As the Solomon administration works to renegotiate the agreement between Jersey City and KRE for the Pompidou project, PILOT agreements and tax abatements are once again at the forefront of local political discourse.
Tax abatements, tax exemptions, and Payments in Lieu of Taxes (“PILOT”) agreements are among the most commonly used tools in municipal finance and easily the most misunderstood.
In this article, we will tell you what they are, how they work, and what they are used for before dispelling three of the following common myths that are frequently repeated on social media and in community meetings:
- Tax Exemptions And PILOTs Mean New Buildings Don’t Pay Taxes
- Almost All New Construction Gets Tax Exemptions and PILOTs
- PILOT Agreements Defund the Schools
A Brief Primer on Tax Abatements and PILOTs
New Jersey’s cities were hit especially hard by de-industrialization and the transformation of global shipping in the 20th Century. Much of the state’s former industrial base was reduced to rotting rail yards, abandoned warehouses, and contaminated brownfield sites. To fight blight and encourage redevelopment and rehabilitation, the New Jersey legislature authorized municipalities to create financial agreements with private enterprises, including five-year tax abatements, tax exemptions, and PILOT agreements [NJ Rev Stat § 40A:21-3 (2025) and NJ Rev Stat § 40A:20-2 (2025)]. Hard-hit cities like Jersey City and Newark could use these arrangements to encourage the private sector to convert blighted areas that paid little-to-no taxes to productive new offices and residential buildings that could fill empty city coffers.
The distinction between tax abatements, tax exemptions, and PILOT agreements is important. Tax exemptions and tax abatements only last for five years maximum [NJ Rev Stat § 40A:21-5 (2025)]. PILOT agreements can last much longer, typically anywhere from ten to thirty years [NJ Rev Stat § 40A:20-12 (2025)].
While both tax abatements and tax exemptions are short-term agreements authorized by statute, they are subtly different. When improvements such as new buildings are built on a property that raise the value of the property, the property is revalued and property taxes go up.
Tax exemptions exempt the improvements (i.e. the new buildings) on the land from full conventional property taxes for five years. Tax abatements, on the other hand, go further. An abatement can abate (that is, reduce) taxes below the tax level that was charged before the improvements were made.
Jersey City’s ordinance authorizes a five-year tax exemption ordinance on improvements rather than a land abatement ordinance [§304-6 of the Jersey City Municipal Code]. Basically, when a tax exemption is issued in Jersey City, property taxes are phased in on the new improvements to the land, while full conventional taxes continue to be paid on the land itself. In common speech, however, the terms are used interchangeably.
PILOT agreements, also authorized under §304 of the Jersey City Municipal Code, are longer-term agreements that kick in once a redevelopment project is completed. PILOT agreements last for anywhere between 10 and 30 years and typically pay a percentage of annual revenue to the city as a payment in lieu of property tax.
Cities in New Jersey choose to authorize a mix of tax abatements, exemptions, and PILOT agreements because they provide financial stability to otherwise risky projects without the city having to issue a bond for it. And the less risk in a project, the more likely the project is to get outside investment.
Cities also benefit from these agreements because they put parcels with a low property value (and paltry property tax payments) to more productive use, growing the tax base. PILOT agreements are particularly useful for building below-market-rate (affordable) housing, funding vital infrastructure upgrades like improved stormwater retention, or for building needed community amenities on behalf of the city. In such cases, the value of the PILOT is usually tied to the value of the benefit the city is receiving in exchange.
Finally, state PILOT law has an “excess net profits” provision. If a project generates profit above some threshold, a PILOT agreement can stipulate that these excess net profits be paid to the city. This effectively makes the city a business partner in new development where it provides some downside protection to the developer but is able to share in the upside of a particularly successful development.
As Jersey City’s commercial and residential market boomed, PILOT agreements became increasingly controversial. And with the city’s change in fortunes, myths about development and taxes proliferated faster than new buildings went up. We now seek to dispel those myths in turn.
Myth 1: Tax Exemptions And PILOTs Mean New Buildings Don’t Pay Taxes
The myth that properties with tax exemptions or PILOTs do not pay any taxes to the city government is the easiest to disprove. In Jersey City, owners pay property taxes on the value of the undeveloped land all throughout construction. After construction wraps up, five-year tax exemptions (commonly called abatements) and PILOT agreements diverge in how they function.
