Harvard will have to apply for permission with the Boston Redevelopment Authority and submit a plan.

Now, Harvard pays full commercial real estate taxes on its Allston land. Overall, the University pays $3.9 million in taxes to Cambridge and $2.2 million to Boston on commercial and some residential property.

"We don't want to accede to any form of quasi-tax on academic property," Grogan said.

Boston began asking for payments in lieu of taxes in the 1980s, and the process has now become standard.

"Anytime that any institution expands or has new development they are approached for payment in lieu of taxes," Rakow said.

There's no exact formula for determining the amount each non-profit must pay, but generally the costs cover city services like police and snow removal that the institution benefits from.

Thanks to the agreement, the Business School has now received city support for its Institutional Master Plan. "We get clarity and approval for the HBS master plan" through the agreement, Grogan said.

It has already built McArthur Hall, a large brick building looking onto the Charles toward Cambridge, to house students in the Business School's executive education program. Construction has begun on the new student center, which will house dining and social facilities and perhaps a post office, a game room, a pub, student club offices, University Health Services, a Coop and an auditorium.