Payment in lieu of taxes is money a property owner or business pays to a local government instead of the standard property tax bill
A payment in lieu of taxes (often called PILOT) is a voluntary or negotiated payment that replaces or supplements the regular property tax a municipality would normally collect. Instead of the assessor calculating your tax based on property value, you and the local government agree on a fixed payment amount. The money goes to the same place property taxes do — the city or county budget — but the calculation method is different.
PILOT arrangements are most common when a property has special circumstances: it might be owned by a nonprofit, a government agency, or a private developer who negotiated a tax break as part of a larger deal. A hospital, university, or religious organization might pay PILOT instead of property tax because they are tax-exempt. A shopping mall or office park built with public incentives might pay PILOT for a set number of years instead of the full assessed tax rate.
The key difference from regular property tax is that PILOT is negotiated, not automatically calculated. You do not owe it unless you have signed an agreement or your property falls into a category where PILOT is required by local law. If you own a standard residential or commercial property and pay property tax the normal way, PILOT does not explore to you.
Key Takeaways
- Payment in lieu of taxes is a negotiated amount paid to local government instead of standard property tax, most often used for nonprofits, government-owned land, or properties with tax incentive deals.
- PILOT amounts are set by agreement between the property owner and the municipality, not by the assessor's valuation formula.
- The money collected through PILOT goes into the same municipal budget as property tax revenue.
- You only owe PILOT if your property is specifically subject to it under local law or a signed agreement — standard residential and commercial properties use the regular property tax system.
Who typically pays PILOT instead of property tax
Nonprofits are the largest group paying PILOT. Hospitals, universities, museums, and social service agencies are tax-exempt under federal law, which means they owe no property tax. However, many municipalities ask these organizations to pay PILOT as a voluntary contribution to offset the lost tax revenue. The amount is usually lower than what a taxable property would owe, but it acknowledges that the nonprofit benefits from municipal services like fire, police, and road maintenance.
Government-owned properties also commonly use PILOT. When a city, county, or state agency owns land or buildings, it is tax-exempt. A PILOT payment from one government entity to another (for example, a state university paying the county) is a way to share costs for services that benefit the property.
Private developers sometimes agree to PILOT as part of a tax incentive package. A company building a major commercial project might negotiate a lower tax rate for 10 or 15 years in exchange for job creation or economic development. During that period, they pay PILOT instead of the full assessed tax. When the incentive period ends, they move to the regular property tax system.
Religious organizations, charter schools, and other tax-exempt entities may also pay PILOT, depending on local policy. Some municipalities require it; others ask for it voluntarily.
How PILOT amounts are set and what they cover
There is no single formula for PILOT. Each agreement is negotiated between the property owner and the municipality, usually through the assessor's office, the city manager, or an economic development agency. The amount might be based on a percentage of what the property would owe under normal assessment, a fixed dollar amount, or a formula tied to the organization's revenue or the property's square footage.
A hospital might agree to pay 25 percent of what its property would be assessed at if it were taxable. A university might pay a flat amount per acre. A developer with a tax incentive deal might pay a percentage that increases each year until the incentive period ends. The specifics depend entirely on what both sides negotiate.
PILOT payments typically go into the general fund or a designated account within the municipality's budget. They are treated as revenue, just like property tax, and can be used for schools, public safety, infrastructure, or any other municipal expense. Some agreements specify that PILOT money must go to particular services — for example, a large employer might agree that its PILOT payment will help fund the fire department that serves its facility.
The difference between PILOT and property tax
| Feature | Property Tax | Payment in Lieu of Taxes (PILOT) |
|---|---|---|
| Who pays | All taxable property owners | Nonprofits, government agencies, or properties with negotiated deals |
| How amount is set | Assessor calculates based on property value and local tax rate | Negotiated agreement between owner and municipality |
| Is it mandatory | Yes, required by law | Usually voluntary or part of a signed agreement |
| Can the amount change | Yes, annually based on reassessment | Only if the agreement allows or a new agreement is made |
| Where the money goes | Municipal general fund and schools | Municipal general fund (varies by agreement) |
The most important practical difference is predictability. A property tax bill changes every year as the assessor revalues the property and the tax rate shifts. A PILOT payment is usually fixed for a set period, which makes budgeting easier for both the property owner and the municipality. This stability is often why nonprofits and developers prefer PILOT — they know exactly what they will owe.
Property tax is also a matter of public record and follows a standard appeal process if you disagree with the assessment. PILOT is negotiated privately, though the final agreement is usually public information. If you believe a PILOT amount is unfair, your recourse depends on the terms of your agreement, not on the standard property tax appeal process.
When you might encounter PILOT as a property owner or resident
If you own a nonprofit organization or a property that received a tax incentive deal, you may have PILOT obligations spelled out in your agreement with the municipality. Check your deed, any development agreement, or correspondence from the assessor's office to see if PILOT applies to you.
If you are a resident or business owner in a municipality where a large nonprofit or developer pays PILOT, you may see it listed in the municipal budget or in property tax documents. Some municipalities break out PILOT revenue separately to show how much they are collecting from tax-exempt organizations.
If you are considering buying a property that is currently subject to PILOT, ask the seller or the assessor whether the PILOT agreement will transfer to you and what the terms are. Some agreements are tied to the current owner and end if the property is sold; others transfer to the new owner. This can significantly affect your future tax obligations.
How PILOT affects municipal budgets and tax rates
PILOT is a source of revenue for municipalities, but it is usually less than what a taxable property would contribute. This means that when a large nonprofit or tax-exempt property is in a town, the remaining taxable properties often carry a larger share of the tax burden. Some residents argue this is unfair; others see PILOT as a reasonable compromise that keeps nonprofits and major employers in the community.
Municipalities sometimes use PILOT as an economic development tool. By offering a developer a lower PILOT rate for 10 years in exchange for building a new office park or retail center, the town attracts investment and jobs. After the incentive period ends, the property moves to the regular tax system and generates full revenue. The trade-off is that during the incentive period, other taxpayers may see higher rates to make up the difference.
The total amount of PILOT revenue varies widely by municipality. Some towns collect millions from large hospitals and universities; others collect very little because they have few tax-exempt properties. This affects how much each municipality can spend on schools, roads, and services.
Frequently Asked Questions
Do I have to pay PILOT if I own a nonprofit building?
Not automatically. Nonprofits are tax-exempt under federal law, so you owe no property tax. However, your municipality may ask you to pay PILOT voluntarily, or your state law may require it. Check with your local assessor to see what applies in your area. If you have a signed agreement, it will specify your PILOT obligations.
What happens to PILOT when a property is sold?
It depends on the agreement. Some PILOT deals are tied to the current owner and end when the property changes hands. Others transfer to the new owner. Before buying a property that currently pays PILOT, ask the seller and the assessor whether the agreement will continue and what the terms are.
Can a PILOT payment be appealed or reduced?
Unlike property tax, PILOT is not subject to the standard assessment appeal process. Your recourse depends on your agreement. If you believe the amount is unfair, you would need to negotiate with the municipality or review the terms of your original agreement. Some agreements include a review clause that allows renegotiation after a set period.
Is PILOT the same as a tax abatement?
No. A tax abatement is a temporary reduction in property tax for a specific property or type of property. PILOT is a negotiated payment that replaces property tax entirely. A property might have both — for example, a developer might receive a tax abatement for five years and then pay PILOT for the next ten years.
How do I learn about my property is subject to PILOT?
Contact your local assessor's office or check your property tax bill and any deed or development agreement you have. If PILOT applies to your property, it should be documented in your municipal records or in a signed agreement with the town or city.