Tax exemptions slowly phase in full property taxes on the value of the improvements to the property over a five-year period. So while the full value of the improvements might be exempt in the first year, each year an additional 20% of the improved value will be subject to taxes. The property will be paying 80% of the full property taxes on the improved property by the fifth year of the agreement, and 100% by the sixth. And again, even in the first year, exempt properties still pay full conventional property taxes on the pre-improvement value of the land and its structures. Both the pre-improvement taxes and the phased-in taxes on improvements flow to the city, county, and public schools pro rata (i.e., in proportion to how the money should be distributed under conventional taxation).
PILOT agreements are even more straightforward even though the deals themselves can be much more complex. While tax exemptions phase in conventional property taxes on the land improvement, PILOT agreements replace conventional property taxes completely with a payment formula that is based on the building’s gross revenue, working somewhat analogous to an income tax on the building. Under current New Jersey law, cities get to keep 95% of PILOT revenues with 5% going to the county government. More importantly, cities are prohibited from collecting less than what they were collecting in taxes before the development [NJ Rev Stat § 40A:20-12 (2022)].
PILOT agreements can be comparable to conventional taxes on an improved property or, in some cases, even exceed them if there are excess net profits. Even when PILOT agreements are lower than what the conventional taxes would be on the improved property, they still exceed the value of the full conventional taxes on the unimproved property. After the term of the agreement, the property pays full conventional property taxes.
Even when there is a community giveback that the PILOT pays for, like a community center or affordable housing, the PILOT still pays more in revenue to the city than the conventional taxes on the property before the development.
Myth 2: Almost All New Construction Gets Tax Exemptions and PILOTs
PILOT agreements cannot be recklessly given to any developer that requests one, as a matter of law.
First, the city has to designate an area in need of redevelopment and the property has to be in the redevelopment area. Second, the developer has to be designated as an Urban Renewal LLC. Finally, an independent financial analysis must prove that development would not be possible but for the PILOT agreement (i.e. the project would not happen without a PILOT agreement in place).
We previously wrote about why a PILOT was needed to make the 15% affordable housing set-aside at 177 Grand Street work. Jersey City is littered with projects (and empty lots) that got Planning Board approval but never broke ground due to the costs and risks associated with development.
Still, in Jersey City, there is a perception that every single development built or under construction has received either a PILOT or a tax exemption. This is false.
Jersey City commonly used such agreements under the Schundler, Cunningham and Healy administrations when most new developments were in abandoned warehouse districts, former rail yards, and many of the city’s brownfield sites – exactly how PILOT agreements are meant to be used. Back then, PILOT agreements made it financially possible to clear blight, put land back to productive use, and supported projects that were economically beneficial. In the first two terms of the Fulop administration, the use of PILOT agreements shifted away from downtown and the waterfront to new neighborhoods like Journal Square and West Side. The share of projects receiving PILOT agreements, which was already small, fell to zero for a number of years.
By 2020, there were 178 active PILOT agreements (around 70 agreements were struck during Fulop’s first two terms, with the rest struck during the previous administrations). Of those PILOT agreements, 46 were used for affordable housing projects, 90 for market-rate projects, and a handful for commercial properties. By 2025, the number of active PILOTs had fallen to 153. The city has entered into only 8 new PILOT agreements since 2017 (the year Fulop signed the 70th PILOT agreement of his administration). Almost all of these recent PILOT agreements have been to support the construction or renovation of affordable housing or in exchange for expensive community give backs like parks and cultural centers.
| Project | Reason | Year Granted |
| Bayfront I | 35% Affordable Housing | 2023 |
| Lafayette Village | Affordable Housing Renovations | 2023 |
| 808 Pavonia | 100,000-square-foot space for the Pompidou | 2024 |
| 353-381 Montgomery Street | Affordable Housing Renovations | 2025 |
| 259 Van Nostrand Ave | Senior Affordable Housing Renovations | 2025 |
| 701 Newark Avenue | 25% Affordable Housing | 2025 |
| 177 Grand Street | 15% Affordable Housing | 2025 |
| Embankment Block 1 | 5% Affordable Housing and Embankment | 2025 |
PILOT agreements remain controversial because some voters mistakenly think of them as a “giveaway” rather than an exchange for value between the city and a redeveloper. On net, both the city and redevelopers usually come out ahead by entering into PILOT agreements.
