Some of those criticisms were first reported in this blog: the letter overstates how much land Atlantic Yards developer Forest City Ratner actually controls and it fails to point out that, at least according to available evidence, the foregone property tax might be much less than the anticipated PILOT payment. Also, DDDB points out that the city and state overstate the amount of progress achieved on the project.
Closing the “loophole”
The chief counsel of the IRS has said the agency wishes to close a “loophole” that allowed use of PILOTs to pay back tax-exempt bonds for sports facilities, given that PILOTs--a fixed amount set for bond repayments--would not realistically replace the foregone property taxes, which should fluctuate over the years.
The city and state, who saw PILOTs for the Yankees and Mets stadiums each approved under what is known as a Private Letter Ruling (PLR), essentially want those PLRs to be grandfathered in, and that PILOTs be allowed to repay additional bonds for those stadiums. The city and state also want the OK for arena PILOTs, contending that plans for the arena were well under way when the stadium PILOT plans were approved in 2006.
A proposed IRS rule remains under discussion, a Treasury Department spokesman told the New York Observer last week.
At stake is a benefit --the difference between tax-exempt and taxable bonds--to arena developer Forest City Ratner worth an estimated $165 million on $800 million worth of bonds for a $950 million arena. The burden would fall mainly on federal taxpayers--hence the interest of the city and state in getting it passed. Should the “loophole” not be preserved for the arena, there might be increasing pressure on the city and state to increase local subsidies for the facility.
While DDDB’s concerns may be seen as more parochial than concerns about tax-exempt financing for sports facilities expressed by Rep. Dennis Kucinich (D-OH) and Assemblyman Richard Brodsky, the specific criticisms in the letter likely had not been raised previously in direct communication to IRS and the Department of the Treasury.
(Note that the DDDB letter could use some further proofreading.)
Warning of slant
The letter begins with cautions:
Assertions in the Ratner Arena Letter regarding the bonding for that arena leave out key pieces of information and make misleading and politically slanted arguments, and as such compel the IRS to conduct a review with a heightened level of scrutiny and due diligence.
...Since the time the project was initiated by the developer, ESDC has frequently been a conduit for information about the project obtained from the developer, not in it own possession, and not subject to its own independent verification. We hope that the IRS will not be accepting of assurances from those who are not carefully verifying that which they assert to you.
The PILOT deal
The city/state letter asserts that the developer will pay a semi-annual PILOT “not to exceed the full real estate taxes which the City would assess were the Arena Building Site and the Arena not exempt from such taxes and the LDC shall have the right to pledge such PILOT payments to service the LDC’s tax-exempt bonds.”
The DDDB letter warns:
However, the Ratner Arena Letter fails to explain that ESDC/LDC/FCRC will not peg the PILOT to any actual assessed foregone property tax, but rather will fabricate a number working backwards from their calculation of what is necessary to pay the debt service to pay towards the private arena facility.
What are property taxes?
The letter cautions:
According to information available, if the PILOTS cannot exceed the foregone property taxes—as stated in the Ratner Arena Letter—then the PILOTS will not come anywhere near paying off the $800 million in tax-exempt bond financing FCRC has stated it will pursue for its currently price $950 million arena. If the PILOT were really pegged to foregone taxes, the developer would be approximately $40 million dollars short of the roughly estimated $48 million annual bond payment. If those numbers are not precise, it is clear that FCRC would be substantially short of the roughly estimated annual bond payment if the PILOT were truly pegged to assessed property tax.
While the amount of foregone taxes actually remains unclear, there are clues that the total would be much less than the annual $48 million needed to pay off $800 million in tax-exempt financing. The letter cites AYR’s citation of a foregone property tax exemption of $11 million for Madison Square Garden, according to the Independent Budget Office.
The PILOTs for the Mets and Yankees stadiums have already been assessed, and match up with the bond repayments. The DDDB letter states:
We believe the assessed taxes for the Mets and Yankees are also made up numbers having nothing to do with foregone taxes. But the reason the Nets assessment is missing is not because the IDA and ESDC cannot estimate the assessed property taxes for the improved arena site (the arena is not under construction, has not broken ground, and currently cannot break ground), but rather because it is that only after FCRC calculates the arena construction cost and the tax-exempt bond financing it requires, will it be able to make up a PILOT value necessary to pay the debt service BUT call it “Annual Estimated Taxes” as in Exhibit D of their letter.
Were ESDC to provide for you today the estimated taxes, the developer would be boxed into a corner from which it would have trouble removing itself when the arena cost increases again as it is certain to do.
The DDDB letter argues out that the city/state letter “blatantly" states that Atlantic Yards has made significant progress, given that the city/state letter notes that “Substantial amounts have been spent on the Project,” including “$219 million prior to 2007 (of which $47 million related to the Arena).”
Clarifying the ambiguity, I noted in June that the money was spent by the developer, though actually, some was a pass-through of $55 million in city and state funds, as well.
The $47 million, DDDB points out, is a little less than 5% of the cost of the $950 million arena, arguing that the “expenditures are for needed basic infrastructure in the area, independently necessary for public purposes without regard to the proposed development.”
That’s what the city has said, but I’m not so sure that the money would be used for any development; the scale of the Atlantic Yards project likely requires a different amount of infrastructure.
DDDB challenges the chronology in the city/state letter, which, in attempting to illustrate “substantial progress,” offers this claim:
The Project commenced in 2003; the Arena is anticipated to be completed in 2010, and the balance of the Project is expected to be built over the next decade.
These claims are palpably, self-servingly and cynically false.... This is one example of why the IRS should be reviewing all the assertions in the Ratner Arena Letter with rigorous skepticism and rejecting many of them.
DDDB points out that, when the project was announced, the arena completion was set for 2006. Further, DDDB notes that the the letter fails to cite the State Funding Agreement that allows 6-plus years to build the arena after the close of litigation and delivery of property by emiment domain, 12-plus years to build the rest of Phase 1, and no timeline to build Phase 2, which would contain most of the project.
DDDB suggests that there's no obligation to allow PILOTS: The Arena is about luxury skyboxes and naming rights.... A non-binding promise to FCRC made four years ago with respect to an inchoate and since much altered project should not be overlaid to bootstrap FCRC into tax loophole benefits on the backs of federal, state and local taxpayers...
Of course, the city and state want tax-exempt bonds to save state and local taxpayers subsidies that federal taxpayers could provide.