Most people think of a PILOT as a person who flies a plane, or the device that lights your stove or furnace. Those of us who work in real estate development and community revitalization have a different definition for a PILOT, and it is one of the more important and useful resources in our development toolbox.
A PILOT, or Payment in Lieu of Taxes, is an investment incentive negotiated between a taxing authority (typically a municipality) and a developer. The PILOT replaces a traditional property tax assessment with a limited and/or deferred payment, in place, or in “lieu”, of the summer and winter property taxes that most property owners in Michigan pay. Housing development PILOTS are most often multi-year agreements with payments based on a percentage of net collected rents.
In essence, the municipality agrees to accept a lesser amount of property tax revenue in exchange for all of the other economic benefits that come from the new development. In the case of housing development, these benefits include direct municipal revenues from things such as building permits, water and sewer, property licensing and inspection fees, and additional property tax revenues from increased property values in the area surrounding the new development. There is also indirect benefit to the community from new residents who contribute to the local economy.
PILOTS can often make it possible for developers to invest in communities and neighborhoods where it would be difficult to develop if the property was subject to taxation on the assessed value of the property. PILOTS help form long-term partnerships between developers and the municipalities and are an important tool in creating places where people want to live, work, and play.