New Approach to PILOTs Could Change Nonprofits Finances
By Joe Giso
Nonprofits already dealing with severe budget constraints could be facing another headwind as local governmentsspurred by a recent Boston reportre-examine certain long-standing privileges for nonprofits, including the real estate tax exemption, and consider asking for payments in lieu of taxes, known as PILOTs.
Hospitals, universities, and other nonprofit landowners increasingly are seen as a source of potential revenue for municipalities facing their own budget shortfalls. In recent years, there has been a push to collect more from the largest nonprofits, including educational, medical, and cultural institutions where police, fire, sanitation, and emergency medical response services are more regularly rendered, as well as organizations that are expanding their real estate holdings or beginning new construction on existing property.
An April report by a Boston mayoral task force has turned up the heat in the states largest city and given a boost to pro-PILOT conversations in such municipalities as Worcester, Springfield, Lowell, and Framingham. An understanding of the latest developments in Boston will help nonprofits all over the state prepare for increased scrutiny.
The Boston task force suggested that the citys budget shortfall would be greatly alleviated if New Englands 16 largest educational institutions and 12 largest medical institutions paid standard commercial rates for real estate taxes, rather than offer a PILOT.
In addition, the task force noted the lack of uniformity in PILOTs. In the case of educational institutions, for example, PILOTs currently range from 8.24% to 0.08% of the taxable amount.
Following the reports publication, the mayors office announced it would develop a standard for valuing the contributions, in programs and payments, made by all major not-for-profit landholders in Boston. Area charities should take notice of this and other related developments that may significantly impact their tax-exempt status.
According to the City of Boston Assessing Departments publication, Payment in Lieu of Tax Program Guidelines, when an organization demonstrates its intention to expand, improve, replace or acquire a facility, the institution is sent a PILOT New Project Profile Form by the Assessing Department. The organization is asked to provide data regarding its property, revenue raising capability, intended use of the property, and other related information. The institution is also asked to submit its Project Master Plan.
Once the Assessing Department reviews the New Project Profile, its representatives begin discussions with the tax-exempt institution about the property expansion or development, an appropriate contribution amount, and various other terms to be incorporated into the PILOT agreement. After the PILOT agreement is approved by the organization, the Assessing and Law departments, and the mayors office, the contract is finalized and executed by all parties.
In 2008, the Massachusetts House of Representatives introduced HB 3168, which would have repealed the real-estate tax exemption for institutions of a certain size. Even though this legislation was never enacted, the sentiment behind ita desire for not-for-profits to contribute moreremains.
Thats why charities today should plan for what many see as inevitable: that they will soon be required to contribute more in many cities and towns, and will have to justify their exemption to elected state officials, local assessors, citizens, and media.
The National Council of Nonprofit Associations offers charities suggestions for dealing with the growing perception that institutions are not doing enough to contribute to the community. The suggestions, contained in its 2003 tool kit report, are as relevant today as when it was first published. Among them:
- Make sure all activities clearly fit within the organizations intended and expressed mission.
- Do not try to obtain exemption for property not used for the organizations charitable purposes.
- Seek donations from more individuals and entities. The larger an organizations tax base, the more politically unpopular it will be to tax the nonprofit.
- Increase the level of charitable services: the more services that compete with for-profit companies, the more unpopular, and less charitable, an organization appears.
- Develop relationships with local officials to build mutual trust between your organization and tax assessors and others.
- Negotiate PILOTs and fee payments now because proactively negotiating a voluntary payment is usually better than paying a flat tax rate.
Following recent reports, city task forces, and proposed legislative efforts, it is increasingly vital for nonprofits to deliver a compelling message that shows just how much they return to their communities in terms of programs and services, whether in direct dollars or indirect goodwill.
Joseph Giso. CPA, MST, is a director in CBIZ Tofias Not-for-Profit & Education Tax Practice. He can be reached at email@example.com or 617-761-0623.