Payment in lieu of taxesPILOT

A payment in lieu of taxes replaces a property's ordinary tax bill with a negotiated schedule of payments, typically lower and often fixed or slowly rising for a set number of years. Governments use PILOTs to attract projects that would not proceed at full taxation, to support affordable housing, or to bring tax-exempt owners, such as nonprofits or public authorities, into partial contribution for the services they use.

Property taxes are usually the largest single operating expense in a rental building, and they are paid every year for as long as the building stands. Reducing them raises net operating income directly, which lowers the rent needed to support a given cost or supports a larger loan against the same rent. Assume a PILOT reduces taxes by $1,500 per unit per year on a 100-unit building: that is $150,000 of added NOI, which at our default assumptions lowers the required rent by about $132 per unit per month.

The cost of a PILOT is borne by the taxing jurisdictions, which forgo revenue they would otherwise collect, and indirectly by other taxpayers. Whether that is a good trade depends on whether the project would have happened without it and on what the community receives in return, often a share of affordable units or a commitment to build on a difficult site. It is closely related to tax increment financing and often layered with tax credits in subsidized projects. We cover the trade-offs in Public Finance.