Skip to main content

Another potential snag for AY arena financing: foregone property tax may severely cap tax-exempt bonds

Even if the Empire State Development Corporation (ESDC) and the City of New York succeed in getting tax-exempt financing for the Atlantic Yards arena under the more lenient rules that applied to the new Yankees and Mets stadiums, bonding for the arena faces another potential snag: tax-exempt bond payments, given the cost escalation of the arena, threaten to significantly exceed the amount of foregone property tax, which would cap the bond payments.

If so, that would limit the amount of tax-exempt bonds issued by the state on behalf of the $950 million arena. That suggests that developer Forest City Ratner, which aims to have $800 million in tax-exempt bonds issued--at a savings of an estimated $165 million over taxable bonds--might have to accept a smaller amount of tax-exempt bonds.

The more taxable bonds, the more the deal would cut into the developer’s profit. Thus, should Atlantic Yards proceed, the city’s tax assessment on the arena site will deserve a close look, given that the assessment would regulate the amount of tax-exempt bonds issued and thus the amount of payments in lieu of taxes (PILOTs) used to pay back the bonds.

That figure remains unknown, but if it bears any relation to the foregone property tax for Madison Square Garden, it might be a big problem for Forest City Ratner. Tax assessments, of course, are subject to many factors, so it’s also possible a revised assessment might line up neatly with the amount of tax-exempt bonds that Forest City Ratner ultimately seeks.

ESDC aims to maximize tax-exempt bonds

“Our goal is to maximize the amount of tax-exempt bonds,” ESDC spokesman Warner Johnston stated by email. “We have not determined the dollar amount of the annual PILOT payment. However, PILOT payments will not exceed full taxes, which is based on the assessment.”

[Note the comment below, which suggests the term "full" implies the absence of various exemptions, and thus potentially a significant sum.]

The assessed value of the premises will be determined by the city assessor, he noted, and that has not yet occurred. “Consequently, the maximum amount of tax-exempt financing that is permissible may be impacted by the assessment,” he said.

Bettina Damiani of the watchdog group Good Jobs New York has taken a close look at the Yankee Stadium project; she said that the expected PILOT payments for the arena and the stadiums should have been announced “long ago--when a project is proposed.”

She acknowledged that numbers change regarding such projects, but they can be updated. “People want to be engaged in these large projects,” she said. “It makes it easier to think it a done deal when people on the ground aren't given figures they should have.”

Looking at the rules

Let’s recap. Tax-exempt financing for stadiums, according to a 1986 law, appears limited to bonds backed by general governmental revenues, such as a sales tax. Such a plan may not be popular with voters, so lawyers for the city, along with the three New York-area teams, came up with a more creative idea: the tax-exempt bonds would be bonds instead backed by PILOTs.

Why PILOTs? Because the land is tax-exempt. So the team owners get to pay off the arena by paying off bond payments that would not be larger than the property tax on the site that would be assessed were the property not tax-exempt.

That’s the reason that Yankee Stadium and the Atlantic Yards arena would be nominally publicly-owned--it’s another discount for the AY developer, since Forest City Ratner has to pay only PILOTs rather than the combination of bond payments and property taxes.

The Internal Revenue Service (IRS), which apparently had not agreed to such PILOT deals before, claims that it was compelled to do so regarding the Yankees and Mets in 2006 because of 1997 regulations. Rep. Dennis Kucinich, D-OH, chair of the Domestic Policy Subcommittee of the House Committee on Oversight and Reform, disagrees strenuously.

Narrowing the regulation

However, to close what the IRS chief counsel admits is a “loophole,” the IRS in 2006 proposed narrowing--but hardly eliminating--the opportunity to use PILOTs to pay off tax-exempt bonds. Rather than allow the PILOTs to be a fixed sum--which makes it much easier to sell the bonds, since bond buyers seek predictability--the PILOTs would have to be keyed to fluctuating property tax assessments.

In other words, they really would have to look like payments in lieu of taxes.

The city and ESDC oppose such a limit. They are currently lobbying to get grandfathered in both the Yankees and Mets deals, given that both teams want to sell additional PILOT bonds this year, as well as the Atlantic Yards arena, given that plans were in process before the revised regulation was proposed.

The regulation was supposed to be finalized early last year, but Kucinich’s subcommittee held two hearings relating to the issue, and lobbying continues. On May 23, Kucinich asked the IRS and Treasury Department to desist from approving any more sports facility deals based on PILOTs, pending further clarification of their policies.

