New Jersey Long Term Tax Exemption Law: PILOT Payments and Rules

New Jersey’s Long Term Tax Exemption Law, codified at N.J.S.A. 40A:20-1 et seq., lets a municipality replace conventional property taxes on a redevelopment project with a negotiated annual payment, commonly called a Payment in Lieu of Taxes or PILOT. A developer forms a dedicated entity, applies to the municipality, and if approved pays that service charge instead of standard property taxes for as long as 35 years. The trade-off is a cap on how much profit the developer can keep and ongoing reporting obligations to the town.

Who Qualifies

Two threshold requirements decide whether a project can even apply.

First, the property must sit inside an area the municipality has already designated as in need of redevelopment or rehabilitation. That designation is a separate legal process under the Local Redevelopment and Housing Law (N.J.S.A. 40A:12A-1 et seq.) and involves a planning study, public hearings, and a formal resolution. A blighted parcel outside a designated area does not qualify, however run-down it looks.

Second, the developer must form an Urban Renewal Entity dedicated to the project. This can be a corporation under Title 14A or a partnership under Title 42.¹ The entity’s organizing documents must limit its business to the specific redevelopment project and state that it will operate under the Long Term Tax Exemption Law for the entire term of the agreement. The entity also has to accept the statutory caps on profit, which is the price of the exemption.

The entity’s obligations to the municipality are generally limited to the project property itself, not the developer’s other holdings. That non-recourse structure protects the developer’s broader assets and, on the other side, narrows what the municipality can pursue if things go wrong.

What the Application Must Include

The developer submits a written application to the mayor or chief executive officer of the municipality.² The statute lists what has to be in the package:

A project description with architectural and site plans, a statement that the project conforms to municipal ordinances, and an explanation of how it fits the redevelopment plan and master plan.
A detailed cost estimate prepared by a qualified architect or engineer.
A year-by-year fiscal plan projecting gross revenue, operating expenses, debt service, reserves, and payments to the municipality.
A draft financial agreement laying out the PILOT payment schedule and the entity’s obligations over the life of the exemption.
Ownership and management information for the Urban Renewal Entity, showing it complies with the formation rules.

The application also has to address the allowable net profit for the project so the municipality can check the numbers against the statutory caps.¹ Municipalities typically charge a non-refundable application fee to cover professional review, and the amount varies by town.

Municipal Approval and the 20-Day Challenge Window

Once the mayor forwards the application to the governing body, the review moves to a public hearing. The municipality must notify the county’s chief financial officer and the clerk to the board of county commissioners of the date, time, and location.³ Residents and other stakeholders can be heard at that hearing.

The governing body then adopts an ordinance approving the exemption and the financial agreement. The ordinance must contain findings that the tax exemption is an important factor in getting the project done and that the project’s benefits justify departing from standard property taxation.⁴ Those findings are not decorative. A court reviewing the deal later will look for them.

After the ordinance passes, notice is published in a newspaper of general circulation. Anyone who wants to challenge the agreement has 20 days from that publication to file suit. Once the challenge period closes, the mayor and the developer execute the financial agreement.⁵

How the PILOT Payment Is Calculated

The annual service charge stands in for property taxes but is not calculated from assessed value and the local tax rate. Instead, the financial agreement sets a formula, typically either a percentage of the project’s annual gross revenue or a percentage of total project costs, with a statutory floor.

The agreement spells out how gross revenue is computed, including which tenant-paid expenses count. Federal subsidies received by nonprofit sponsors of qualified subsidized housing projects are excluded from gross revenue, and so are gains from selling individual units.¹ Those exclusions can meaningfully lower the PILOT base for affordable housing and mixed-use developments.

On top of the service charge, the municipality can impose an annual administrative fee capped at 2% of the service charge amount.³ Because the formula is negotiated rather than fixed, terms differ substantially from one project to the next.

Profit Caps and Excess Profit Payments

The developer’s return is limited by an “allowable profit rate,” defined as the greater of 12% or the entity’s initial permanent mortgage interest rate plus 1.25 percentage points. If the mortgage is government-insured, the insurance premium is treated as part of the interest rate. When there is no permanent mortgage, the municipality determines the prevailing mortgage rate for comparable properties in the county and adds 1.25 points.¹

That rate is applied to total project cost (or to each unit’s cost in a phased project) for the period from construction completion through the most recent fiscal year. The result sets the maximum net profit the entity can keep. Whenever cumulative net profits go over that amount, the excess must be paid to the municipality within 120 days of the fiscal year close as an additional service charge.⁶ Because the calculation is cumulative, early losses are credited against later profits before any clawback is due.

Annual Reporting and Dispute Resolution

The entity must file audited financial statements with the mayor and governing body within 90 days after the close of each fiscal year.³ A certified public accountant prepares the audit, which has to show clearly how net profit was calculated. That is how the municipality verifies that the service charge is correct and that the entity is staying inside the profit cap.

The entity must also let municipal or state representatives inspect the property, equipment, and buildings and examine its books, contracts, and records.³ Disputes between the municipality and the entity go to arbitration under a process the financial agreement itself must contain. That routes disagreements out of court, so both sides should think carefully about the arbitration terms when the agreement is drafted.

County Share of PILOT Revenue

For financial agreements entered on or after the effective date of P.L. 2003, c.125, the municipality must remit 5% of the annual service charge to the county.⁷ Each quarterly installment has to be accompanied by detailed information on every active PILOT agreement, including project name and address, agreement dates, the total service charge, and the county’s share.

If a municipality misses the payment, the county can sue for the unpaid balance plus 1% interest per month, attorney fees, and court costs. A municipal finance officer who willfully refuses to comply can have their professional certificate suspended or revoked.⁷

Separate legislation has been proposed to require sharing PILOT revenue with local school districts. For nonresidential and mixed-use projects, the proposed share would be 5% of the annual service charge, or an in-kind contribution of equal value. For residential projects, it would be tied to the number of school-age children in the development multiplied by the state’s base per-pupil funding amount. As of early 2026, the bill had advanced through committee but had not been enacted.

Duration and Termination

The financial agreement is structured as a contract requiring full performance within 30 years from project completion.³ The exemption itself has a hard ceiling of 35 years from the date the agreement was executed. For phased projects, or where a single redevelopment agreement covers multiple projects, the ceiling extends to 50 years from execution of the first financial agreement.⁸

When the exemption ends, whether by expiration or voluntary relinquishment, the termination date is treated as the entity’s fiscal year close. Within 90 days, the entity must pay the municipality any accumulated reserve balance and any excess net profits owed as of that date.⁸ The property returns to the standard tax rolls, and the exemption, service charges, and profit restrictions all end together.

One point worth flagging: the statute expressly lets the entity terminate the agreement, but it does not give the municipality a matching unilateral right to terminate for non-payment or missed reports. The prescribed route for those disputes is the arbitration process in the financial agreement.³ A municipality that wants a clean termination trigger for non-compliance has to negotiate one into the agreement itself.

1
Justia. New Jersey Code 40A:20-3 – Definitions
2
Justia. New Jersey Code 40A:20-8 – Application Required, Form, Contents
3
Justia. New Jersey Code 40A:20-9 – Financial Agreement for Approved Projects, Form and Contents of Contracts
4
Justia. New Jersey Code 40A:20-11 – Municipal Determinations
5
Justia. New Jersey Code 40A:20-12 – Tax Exemption
6
Justia. New Jersey Code 40A:20-15 – Excess Profits of a Limited Dividend Entity
7
New Jersey Legislature. New Jersey PL 2025 Chapter 91
8
Justia. New Jersey Code 40A:20-13 – Termination of Tax Exemption