Harvard sketched the outlines of a payment deal with Watertown yesterday in an attempt to quell fears that the University's tax-exempt status would cost the town millions in vital revenue if Harvard purchases Arsenal on the Charles, a Watertown business complex.

The University agreed to waive tax-exemption on the property until 2003, and offered to offset lost revenue--at least in part--if it put the site to tax-exempt use.

The offer came in a letter from Paul S. Grogan, Harvard's vice president for government, community and public affairs, to Watertown Town Manager Michael K. Driscoll. The letter responded to a town meeting last week during which Watertown residents voiced concerns about the financial impact of the deal.

Driscoll says Watertown depends on revenues from the Arsenal site for $3.5 of its $15 million annual budget, and will be unable to proceed with many capital projects--such as school and library renovations and road repairs--if the site becomes tax-exempt.

"This is a big hit for a small community," said John S. Airasian, chair of the civic group that developed the Arsenal from a 200-year-old military base into a corporate campus for high-tech and consulting firms.

Watertown spent 12 years rebuilding the Arsenal to broaden its tax base, according to Airasian.

"Watertown has a lot of its hopes and dreams hung on the revenues from this site," Airasian said.

Grogan acknowledged that the revenues were vital to the town.

But, he said, "Harvard is not about to create a fiscal emergency for Watertown."

Commercial tenants currently occupy 80 percent of the Arsenal under long-term lease, he said, and will continue to pay taxes to the town.

Grogan also offered to enter into a Revenue Protection Agreement with the city which "would have as its goal a long-term protection for tax revenues from the Arsenal, even if Harvard eventually chooses to place more of the property in tax-exempt use."

Harvard already has similar agreements with Cambridge and Boston, though these agreements only partially reimburse the cities for lost tax revenues.

Harvard has no legal obligation to reimburse the town, Grogan said in the letter.

Town officials said they appreciate the letter's intent, but are still cautious about Harvard's prospective purchase.

"The letter clearly hasn't quieted any issues," Driscoll said. "With all due respect, the community's concerns are long term, and long-term isn't until fiscal year 2003."

Watertown's Town Council agreed two weeks ago that Harvard should pay full taxes for as long as it held the site, and the lack of specifics in the letter has left many residents and officials wary of Harvard's assurances.

"We are prepared to go along with this, but it's all in the details of that agreement. We won't be able to proceed until we know exactly what those terms are," Airasian said.

Watertown officials have no legal control over the sale and development of the property, Driscoll said, but will continue to meet with Grogan to work out the long-term details of an agreement with the city.