Payment in Lieu of Taxes (PILOT)

What Is a Payment in Lieu of Taxes?

A payment in lieu of taxes (PILOT) is money an owner pays to a local government in place of ordinary property taxes. The property is exempt, or partly exempt, from the regular tax. The owner instead pays an amount set by a formula or a negotiated agreement.

In housing, PILOTs matter because property taxes are one of the largest operating costs of a rental building. Lowering that cost leaves more income to cover debt and maintenance while rents stay restricted.

How PILOTs Work

PILOTs show up in housing in three main settings:

• Public housing. Under the federal law governing public housing, a project is exempt from local real and personal property taxes. In exchange, the public housing agency makes payments in lieu of taxes equal to 10% of the shelter rents it charges, or a lower amount set by state law or agreed with the local government.
• Privately owned affordable housing. Some states let localities exempt affordable developments from regular taxes for a set term, tied to a recorded deed restriction or regulatory agreement. New York City’s Article XI program, for example, can grant a full or partial exemption for up to 40 years to affordable housing held by a housing development fund company. In one common structure, regular taxes are replaced by a “gross rent tax” calculated as a percentage of the project’s rental income.
• Nonprofit institutions. Tax-exempt nonprofits, such as universities and hospitals, sometimes make voluntary PILOTs to their host cities. These are not housing subsidies, but the term is the same.

Example

Suppose a 50-unit affordable building would owe $250,000 a year in regular property taxes. Under a PILOT agreement, it instead pays 10% of its $900,000 in annual gross rents, or $90,000. The $160,000 difference helps the property carry its mortgage at restricted rents. In return, the owner agrees to keep the units affordable for the length of the agreement.

Criticisms and Limitations

• Forgone revenue. Every dollar not collected is unavailable for schools, police, and other services, unless it is made up elsewhere.
• Case-by-case deals. Negotiated PILOTs can be hard for the public to track and compare, and terms vary widely between projects.
• Expiration risk. When a PILOT term ends, taxes can jump to the full amount, straining a building’s budget unless the agreement is renewed.
• Voluntary payments are uncertain. Nonprofit PILOTs depend on the institution’s willingness to pay.

For a related tool, see property tax abatement.