Damiani warned that the financing plans in New York may become a national issue. “Is this going to be the straw that breaks the camel's back on public financing?” she mused. Unless Congress fixes the rules, “what prevents all the stadiums in the future from hiring the Yankees’ attorneys?”

The Yankee Stadium example

For some $943 million in tax-exempt bonds were issued by the city, the Yankees would make PILOT payments of $56.7 million. (See chart at right, from page marked 6 of this 23MB+ PDF. Click on graphic to enlarge.)

How would those numbers relate to property taxes? In a 4/25/06 analysis, the Independent Budget Office estimated the projected initial property tax bill for the new Yankee Stadium to $39.6 million.

Some two weeks earlier, in testimony before the City Council, the IBO noted:
The solution devised by the project’s planners is a payment in lieu of taxes, which according to the Industrial Development Agency documents will be calculated in a manner similar to the city’s regular property tax. (The stadium will actually be exempt from property tax because it will be publicly owned and leased to the Yankees, rather than being owned outright by the Yankees, in part to help qualify the deal for tax exempt financing.)

Given the large annual payments needed to service the $866 million of tax exempt bonds proposed in the financing plan, it is not clear that a property tax-based PILOT would be sufficient. Assuming an interest rate of 6.5 percent, annual debt service payments for 30 year, level payment bonds would be about $66 million. Based on the $736 million estimated construction cost for the new stadium plus the existing land value, IBO estimates that a regular property tax bill would be about $37 million (before exemptions)—considerably below the annual debt service payments.

(Emphasis added)

Note that the amount of tax-exempt bonds has already gone up to $943 million, a nearly nine percent increase, so we can assume that the property tax bill would have risen from $39.6 million to well over $40 million.

But does it reach $56.7 million, the amount of the PILOTs? That’s a question that should be asked at the State Assembly hearing planned on these stadium deals.

The Atlantic Yards arena example

Extrapolating from the amount of bonds and the PILOT payments for the Yankees, a similar 6% ratio suggests annual PILOT payments on $800 million in tax-exempt Atlantic Yards arena bonds would be about $48 million.

In 1/7/08 testimony to the City Council Finance Committee, Theresa Devine of the Independent Budget Office stated that owners of Madison Square Garden, who benefit from a full property tax exemption, were saving $11 million in the current fiscal year.

That’s a lot less than $48 million.

In its September 2005 report on Atlantic Yards, the IBO estimated the value of the Atlantic Yards arena at $100 a square foot, compared to Madison Square Garden at $125/sf. Based on the $100 figure, the IBO had calculated the foregone property tax at the Atlantic Yards arena at only $3.85 million.

The value of Madison Square Garden, IBO’s George Sweeting told me in a recent email, is now calculated for tax purposes at $250/sf. So even if doubled to $200/sf, the foregone property tax for the AY arena would be less than $8 million a year--a reasonable ratio if the figure for Madison Square Garden is $11 million.

Sweeting noted that the agency’s 2005 analysis “was based loosely on the Department of Finance’s official market value for MSG at the time, discounting for differences in land value. It is probably true that neither the MSG value assigned by the city, nor the AY arena value estimated by IBO, reflect the actual cost somebody would pay to buy the land and build a new arena. We based our value on an assumption that whatever the Finance Department is doing when valuing MSG, they would do for AY.”

If so, there would have to be a lot more taxable bonds than currently contemplated.

Will PILOTs track property tax?

In a footnote to its September 2005 report on Atlantic Yards, the IBO noted:
Under IRS regulations, there are a number of tests concerning the use of revenue from sports facilities to back private activity bonds. Essentially, in order to qualify for tax-exempt status, debt service can be paid from arena-generated revenue only if it is collected as payment of an existing tax or tax-equivalent (that is, a PILOT). This seems to imply that the PILOT payments cannot be significantly discounted or increased from the regular property tax amount or they will not pass the IRS test.

So what would be the regular property tax amount for the AY arena? That issue becomes ever more worthy of scrutiny as the question of PILOTs for Atlantic Yards emerges. How can the foregone property tax--which would seem to be less than $10 million--match up with PILOTs that could well exceed $40 million?

Then again, maybe there’s some wiggle room to calculate what ESDC said was “full taxes.” Would some other calculation be added to suggest that the foregone property taxes for the AY arena would be larger than those forgone by Madison Square Garden, which, while older, is somewhat larger and clearly located at a more valuable intersection?


