Thursday, September 10, 2009

IBO: increase in land assessments insufficient for arena PILOTs

The New York City Independent Budget Office (IBO), in its new report, The Proposed Arena at Atlantic Yards: An Analysis of City Fiscal Gains and Losses, points out that the New York City Department of Finance has steeply increased assessments on properties destined for the arena block, especially the vacant land.

I've previously raised questions about this issue, and the IBO does not back up those concerns, though it raises new ones.

The IBO does not conclude that that the increased exemptions are fishy--I think they still deserve scrutiny--but does say that the foregone property taxes would not be sufficient to generate PILOTs (payments in lieu of taxes) to pay off the arena bonds.

The implication is that either the assessments would have to be increased--or the total amount of bonds lowered.

From the report

The IBO states:
Even if Forest City Ratner is able to beat the deadline before its grandfathered approval to use the now-banned payment in lieu of taxes, or PILOT, financing structure expires, the arrangement may face scrutiny based on the amount of the PILOT. If a PILOT is to be used for debt service, it cannot exceed the regular property tax that would apply if the property were not tax-exempt. Concern that a PILOT be high enough to cover the debt service can result in the unusual situation of a property owner hoping for a higher assessment.

In the case of the new Yankee Stadium, the city’s Department of Finance’s assessments—particularly the land portion of the assessment—proved controversial and prompted a Congressional hearing because they were significantly higher than other estimates, including one by independent appraisers hired by the city for other purposes.

Turning to Atlantic Yards, IBO estimates that a typical property tax assessment would result in a PILOT that falls short of the payments needed to cover debt service in the early years of the project. Assuming the arena is assessed using a cost methodology, taking into account hard and soft construction costs and actual land acquisition costs, IBO estimates that in the early years after the arena opens, a typical property tax assessment would yield a tax bill of about $40 million annually. (If the developer took advantage of the as-of-right Industrial Commercial Abatement Program, the bill would be less than $10 million annually for more than a decade). In contrast, IBO’s estimate of the annual debt service payment for the arena’s tax-exempt bonds—assuming a 7.0 percent interest rate, 30-year term, and level payments—is $55 million.

Although the Department of Finance has sharply increased its assessments on land (particularly vacant land) throughout the city over the past year, the increases elsewhere in the city are just a fraction of those at the site. Citywide, the average increase in assessments on vacant land from 2009 to 2010 was 63 percent; for Brooklyn as a whole, vacant land values grew by 100 percent. Over the same period, the aggregate assessment increase for the three tax blocks that will be at least partially covered by the arena at Atlantic Yards has grown by 238 percent, while the assessment on the arena site’s vacant land has risen 702 percent—an eight-fold increase.

Despite the steep rise in assessments for Atlantic Yards, IBO estimates the increases this year bring the city’s current land assessments for the arena blocks more closely in line with sales prices. Even at the current assessment levels, however, we project that PILOTs generated by the arena would still fall short of the payments needed to finance the arena’s debt service
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(Emphases added)

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