Payment in Lieu of Taxes Explained

Payment in lieu of taxes (often called PILOT) is money a private organization or business pays to a local government instead of paying property taxes. It happens when a property would normally be tax-exempt—because a nonprofit owns it, a government agency uses it, or a public authority controls it—but the local community still needs revenue to cover schools, roads, and services that the property benefits from.

The payment is voluntary in the sense that no law forces it, but it is negotiated as part of a deal. A hospital, university, or sports arena might agree to pay PILOT to the city or county in exchange for being allowed to operate tax-free. The amount is usually lower than the property taxes would have been, but it gives the local government something instead of nothing.

PILOT is not a tax refund or a payment you receive. It is a payment a large organization makes to your local government. Understanding how it works matters if you live near a major nonprofit or if you are curious why some large properties do not show up on tax rolls.

Key Takeaways

  • Payment in lieu of taxes is money a tax-exempt organization pays to local government as a substitute for property taxes it would otherwise owe.
  • PILOT is negotiated between the organization and the city or county, so the amount varies widely and is not set by law.
  • Common PILOT payers include universities, hospitals, nonprofits, and public authorities that own valuable real estate.
  • The payment goes to the local government to fund schools, infrastructure, and services, not to individual residents.

Who Pays PILOT and Why

Organizations that pay PILOT are usually tax-exempt under federal or state law. A nonprofit hospital does not pay federal income tax. A state university does not pay property tax on its campus. A public housing authority does not pay tax on the buildings it manages. But all of these organizations use local services—police, fire, water, sewers, roads—that cost money to maintain.

The organization and the local government negotiate a PILOT agreement to bridge that gap. The organization agrees to pay a set amount each year, usually for a fixed term (5, 10, or 20 years). In return, the organization keeps its tax-exempt status and avoids the much larger bill it would face if it had to pay full property taxes.

For the local government, PILOT is imperfect but better than zero. A city might calculate that a university's property would generate $2 million in annual property taxes if it were taxable. The university and city might agree on a $500,000 annual PILOT payment instead. The city loses revenue compared to a taxable property, but it gains money it would not have received otherwise.

How PILOT Amounts Are Calculated

There is no single formula for PILOT. Each agreement is negotiated separately, so the amount depends on what the organization and the local government agree to. Some common approaches include a percentage of the property's assessed value, a percentage of the organization's revenue, a fixed dollar amount, or a formula that increases over time.

A hospital might pay 10 percent of what its property taxes would be. A university might pay based on the square footage of buildings it uses for non-educational purposes (like a bookstore or parking garage). A nonprofit might pay a flat amount that increases by 2 percent each year. The variation is wide because each negotiation reflects the specific property, the organization's finances, and the local government's needs.

Some states have guidelines or caps on PILOT. New York, for example, has a PILOT program for certain state-owned properties with formulas set by law. But most PILOT agreements are local deals with no state oversight, which is why amounts differ so much from city to city.

Where PILOT Money Goes

PILOT payments go into the local government's general fund or are sometimes dedicated to specific uses like schools or infrastructure. The money is public revenue, just like property taxes. A city council or county board decides how to spend it through the budget process.

Because PILOT replaces some of the tax revenue a property would have generated, it often goes toward the same services that property taxes fund: public schools, police and fire departments, road maintenance, water systems, and libraries. If a large nonprofit pays PILOT, residents benefit from better-funded services, though the benefit is indirect—you do not receive a check or a tax credit.

In some cases, a PILOT agreement includes a clause that dedicates money to a specific purpose. A university might agree to fund a scholarship program for local students, or a sports arena might contribute to neighborhood improvements. These are negotiated add-ons, not standard practice.

PILOT vs. Property Taxes: What Is the Difference

Property taxes are mandatory payments based on the assessed value of real estate. A homeowner or business owner must pay them or face liens and foreclosure. The amount is set by local tax assessors and is the same for all taxable properties in the same category.

PILOT is voluntary in the sense that it is negotiated, not imposed by law. The amount is not set by a formula—it is whatever the organization and the government agree to. And PILOT only applies to tax-exempt properties; taxable properties pay property taxes instead.

In practice, PILOT is often much lower than the property taxes would be. A property worth $50 million might generate $1 million in annual property taxes but only $300,000 in PILOT. This is why some communities argue that PILOT agreements shortchange local schools and services, while organizations argue that PILOT is a fair compromise that keeps them financially viable.

Common PILOT Payers

Universities and colleges are among the largest PILOT payers. A major research university might own hundreds of acres and dozens of buildings. The university is tax-exempt, but it negotiates PILOT with the city or county where it operates.

Hospitals and health systems also commonly pay PILOT. A large medical center is tax-exempt as a nonprofit but uses significant local resources. PILOT agreements with hospitals are common in cities with major medical centers.

Other PILOT payers include nonprofits that own office buildings or housing, public authorities that operate parking garages or transit systems, and sports teams or arenas that are owned by public authorities. Some states also pay PILOT to local governments for state-owned properties like office buildings or university campuses.

How to learn about Your Area Has PILOT Agreements

Your city or county assessor's office or finance department can tell you whether PILOT agreements exist in your area and how much they generate. Some local governments publish PILOT information on their websites or in annual budget documents.

If you want to know the details of a specific agreement—how much a university or hospital pays, how long the agreement lasts, or what it covers—contact your city council member or county supervisor. They can direct you to the right department or provide copies of the agreement.

Some communities publish PILOT data as part of transparency initiatives. Search your city or county name plus "PILOT" to see if public information is available. If not, you can request it under your state's public records law, though response times vary.

Frequently Asked Questions

Do I pay PILOT as a property owner or resident?

No. PILOT is paid by large organizations like universities and hospitals to local government, not by individual residents or homeowners. You do not pay PILOT directly. The money goes to your city or county to fund public services.

Can a PILOT agreement be changed or ended?

Yes, but usually only when the agreement expires. Most PILOT agreements last 5 to 20 years and then must be renegotiated. If an organization's circumstances change dramatically, a local government can sometimes request renegotiation, but this is uncommon and often leads to conflict.

Why do some organizations pay PILOT and others do not?

PILOT is negotiated case by case. An organization might pay PILOT because the local government requested it, because the organization wanted to build goodwill, or because it was a condition of receiving a zoning variance or other permission. Not all tax-exempt organizations pay PILOT, and not all local governments require it.

Is PILOT the same as a tax refund?

No. PILOT is not a refund of anything. It is a payment from an organization to a local government. Tax refunds are money returned to individuals or businesses after they have overpaid taxes. PILOT and tax refunds are unrelated.

Can PILOT payments be deducted from taxes?

If you are an individual, PILOT does not affect your personal taxes—you do not pay it. If you work for an organization that pays PILOT, the organization may deduct it as a business expense, but that is a separate matter from your own tax situation.