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NEWS RELEASE
NAIOP New Jersey
317 George Street
New Brunswick, NJ 08901
Media Contact: Evelyn Weiss Francisco/ 201-796-7788 / [email protected]
PILOTs as CRE Redevelopment Tool: Focus of NAIOP NJ Seminar
Industry Experts Share Perspectives, Examine Pros and Cons of State’s Tax
Abatement Programs
EDISON, N.J., May 9, 2017 – Payments in lieu of taxes (PILOTs) are among New
Jersey’s most powerful commercial real estate redevelopment tools. From the basics to
case studies, local officials, consultants and developers provided an in-depth look at the
benefits, legal considerations and common myths and misconceptions about the state’s
tax abatement programs during NAIOP New Jersey’s recent Continuing Education
seminar at the Sheraton Edison in Edison.
A Legal Perspective on PILOTs
Frank Giantomasi of Chiesa Shahinian & Giantomasi PC moderated the opening panel
discussion, which provided an overview of the PILOT program’s constitutional
background as well as the basics of the state’s long-term and short-term tax
exemptions.
“Essentially, a PILOT is a tax abatement aimed at encouraging redevelopment and
rehabilitation of properties,” said Giantomasi. “The New Jersey Constitution provides the
legal basis for exemption from taxation for a specified period of time, which may be
granted for improvements constructed within what’s referred to as blighted areas.”
Panelist Bob Goldsmith, a partner with Greenbaum Rowe Smith & Davis LLP, noted,
“Since 1992, properties have been referred to as ‘in need of redevelopment’ rather than
‘blighted’, a change that has helped to positively shift the perception of eligible projects
over the years.”
Cecilia Lassiter, an associate with Sills Cummis & Gross, examined the specifics of
Long Term Tax Exemptions (LTTEs) including eligibility requirements, the duration of
exemption and the method of calculating the amount of a PILOT, or annual service
charge, paid in lieu of real property taxes. “The method by which the PILOT is
calculated must be included in the financial agreement,” said Lassiter. “The terms are
usually heavily negotiated and decided on a case-by-case basis, although some urban
areas such as Newark and Jersey City have adopted ordinances that dictate the terms.”
Goldsmith was asked at what point in the negotiating process a developer knows what
the taxes on a specific project will be. “The municipality’s tax assessor will set the value,
and sometimes they will provide a letter estimating what the assessment will be,” he
said. “They will give you a range, which may give you some comfort, but it’s not going to
be absolute.”
The panel also addressed the advantages of PILOTs to both the developer and
municipality. From the developer’s perspective, PILOTs offer predictability and, in most
cases, a reduction in operating expenses. “PILOTs can also benefit municipalities, even
where the amount appears to be substantially less than the amount of otherwise
applicable taxes,” said Lassiter. “Under generally applicable taxes, a typical municipality
might retain 30 cents of each tax dollar it collects. With an LTTE, the municipality retains
95 percent of the annual service charge.”
Financing Community Needs through RABs
The seminar’s second panel focused on Redevelopment Area Bonds (RAB). George
Jacobs of Jacobs Enterprises led the discussion with Joseph Baumann of McManimon
of Scotland & Baumann and Timothy Cunningham with the New Jersey Department of
Community Affairs.
“Developers use PILOTS for two reasons: cost and predictability,” said Jacobs. “At the
end of the day, redevelopment is driven by money. If you can’t make a project work
financially, it won’t happen despite the best planning in the world.”
Bauman reviewed the basics of RABs, describing them as being “essentially like grants,
in that they can be considered free money from a third party resource that is neither
debt nor equity.” He noted that there are two types of RABS, those that address capital
stack shortfalls and nominal RABs for use when a standard PILOT is insufficient for a
project to be competitive.
As director of the Division of Local Government Services within the NJ Department of
Community Affairs, Cunningham serves as chair of the Local Finance Board. “I oversee
the financial integrity of New Jersey’s municipalities, and my job is to review developer
applications and decide if an RAB will make sense for the public entity.”
A key consideration is whether or not there is enough revenue to the municipality to
support it. “In my analysis, I need to determine whether, but for that, the project has the
financial wherewithal to succeed.”
Cunningham used as an example the town of Boonton, which had come forward with a
capital stack RAB to build an apartment complex. “Initially we thought it was a
nonstarter, but it was a prominent residential developer and they had encountered an
unexpected environmental condition,” said Cunningham. The settlement from resulting
lawsuit was not enough to cover the cost to abate the contamination. “Essentially this
project could not have succeeded, so we let the RAB move forward.”
Case Studies Offer Insight and Advice
During the final panel discussion, developers presented case studies which illustrated
both the challenges and opportunities PILOTs provide.
Discussion moderator Steve Santola with Woodmont Properties noted, “These projects
can be incredibly complex, and it is critical that you invest in working with professionals
who are familiar with what is required. If you are considering applying for a PILOT, I
urge you to reach out to developers who have had PILOTs in place for eight to 10 years
and learn from their experience.”
NAIOP NJ president Dave Gibbons, president and CEO of Elberon Development
Group, described the process involved with securing the firm’s first PILOT to redevelop
an industrial site in Elizabeth. The antiquated property was occupied by Wakefern,
which sought to relocate to a more modern facility. Elberon worked with the city to retain
the company and its 300 jobs, ultimately demolishing the building and redeveloping the
site.
“We learned a lot over the duration of this project,” said Gibbons. “PILOTs and
redevelopment go hand in hand, and we could not have done this project without one.
But the negotiation process was incredibly complex, and thankfully we worked with a
sophisticated municipality that was invested in keeping Wakefern from moving
elsewhere.”
Bill O'Dea, executive director of Elizabeth Development Company, oversees the
administration of over $10 million for economic and community redevelopment projects
annually. He advised developers to “invest time in really getting to know what the town
and the mayor are thinking, and ask yourselves how you can polish your application to
get it through the municipal application process. Every project is a negotiation, and if it’s
viable, the developer will usually win. However, you will need to convince the
municipality as well as the residents of the benefits that your project will bring to their
community.”
Ed Russo, CEO of Russo Development, added, “With residential, we’re seeing a trend
towards more communities being open-minded about the need for PILOTs in
redevelopment areas. But we do a lot of research, particularly into what other
developers have done in a particular area. Many communities won’t entertain a PILOT
application that is not compatible with what’s been done before.”
Russo noted that the most important aspects of a PILOT to consider are the term, the
rate and, most importantly, the staged adjustments. “This is the most critical and most
overlooked term in the financial agreement,” said Russo. “Take a hard look at the
percentage of revenue to the percentage of assessment, and determine how it will
impact your bottom line over the term of the PILOT. Reaching 60 to 80 percent early on
will make a huge difference in what you’ll pay.”
Santola encouraged NAIOP members to pay close attention to what is happening in
Trenton regarding the state’s tax abatement programs. “There is legislation pending that
would eliminate the incentive for municipalities to grant PILOTS, which could be
devastating for developers and for local communities. The key takeaway today is that
New Jersey has a program that works, and we need to make sure it continues.”
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Photo caption: Steve Santola (Woodmont Properties), Dave Gibbons (Elberon
Development Group), Bill O'Dea (Elizabeth Development Company) and Ed Russo
(Russo Development)
About NAIOP New Jersey