Tuesday, October 21, 2008

New Treasury Department regulations would grandfather in tax-free bonds for Atlantic Yards arena

[updated 9:21 pm]
In a big boost for developer Forest City Ratner, worth perhaps $165 million, the U.S. Treasury Department has issued a regulation (also below) that would grandfather in tax-exempt bonds for the planned Atlantic Yards arena under a rule the Chief Counsel of the Internal Revenue Service (a bureau of the Treasury Department) called a “loophole.”

The Treasury Department, not heeding a request from Rep. Dennis Kucinich (D-OH) to delay action until his inquiries into sports facility finance issues are concluded, on Monday filed a new regulation that, in fact, would eliminate the loophole for new projects. However, a “transitional rule for certain projects substantially in progress” would allow tax-free bonds for the arena, as well additional tax-free bonds for new stadiums under construction for the Yankees and Mets, as requested by city and state economic development agencies.

(That’s my reading of p. 13 and p. 20-21 the document; Treasury Department spokesman Andrew DeSouza told me “we wouldn’t be able to comment on a specific taxpayer.” Let’s expect a statement soon from Forest City Ratner and an acknowledgement in the press that the arena is not nearly as doomed as some believed. The Observer, which got confirmation from an unnamed state official, puts the gain at perhaps $100 million.)

Reactions

"The IRS's attempt to favor Bruce Ratner to the tune of an estimated $165 million on the backs of federal taxpayers, for a project that does nothing for those taxpayers, is obscene and offensive in the midst of an historic $700 billion bailout and a national fiscal crisis," commented Develop Don't Destroy Brooklyn (DDDB) spokesman Daniel Goldstein. (DDDB claimed the regulation doesn't apply to the AY arena, though that's a minority view.)

Bettina Damiani, Project Director of Good Jobs New York, noted that part of the regulation seems written to help the three sports teams: "The mumbo jumbo language that will help the NYC applicants borders on the comical. Isn’t it interesting that in the midst of what some people have called a global economic crisis, officials found the time to give more tax breaks to rich sports franchises?"

"This is another example of powerful special interests getting access to public dollars under this administration," Assemblyman Richard Brodsky, a critic of the Yankees deal, told the AP. "The rules don't apply if you've got enough juice."

Forest City spokesman Joe DePlasco gave a statement to the Observer: “We are of course very pleased with the Treasury Department regulation. The tax exempt financing was always part of the plan for the development of the arena and the regulation released today acknowledges that. The regulation will help us move forward with a project that is critical to the on-going economic vitality of Brooklyn and the City.”

While tax-exempt financing (updated 8:12 a.m Wednesday: backed by PILOTs) was long part of the plan for the development of the arena, it certainly wasn't at first. The regulation, in effect, acknowledges projects for which tax-exempt financing had been planned, but it doesn't say anything specific about Atlantic Yards, nor anything about financing being "always part of the plan."

Potential snags

Forest City Ratner has said it expects $800 million in triple (city/state/federal) tax-exempt bonds for the $950 million arena, but even with the new regulation, there are some potential snags.

For one thing, the new regulation requires that bonds for the project be issued on or before December 31, 2009. While major litigation should be concluded by then, giving the developer a cushion, it’s possible that some new legal challenge might emerge.

Also, should the pending challenge to the project’s environmental impact statement (EIS) be successful, the courts could require a new such EIS—or declare the finding of blight illegitimate.

"We will consider all options if Ratner attempts to have issued a tax-exempt bond under this rule," Goldstein said.

Another potential roadblock involves whether city officials have “gamed” tax assessments for the arena, inflating them to be commensurate with the large PILOTs (payments in lieu of taxes) needed to pay off the arena bonds.

Kucinich, Chairman of the Domestic Policy Subcommittee of the House Committee on Oversight and Government Reform, has scheduled a hearing Friday to look into charges that the city did “game” such assessments for the new Yankee Stadium. The new regulation may well be under discussion, as well.

Can the regulation be challenged? Treasury Department spokesman DeSouza said, "Again, I want to emphasize that there was a long comment period for the proposed regulations when they were issued in October 2006. We took all of the comments into consideration when moving forward with the final regulations. I'll also note that the area in the tax code that deals with PILOTs is well established--back to the 1970s, and the tax code provides us very broad regulatory authority. That said, like any other piece of regulation or law, should someone have problems with the final regulations they have the ability to go to court."

When it started

The new regulation was promulgated on October 19, 2006, after the IRS—reluctantly, officials have said—provided private letter rulings (PLRs) allowing the issuance of fixed PILOTs (payments in lieu of taxes) for the new stadiums for the Mets and Yankees.

While property taxes typically fluctuate, the PLRs allowed fixed PILOTs, which make it much easier to sell bonds. (The new regulation, while it allows for some adjustment of PILOTs, requires them to more closely resemble taxes.)

“Substantially in progress”?

In agreeing to allow fixed PILOTs for the Atlantic Yards arena, the Treasury Department essentially agreed with arguments from the New York City Industrial Development Agency (IDA) and the Empire State Development Corporation (ESDC) that the Atlantic Yards arena was “substantially in progress” by October 19, 2006—surely a debatable issue.

DDDB's Goldstein commented, "It is clear that the IRS has written the 'Transitional rule for certain projects, substantially in progress,' in an attempt to specifically qualify Ratner for the tax-exempt bond, but that attempt fails as it does not apply to Ratner; no official action was taken on his arena prior to the IRS's Oct. 19, 2006 date.

City/state request

In the 5/8/08 letter to the Treasury Department, the city and state agencies had said that the proposed 120-day transitional period to complete ongoing transactions was insufficient:
Finally, the new regulations should not apply to bonds issued to finance a project that was described in a resolution, memorandum of understanding, or other preliminary approval adopted by a governmental entity prior to October 19, 2006. As we discussed, the Atlantic Yards project fits into this last category. The bonds for the Atlantic Yards project are expected to be issued in 2008, although there are several ongoing litigation appeals and there could be additional litigation-related delays.

Along with the deadline for issuing the bonds, the new regulations provide two other requirements for projects “substantially in progress”:
(i) A governmental person (as defined in §1.141-1) took official action evidencing its preliminary approval of the project before October 19, 2006, and the plan of finance for the project in place at that time contemplated financing the project with tax-exempt bonds to be paid or secured by PILOTs.
(ii) Before October 19, 2006, significant expenditures were paid or incurred with respect to the project or a contract was entered into to pay or incur significant expenditures with respect to the project.


Matter of debate

Whether Atlantic Yards was “substantially in progress” as of October 19, 2006, the date of the proposed regulations, remains a matter of significant debate. The project’s Draft Environmental Impact Statement was issued in July 2006, at the same time the appointed board of the Empire State Development Corporation (ESDC)--a governmental entity, though not an elected one--approved the General Project Plan. The project was formally approved by the ESDC board, however, only in December 2006.

DDDB earlier pointed out that the $47 million related to the Arena spent before 2007, as cited in the city/state letter, is a little less than 5% of the cost of the $950 million arena, and that the “expenditures are for needed basic infrastructure in the area, independently necessary for public purposes without regard to the proposed development.”

Timing issues

DDDB earlier also challenged the chronology in the city/state letter, which, in attempting to illustrate “substantial progress,” offered 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.

DDDB argued:
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.

Indeed, the developer now says that the arena would open in 2011, though 2012 is a more likely best-case scenario. Few believe that the project could be completed in a decade.

Indeed, as DDDB earlier pointed out, when the project was announced, the arena completion was set for 2006. DDDB also noted that the city/state 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 eminent 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.

2008 Treasury Regulations on PILOTs

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