Payment in Lieu of Taxes (PILOT) is an agreement between the City of Baltimore and a developer, business, or landowner ("applicant") that substitutes the annual real estate taxes due on a property for an established time period with a negotiated payment. The purpose of a PILOT is to provide for a certain exemption from Baltimore City property tax for certain real estate located in Baltimore City.
Types of PILOTs and Legal Requirements
Currently, there are five types of PILOT's authorized under state and local law.
- Housing Authority Property (Public Housing) – Housing Authority of Baltimore City (HABC) property is exempt form local and state property taxes provided an agreement is in place to provide for some other payment acceptable to Baltimore City.
- City-Owned Property – State law provides that a property owned by the City and leased to a business for profit is subject to the property tax; however, the City may, by ordinance, exempt City-owned property from City real estate taxes and negotiate a PILOT.
- Low Income Housing – The City can grant PILOTs for low income and elderly housing developed by a non-profit corporation or a limited distribution entity.
- Residential Conversion of Commercial Buildings – The City can provide certain exemption from property tax for certain vacant and underutilized commercial buildings in the Downtown Management District. The real property must meet two of the following criteria: (I) The improvement on the property is over 25 years old; (II) The property was last used as commercial space with accessory uses; or, (III) The property has been at least 75% vacant for more than 3 years. The real property must be owned by a person who: (a) is engaged in constructing and operating housing structures or projects, including non-dwelling commercial and community facilities; (b) provides a minimum of $500,000 of private capital in the development of the residential portion of the project; (c) renovates the real property so that at least 75% of the total leasable square footage of the building is used for rental residential housing. The project must be approved by the Mayor's Development Group before the PILOT agreement is written and submitted to the Board of Estimates for approval.
- Commercial and Market Rate Residential PILOT – In 1999, the State of Maryland approved legislation enabling the City to negotiate PILOTs for economic development projects, including new construction of market-rate residential buildings. The maximum PILOT the City can provide is a 95% reduction in real estate taxes normally due absent the PILOT. Developers must submit a detailed information package to the City justifying the need for a PILOT. The City, or its designated agency, must conduct an independent cost-benefit analysis to determine returns to the developer and benefits to the City. Projects must be approved by City Council before the PILOT agreement is written and submitted to the Board of Estimates for approval.
Economic Development Projects receiving the benefit of a PILOT must:
- Be at least $5 million in size and have an equity investment of at least $250,000 (for Residential projects)
- Continue to pay existing taxes as a base line
- Pay a minimum of 5% of the incremental taxes that would normally be due in the absence of any PILOT.
"Economic Development Project" refers to a real estate development project that is located in one or more parcels of land; and includes at least one of the following:
- A Hotel that provides at least 100 full-time equivalent job opportunities and has a private capital investment of equity and debt combined of at least $20,000,000;
- An Office Building that provides at least 150 full-time equivalent job opportunities and has a private capital investment of equity and debt combined of at least $20,000,000;
- Retail Facility that provides at least 100 full-time equivalent job opportunities and has a private capital investment of equity and debt combined of at least $10,000,000
- A multifamily residential facility that has a private capital investment of equity and debt combined of at least $5,000,000 and have an equity investment of at least $250,000
- An off-street parking facility that contains at least 250 parking spaces and has a private capital investment of equity and debt combined of at least $2,500,000 or
- A mixed-use facility that contains one or more of the facilities described in items 1 through 5 of this item, at least one of which satisfies the minimum criteria set forth.
Justifying the use of PILOTs requires an understanding of, and agreement on, a set of principals guiding the use (and preventing the misuse) of PILOTs.
- Analysis must determine that "but-for" the PILOT, the project would not be built in Baltimore City because the rates that the project must charge are higher than the intended purpose (the private returns are inadequate to assume the risk associated with the development.)
- The project must achieve a clear and well documented public purpose (such as downtown housing, hotels that assist the convention center, alleviation of the downtown parking shortage, major business retention and job growth, the creation of affordable housing, or other public economic benefits).
- The PILOT must not produce a higher than reasonable market rate of return to the developer and or owner and in no event should cash-on-cash return exceed 20 percent;
- Overall tax revenues to the City (parking, hotel, piggy-back, amusement, and utility) shall increase substantially after the PILOT-assisted project is constructed.
- The City's goal is to create an economic environment that mitigates the need for PILOTs in the future.
PILOT Review and Approval Process
The Baltimore Development Corporation (BDC) and the Department of Housing and Community Development (DHCD) are two city agencies responsible for facilitating commercial, industrial, institutional, and residential development in Baltimore City. As such, staff from the two agencies will be responsible for negotiating PILOT terms.
Developers must submit a narrative statement with the following information:
- Project description.
- Ownership interest(s).
- Development team.
- Funding commitments.
- PILOT request and justification.
- Justification for desired cash-on-cash return and/or internal rate of return (IRR).
Developers must submit information on economic benefits, including, but not limited to:
- Jobs retained.
- Jobs created.
- Salary ranges and benefit packages.
- Projected parking, hotel, utility, and amusement taxes.
- Permit fees.
- Projected number of new City residents (for housing projects).
Developers must submit a sources and uses statement and 20-year operating pro-forma in a form acceptable to the reviewing agency.
The "uses statement" should include a detailed hard and soft cost break-out, including acquisition costs, construction costs by trade, general contractor's fee and general conditions, construction contingency, professional fees, financing costs, interest carry, developer's fees, marketing and lease-up reserves, and soft cost contingencies.
The "sources statement" should include all entities providing financing for the project, including developer equity, and the terms under which the financing is provided. The pro-forma should include a detailed breakout of revenue sources and expenses, and clearly list assumptions on which the projected revenue and expenses are based.
Developer should submit a profit sharing proposal in the event that the project outperforms the projections on which the PILOT was based.
Tax Incement Financing (TIF) provides the opportunity to leverage limited public financing of public infrastructure and site preparation in order to maintain and attract private investment.
Tax Increment Financing provides funds for activities such as public land acquisition and improvement, construction of streets, utilities, and other infrastructure, pre-development costs, and other permitted costs. A TIF functions by pledging property tax increments gained (over the pre-development year) as a result of the new development within the tax increment district. TIF Bonds are issued based upon this expectation of increased real property taxes and typically upon the guarantee of one or more developers. Proceeds from the sale of the TIF Bonds finance specific activities and/or capital improvements.
Effective October 1, 2013, TIF-supported bonds can be issued for specific projects provided that they are located in state-designated Sustainable Community. Eligible projects include:
- historic preservation or rehabilitation;
- environmental remediation, demolition, and site preparation;
- parking lots, facilities, or structures of any type whether for public or private use;
- highways or transit service that support sustainable communities;
- affordable or mixed-income housing; and
- stormwater management and storm drain facilities.
The City, by City Council Ordinance, designates the TIF Development District and subsequently the assessable “baseline” of all real property within that district. A special fund is created into which all “incremental” real property taxes is placed. Withdrawals are made from this special fund to cover debt payments on the TIF Bonds. The City is not otherwise liable for the bonds as the City’s full faith and credit is not pledged. Typically, one or more developers, anticipating an increase in the value of their property within the District, will guarantee debt service under the bonds by a Developer’s Agreement. If the assessable base increases the developer is not required to pay any funds other than the taxes originally anticipated upon completion of the development.
The City continues to collect the tax revenues generated by the “baseline” assessment in the TIF district.