The city gets both a new source of revenue from the improved project and some combination of improved infrastructure, new community spaces, and affordable housing that it would have had to bond for otherwise. A PILOT is, therefore, likely more financially efficient for taxpayers than a municipal debt issuance when used to fund affordable housing and community amenities.
Developers, of course, also benefit because PILOT agreements offer financial stability and lower risk by tying payments to project revenues rather than land improvements so forecasting cash flows and payments over twenty to thirty years is easier. This lower risk allows redevelopers to get financing from private investors to make projects possible. And once those projects wrap construction, the city collects taxes on the redevelopment in the form of a PILOT.
Myth 3: PILOT Agreements Defund the Schools
As established earlier, tax exemptions pay their pro rata portion to the city, public school system, and county as they are phased in with approximately 43% going to the city, 37% to the schools, and the remainder to the county government.
In contrast, state law obligates PILOT agreements to direct just 5% of revenue to the county, enabling the other 95% of revenues to go to the city – apparently leaving the public school system holding the bag.
Case closed, right? Not quite.
First, Jersey City has a lot of discretion in how it uses PILOT money. Since 2017, 10% of all new PILOT agreement revenue goes directly to the schools. This fact, however, is immaterial to how PILOT agreements actually affect school funding and has likely only served to muddy the waters further.
There are three concepts we have to keep in mind when discussing PILOT agreements and the Jersey City school budget:
- The public school district sets its own tax levy and gets 100% of what it asks for regardless;1
- Jersey City’s municipal budget and the public school budget share the same tax base; and
- Money is fungible — one dollar is equal to another such that every dollar “diverted” from the school district to the city by PILOTs is a dollar by which the city reduces its tax levy and allows the school district to increase its tax levy by a dollar without raising overall taxes.
The JCEA and outfits like Civic Parent (note to reader: this is a valuable community resource and worth checking out) might argue that PILOT agreements shrink the tax base from which the school levy is drawn, which means the school portion of the rate is higher on conventional tax payers even if the schools get every dollar they ask for. And that point is technically true. But it does not ultimately matter because of the fungibility of money concept and the shared tax base between the cities and the schools.
There’s an easy way to explore this concept:
(Warning! Arithmetic ahead but in the written explanation but summarized with a chart and interactive widget)
Before a high-rise apartment building is built, let’s say the lot that it is on pays $100,000 in conventional property taxes. That $100,000 is split roughly $43,000 to the city, $37,000 to the schools, and $20,000 to the county.
After the high-rise apartment building is built, let’s say the same property now paying $4,000,000 a year in PILOT revenues (and it could not have been built but for the PILOT as that’s a requirement in NJ state law) on what would have been a $6,000,000 conventional tax bill. Of that $4 million, $3.8 million goes to the city and $200,000 goes to the county. So you say, “Wait! Now the schools aren’t getting anything!” This is true, they have lost $37,000 but the city has gained $3,757,000 in new revenues.
Assuming the PILOT revenues to the city were split between the city and school roughly proportional to the conventional tax split, then the city would collect $1,995,000 and the schools would take $1,757,500. Here, the city takes the full $3,800,000 but it doesn’t have to collect that $1,757,500 that would have gone to the school in conventional taxes, leaving the school free to use that newly created fiscal space to collect that amount in its levy.
Because of the fungible nature of money, we can imagine the inverse scenario. Let’s imagine 95% of PILOT revenue goes to the school instead of to the city. Here, the schools no longer have to increase conventional property taxes to get their $1,757,500, in fact, they could lower their portion of conventional taxes by $237,500 so the city can raise its full $1,995,000 in conventional taxes.
Critics might rebut the above by asking, “Well, what about the $2,000,000 annual difference between the $4,000,000 PILOT and what would have been the ad valorem (legalese for “full value”) conventional tax of the improved property at $6,000,000?” It is worth keeping this argument in mind, but as we explored in Myth 2, projects only get PILOT agreements under New Jersey state law if they would not have been built otherwise. Plus, PILOT agreements are often the only financially viable way for the city to fund givebacks that community groups and neighborhood associations demand from housing projects. For example, that $2,000,000 annual difference is likely paying for something of value to the city like affordable housing or a parks project like the Embankment.