  1. I think there is a basic misunderstanding of what others have said and how pilots and other tax exemptions work.
    PILOTS payment in lieu of taxes are the full property tax that would be payable on the property without consideration of any tax exemptions program such as J-51 or any other reduction available. So the 11 million dollars that would be payable on Madison Square Garden assumes the "normal" tax reductions available to others would be used-not the special no taxes that MSG pays. But I do believe that for PILOT purposes the unreduced property tax is available to fund the bonds and this amount is much more than the 11 million that MSG would be liable to pay.

  2. “Our goal is to maximize the amount of tax-exempt bonds,” ESDC spokesman Warner Johnston stated by email.- (This is a quote from the above post.)- Let me repeat: “Our goal is to maximize the amount of tax-exempt bonds,” ESDC spokesman Warner Johnston stated by email.

    “Our goal is to maximize the amount of tax-exempt bonds!” How out of control is this process? It seems as if this public official is forgetting a lot. He is obviously forgetting that every dollar `maximized’ with this kind of subsidy doesn’t go anywhere except straight into Forest City Ratner’s pocket: Nothing goes to the public- The way that ESDC is negotiating subsidies with Ratner actually precludes the negotiation of any tittle or jot back to the public. Such maximization doesn’t even mean that Ratner will spend more money on construction or otherwise inject it into the economy.

    For more on ESDC’s predilection to negotiate for Ratner rather than for the public see the comment at:
    Rather than serving the public, ESDC likes to put itself in service toward setting Ratner up as a monopolistic juggernaut.

    Michael D. D. White
    Noticing New York


Post a Comment

Popular posts from this blog

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…

Is Barclays Center dumping the Islanders, or are they renegotiating? Evidence varies (bond doc, cash receipts); NHL attendance biggest variable

The Internet has been abuzz since Bloomberg's Scott Soshnick reported 1/30/17, using an overly conclusory headline, that Brooklyn’s Barclays Center Is Dumping the Islanders.

That would end an unusual arrangement in which the arena agrees to pay the team a fixed sum (minus certain expenses), in exchange for keeping tickets, suite, and sponsorship revenue.

The arena would earn more without the hockey team, according to Bloomberg, which cited “a financial projection shared with potential investors showed the Islanders won’t contribute any revenue after the 2018-19 season--a clear signal that the team won’t play there, the people said."

That "signal," however, is hardly definitive, as are the media leaks about a prospective new arena in Queens, as shown in the screenshot below from Newsday. Both sides are surely pushing for advantage, if not bluffing.

Consider: the arena and the Islanders can't even formally begin their opt-out talks until after this season. The disc…

Skanska says it "expected to assemble a properly designed modular building, not engage in an iterative R&D experiment"

On 12/10/16, I noted that FastCo.Design's Prefab's Moment of Reckoning article dialed back the gush on the 461 Dean modular tower compared to the publication's previous coverage.

Still, I noted that the article relied on developer Forest City Ratner and architect SHoP to put the best possible spin on what was clearly a failure. From the article: At the project's outset, it took the factory (managed by Skanska at the time) two to three weeks to build a module. By the end, under FCRC's management, the builders cut that down to six days. "The project took a little longer than expected and cost a little bit more than expected because we started the project with the wrong contractor," [Forest City's Adam] Greene says.Skanska jabs back
Well, Forest City's estranged partner Skanska later weighed in--not sure whether they weren't asked or just missed a deadline--and their article was updated 12/13/16. Here's Skanska's statement, which shows th…

Not just logistics: bypassing Brooklyn for DNC 2016 also saved on optics (role of Russian oligarch, Shanghai government)

Surely the logistical challenges of holding a national presidential nominating convention in Brooklyn were the main (and stated) reasons for the Democratic National Committee's choice of Philadelphia.

And, as I wrote in NY Slant, the huge security cordon in Philadelphia would have been impossible in Brooklyn.

But consider also the optics. As I wrote in my 1/21/15 op-ed in the Times arguing that the choice of Brooklyn was a bad idea:
The arena also raises ethically sticky questions for the Democrats. While the Barclays Center is owned primarily by Forest City Ratner, 45 percent of it is owned by the Russian billionaire Mikhail D. Prokhorov (who also owns 80 percent of the Brooklyn Nets). Mr. Prokhorov has a necessarily cordial relationship with Russia’s president, Vladimir V. Putin — though he has been critical of Mr. Putin in the past, last year, at the Russian president’s request, he tried to transfer ownership of the Nets to one of his Moscow-based companies. An oligarch-owned a…