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After some extensive testing over the weekend without internet plugged in, just playing over our intranet, I have confirmed the lag still exists without any internet connection, so up/down speed is out of the picture. I believe it to be my router or IP setup on the server. I checked the link...

Currently, the server will rubberband players for ~2 seconds on the average of twice per minute. The rubberbanding affects block updates, entity location and chest opening/closing. The actions do not freeze, though, as mobs will still hit you and your player will appear where you were going...