In that case, let’s continue to explore this concept with some light arithmetic (and an interactive widget meant to represent the city):
The conventional taxes would break down like this: $2,580,000 to the city, $2,220,000 to the schools, and $1,200,000 to the county.
Here, the city is collecting $1,220,000 more than it would have under conventional taxes but the schools need to “make up” $2,220,000 and the county needs to “make up” $1,000,000 (because they already get $200,000 from the PILOT). Since the county has a broader tax base than just Jersey City, which is about 40% of Hudson County’s tax base, county ratables in Jersey City actually only go up $400,000 rather than the full $1,000,000 (the rest of the county helps pick up the tab). The schools, however, only have to make up $1,000,000 because the city is “ahead” $1,220,000 from the PILOT so the city does not raise its conventional taxes, allowing the schools to raise slightly more than the full $2,220,000 in conventional taxes they would otherwise be “missing out” on because they can eat some of the county’s share. In that sense, Jersey City’s tax payers (and schools) might actually come out slightly ahead with the PILOT agreement in place than they would with the ad valorem conventional taxes on the developed property.
At this point, critics might say, “this all works in theory, but if it were true, why has the school portion of my property taxes gone up so much?”
This is a more complicated answer and not the main point of this article but is worth addressing nonetheless. State aid to Jersey City’s public schools has been cut as the city’s tax base has grown. It would be inequitable for the state to bail out a comparatively richer city like Jersey City when the money can support other cities (like Camden and Paterson) that do not have the same tax base to sustain their schools.
Another point worth considering is that many of these high-rise projects add comparatively few children to the public school system. The Rutgers Center for Real Estate estimated that high-rise buildings targeting high-income households lead to comparatively few school aged children joining the district compared to low-rise housing targeting middle-income households which adds nearly three times as many children. The net impact of high-rise “luxury” development might be net beneficial for the schools by increasing the tax base without adding a substantial number of students into the system [The School Age Children Study]. Despite Jersey City’s 20% population growth over the past 15 years, the number of children in the school system has remained relatively flat.
Development does bring a good opportunity to reimagine the buildings used by Jersey City’s public school system. Jersey City already built one new school annex for P.S. 16 using private development. There are other opportunities all over the city to build new public schools. This is worth exploring in greater detail. The Planning Division could evaluate such opportunities if the city council were to pass resolutions authorizing zoning amendments, especially in the downtown and waterfront neighborhoods of Jersey City where demand for housing (and new school facilities) is among the highest in the city.
We have created a widget using data from the Rutgers study and PILOT data on affordable housing from the 177 Grand Street PILOT to make some estimates on the cost of a PILOT and the number of school-aged children a new development might add to a district. The added costs of more children are insignificant compared to either the subsidy needed to support affordable housing mandates or the revenue collected from PILOT revenues.
Conclusion
It is understandable why tax abatements and PILOT agreements generate so much controversy. The mechanics are complex, the terminology is confusing, and the political incentives favor simple narratives over accurate ones.
“Developers don’t pay taxes” fits on a bumper sticker. “Developers make payments in lieu of taxes that can equal or exceed conventional tax payments and send 95% of revenues to the city, 5% to the county, and the fungible nature of money and shared tax base means the schools also benefit from these agreements” does not.
Getting these details right matters for Jersey City’s future as the city faces a $250 million budget gap, rising school costs driven by reductions in state aid, and an ongoing need for affordable housing, infrastructure, and community amenities that it cannot fund through debt alone. Critics of PILOT agreements make the assertion that the population growth causes the city’s budget to balloon faster than revenue. But that is also a myth. Jersey City’s population has grown 20% in the past 12 years but its budget, adjusted for inflation, has only grown by about 10%, showing greater efficiencies realized by the increased population density.
PILOT agreements can be used to fund affordable housing, build new infrastructure, and invest in public amenities while growing the city’s tax base at the same time. We support greater transparency in how these agreements are structured and reported, including clearer public disclosure of PILOT terms and annual revenues. While we enjoy reading the financial analysis reports included in PILOT agreement ordinances, most voters do not. Residents deserve to see and understand the numbers for themselves, and when they do, the numbers tell a more encouraging story than the myths suggest.
Footnotes:
- While there is a 2% cap on school tax increases, there are various exemptions for increases in healthcare costs, losses in state aid; and “banked cap” tax increases from previous years: [NJ Spotlight News] ↩︎