Harvard University

THE COVID-19 pandemic may have receded, but the financial tsunami it spurred is out at sea and gathering strength. It will soon hit our shores. That is not hyperbole, but rather the main finding of a report authored earlier this year by the Boston Policy Institute. The culprit: declining commercial real estate values.

The dynamics are well known, but to explain briefly: commercial real estate leases are often long—even 10-year leases are not unheard of. In short, many commercial real estate operations are still profitable because tenant businesses signed leases before 2020 and are still paying rent based on pre-2020 lease rates. But, as a good share of office work appears to be remote for the long haul, when business leases renew—or, better said, don’t renew—commercial property becomes less valuable.

In coming years, this will greatly reduce the amount of property tax the city of Boston collects. If the Boston Policy Institute’s estimates are correct, by 2029 commercial property tax revenue will fall $250 million from $1.6 billion today to about $1.35 billion. Tax shortfalls can lead to cuts in services, which is not good for the city and its residents. What choices do city leaders have?

The choices floated in the report are not good ones. One is to raise residential property tax rates by 25 to 30 percent. That’s the amount that would be required to fully make good on the expected lost commercial property tax revenue. Another option is to raise commercial property tax rates. Mayor Wu proposes to do this. But raising rates to make up for reduced commercial property values poses its own long-term risks.

Is there another way out? There is. It’s not sexy and it’s not fancy. It involves tapping into two of the city’s leading industries—nonprofit hospitals and universities. Of course, nonprofit institutions are exempt from property taxes. Since 2011, however, in the city of Boston, large nonprofits with more than $15 million worth of property have been expected to make “voluntary” contributions in lieu of property taxes. This goes under the very wonky name of “payments in lieu of taxes,” or PILOT.

According to a formula developed through a task force convened by former mayor Thomas Menino, with participation from area hospitals and universities, institutions committed to make annual cash payments equal to one-eighth of what they would have to pay were they paying full commercial property tax rates (matched by “community benefits” of a like amount).

Since this is not a tax, payment is voluntary, but institutions were expected to act in good faith on their commitments. Some have; many have not. In fiscal year 2023, if institutions had made their current requested PILOT payments, the city would have received $61 million; instead, it only got $35 million. Even this, however, understates the shortfall, because that $61 million figure is based on out-of-date fiscal year 2009 property assessment values, undertaken during a recession.

The city auditor conducted a new assessment in fiscal year 2022. The more up-to-date figures, if implemented, would result in a significant increase in the amount currently asked—meaning that collecting full PILOT payments could contribute well over $86 million a year to city coffers. In other words, about $50 million more than currently collected, if all eds and meds would chip in at one-eighth the rate their for-profit counterparts pay.

To be clear, we are aware that $50 million will not make up the city’s looming shortfall. On the other hand, the money will cut the size of the shortfall without raising either business or residential tax rates. We take that to be a good thing and creates an additional reliable revenue stream.

It is also in keeping with the idea that eds and meds are anchor institutions, with a responsibility to the community. Anchor institutions recognize their future is linked to the communities beyond their walls. Many Boston hospitals and universities claim to be anchor institutions. Being an anchor institution—whether it’s a hospital, university, museum, sports franchise, or corporation—can involve efforts such as supporting local businesses, creating new health or educational services, or making capital investments in the community.

Many of Boston’s large hospitals have met their current PILOT commitment, while the major educational institutions lag behind. Mayor Michelle Wu could follow in the footsteps of Menino, who in tough fiscal times brought institutions in to be part of the solution. Wu could ask these institutions to invest in the future of the city, and commit to true long-term partnership with the city. It is not a silver bullet, but an important pillar of long-term stability for the city.

Steve Dubb is a volunteer for the Boston UJIMA Project, which bills itself as a democratically governed investment fund, and author of the Road Half Traveled: University Engagement at the Crossroads. Enid Eckstein is a co-chair of the PILOT Action Group, a community coalition advocating for PILOT reform.