and PILOT programs have been quite successful in helping revitalize our urban areas. They should not be abandoned as a tool. As some of our suburban towns decline, a PILOT might be used to help them as well. Amending the laws to improve the process can maintain this important tool and be fairer, more transparent and inclusive.

Peter S. Reinhart is director of the Kislak Real Estate Institute at Monmouth University and the chair of New Jersey Future.