Tax abatements are used throughout the country to incentivize development. Typically, municipalities enter into a written financial agreement with developers that calls for the payment of a set, lower fee for a specified period of time in place of traditional real estate taxes on improvements.
In New Jersey, tax exemptions are authorized under the state Constitution, which states that certain properties in blighted areas “may be exempted from taxation, in whole or in part, for a limited period of time during which the profits and dividends payable by any private corporation enjoying such tax exemption shall be limited by law.” In 1991, the state enacted the Five-Year Exemption and Abatement Law, N.J.S.A. 40A:21-1 et seq., and the Long Term Tax Exemption Law, N.J.S.A. 40 A: 20-1 et seq., which statutes currently govern the abatement process. An abatement tax is technically referred to as a “Payment In Lieu Of Taxes” (PILOT).
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As the name suggests, the Five-Year Exemption and Abatement Law authorizes lower tax payments for projects involving the rehabilitation of particular buildings and structures, with a maximum abatement period of five years. Meanwhile, the Long Term Tax Exemption Law is reserved for larger-scale development projects and allows for the abatement term to extend for 30 years after project completion. In either case, developers must submit abatement applications to the municipality for review, which are then approved through the adoption of a local ordinance.
For large projects, a tax abatement agreement can result in substantial savings over the life of the agreement. To maximize the savings, it is imperative to work with experienced counsel who understands the abatement process and can negotiate the most beneficial tax agreement in your favor.