While most real estate developers have heard the acronym PILOT and know that it is an abbreviation for “payment in lieu of taxes,” many are unfamiliar with the mechanics of a PILOT and the financial benefits it can provide to a real estate project. This article is intended to provide a brief overview of PILOTs.
What is a PILOT?
Many parishes across the state of Louisiana have established development districts, development boards or public trusts to promote economic growth. These public agencies are authorized by state law to enter into sale leaseback agreements with private property owners and to enter into an agreement with the lessee of a given project to make payments in lieu of ad valorem taxes.
Typically, a PILOT arrangement includes the following steps:
- The project developer negotiates the terms of a PILOT arrangement with the public agency having jurisdiction over the project location. The terms to be negotiated include the term of the PILOT in years and the amount of the annual payment in lieu of tax the project developer will pay on an annual basis when ad valorem taxes are due. The amount of the PILOT is typically negotiated as a percentage of the ad valorem taxes due on the project if the project were owned by the project developer rather than the public agency. Note that the PILOT arrangement needs to be approved by both the board of the public agency as well as the parish or municipality which is the beneficiary of the public agency.
- The project developer acquires fee simple title to the property where the project is or will be located.
- Pursuant to one or more series of documents, the project developer conveys fee simple title to the property to the public agency, which has the effect of removing the project from the local ad valorem tax rolls.
- Simultaneous with the fee simple title conveyance, the project developer leases the project back from the public agency for the length of the PILOT term.
- Once the PILOT expires, the project developer exercises an option to terminate the PILOT lease and require reconveyance of the project to the project developer.
What are the Financial Benefits of a PILOT?
Over the life of a PILOT arrangement, the financial benefit of paying a reduced PILOT amount annually instead of fair market value-based ad valorem taxes can be quite significant. In exchange for the financial benefit the project developer receives from the PILOT arrangement, the public agency often seeks specific benefits in return, such as a certain number of construction and permanent jobs and overall payroll requirements.
The Steeg Law Firm can assist developers in negotiating all aspects of PILOT arrangements.