A "Payment In Lieu
Of Taxes" (commonly called a "PILOT") capital funding
approach provides the commercial real estate development project with a
funding program alternative that can be made to work for the benefit of
the developer, project and regulators. Traditionally, the main use
of the Payment In Lieu Of Taxes program has been to abate a portion of
the real property taxes (and other taxes) the developing project would
otherwise have to pay over a defined period (usually a 10-year
deal). The emerging commercial real estate project would have a
lower fixed expense costs as a result of the PILOT. This would
boost the near-term EBITDA stream
resulting in the proposed project being able (theoretically) to increase
the amount of long-term debt the project could support.
But, to the savvy commercial
real estate development investor and/or developer the PILOT program
can reach way beyond the confines of enhanced permanent mortgage support
and create an opportunity for a capital
funding plan component that may be brought to bear during the
pre-construction phase or construction phase. These are the most
critical areas where working capital dollars are the easiest to spend,
hardest to justify and nearly impossible for the developer to raise from
a third party because the third party ends up taking 50% to 75% of the
total transaction's equity security ownership.
PILOT reaches beyond that and provides a rebate that averages 25%
of the total property taxes in most states (check with RMC to find out
what the entitlement program requirements are for your pending
project). In larger scale projects, this can amount to a very
significant sum - so much in fact, that it can become part of the
capital funding plan. For a working example, assume that the
property taxes for the project are scheduled to be an average of
$100,000 per year, for the first 10 years. Normally, the PILOT
program approach would seek to reduce these taxes by an average of 26%
(as is the norm in most cases). This means that approximately
$260,000 (or $26,000 per year on average) would be abated. The
resulting PILOT would be an average of $74,000 per annum, resulting in
an increase in the project's operating income of approximately $26,000. In
the alternative, the developer could enter into a PILOT agreement with
the county industrial development authority. Instead of lowering
the overall payment, the payment would remain at $100,000 per year, but
the county industrial development authority could use the $260,000 to
repay a grant or loan that was part of the capital funding plan. Finally,
if your real estate development project has come to the point where you
need to use this program, perhaps another alternative would be better; a
fractional real estate ownership interest syndication using the
tenants-in-common approach. If you have the due diligence up to
date and ready to go, you can go right into the syndication platform as
early as the pre-construction phase and for projects having budgets of
greater than $2.5 million. This real estate syndication program is
designed to increase the developer's financial investment leverage and
increasing the project's at-risk equity contributions. It's made
for making these types of transactions work faster and more
cost-efficiently. |
