Wednesday, October 07, 2009

Forest City Ratner's 2005 PILOTs dodge and the IBO's 2009 recognition that tax-exempt status did not drive a higher railyard price

In its 5/26/05 presentation (above) to the City Council, Forest City Ratner claimed it would voluntarily pay taxes on the Atlantic Yards arena, even though the building would qualify for an as-of-right tax abatement under ICIP, or the Industrial and Commercial Incentive Program (now ICAP).

That sounds civic-minded. From a corporate perspective, it almost sounds foolhardy: why would a profit-seeking corporation voluntarily pay taxes when it could get away with not paying them?

Taxes vs. PILOTs

Well, because they're not actually taxes. And because the savings are much greater if Forest City voluntarily pays such "taxes."

A payment in lieu of taxes (PILOT) is not a tax payment. The PILOT wouldn't go into city coffers. Rather, it would be used to fund arena construction.

Why go through this Rube Goldberg exercise? Because by maintaining the site as tax-exempt, but having voluntary PILOTs, the city and state allow for the issuance of tax-exempt bonds to build the arena.

Forest City Ratner would save nearly $200 million on tax-exempt bonds, with almost all of the loss absorbed by the federal treasury, not the state or city, according to the New York City Independent Budget Office.

(Sports economist Andrew Zimbalist, in his 2004 report for Forest City Ratner on Atlantic Yards, ignored his 2003 observation that there is no justification for the federal government to subsidize a "financial tug-of-war" between cities.)

Tax exemption raises land value?

The presence of the tax exemption, said the New York City Independent Budget Office (IBO) in its September 2005 report on Atlantic Yards, should have increased the price of the Metropolitan Transportation Authority land destined for the arena:
IBO’s estimate of new property tax revenue lost to the arena PILOT does not include a loss of property taxes for the MTA land that would be part of the arena building foot print. The city currently receives no tax payment from the MTA for the rail yard because the MTA, like other state entities, is exempt from local property tax. Under the MTA’s Request for Proposals, any developer acquiring the development rights to the site would probably enter into a long-term lease, leaving the MTA in place as the owner. Therefore, the property would likely remain off the city’s tax roll, resulting in no impact on the city budget. Indeed, the MTA has an incentive to make a deal that maintains the tax exemption in order to maximize the price it receives for the development rights.
(Emphasis added)

As I wrote in June 2008, that hardly happened, given Forest City Ratner paid $100 million in cash on property appraised at $214.5 million, and it expected tax breaks worth $165 million--not to mention naming rights, reported at $400 million.

IBO changes tune

The IBO now apparently agrees, perhaps having observed the MTA's willingness to further accommodate Forest City Ratner by requiring only a $20 million payment upfront, with the rest of the payment coming over 22 years at a generous 6.5% interest rate.

So, in its September 2009 report, the IBO revised its conclusion, adding up $146 million in lost property taxes to the city:
This estimate of the cost to the city of the arena’s property tax exemption is considerably larger than we estimated in 2005. The MTA portion of the land is currently tax-exempt because the land is publicly owned. IBO’s latest estimates assume that if FCRC or any alternative developer operating solely with as-of-right benefits purchased the rail yard from the MTA, the exemption would expire. In our 2005 report we had assumed that the exemption would continue through a leasing arrangement—even if the arena site were transferred to another developer—because that would maximize the proceeds for the MTA. It is clear that the MTA’s ability to maximize its return from property sales has been constrained. Moreover, the latest modified project plan stipulates that FCRC must pay the equivalent of full property tax to the city for all but the arena portion of the project.
(Emphasis added)

Constrained is a euphemism, perhaps, to refer to a deal in which neither private bidders nor government overseers fostered competition.

Yankees vs. Nets

Sports facility expert Neil deMause explained that the city's financing scheme for new baseball stadiums and the arena was questioned by tax experts but did pass legal muster.

And that led to situations, as he explained, like this: "You had this City Council Finance Committee hearing for the Yankees, where the Yankees were simultaneously saying This isn’t private money, this is tax money, so therefore we can use tax-exempt bonds, and you should go ahead with this project because it wouldn’t require any tax money. And nobody questioned them on it."

Regarding Atlantic Yards, it seems, Forest City Ratner was suggesting it was paying taxes.

Brodsky's critique

Assemblyman Richard Brodsky has gone over this issue again and again with city officials, asserting that the payments to build sports facilities are a city subsidy. So far, however, he's focused on the already-built Yankee Stadium, unwilling to insert himself into a controversy where his advocacy might make more of a difference.

To get the Yankee Stadium bonds approved, as Brodsky pointed out at an Assembly hearing last January, the city told the Internal Revenue Service: “The city has determined to use its property taxes to finance the construction and operation of the stadium.”

Sparring with Pinsky

Brodsky and Seth Pinsky, who heads the New York City Economic Development Corporation, sparred themselves into a stalemate.

RB: Do you recall representations made by the IRS by the IDA as to whether or not the money that is going to repay bondholders is taxpayer money or not taxpayer money?

(The IDA, or Industrial Development Authority, issued the bonds for the stadiums, while a subsidiary of the Empire State Development Corporation would issue bonds for the arena.)

SP: The substance of your question is--

RB: No, no--

SP: --No, I’m going to answer my question the way I want to answer it. You asked the question; I heard what you asked.

RB: Then answer if you want but don’t characterize the substance--

SP: That’s fine, I’m telling you that I think--I don’t think you can tell me what to think--I think that the substance of your question is: is the PILOT structure that we described a net payment from the city to--

RB: --No, no.

SP: --I’m going to answer it this way anyway. Is it a payment from the city to the IRS... The facts are these, the way this structure works is that, in order to make the bonds that are financing the stadium tax-exempt, they have to be backed by payments of generally applicable taxes or payments in lieu of generally applicable taxes, which is the case here, PILOTs, so the simple answer to your question is yes. The payments are payments in lieu of taxes to the city. And those payments are in turn being used to pay the bondholders. But I think that it’s very important to look at effectively what is happening here.

RB: Can you explain 'effectively,' so I understand what you mean by 'effectively'?

SP: Why don’t you let me finish and you can tell me if you don’t understand. Effectively what is happening here is that the city currently into its general funds receives nothing from the New York Yankees and the stadium. We also receive nothing from the property where new stadium is being constructed. The reason we don’t at the current stadium is that it’s city owned. The reason we don’t at the new stadium is that it used to be parkland. After the project is completed, we will be paid PILOTs… by the Yankees. Those payments will not go to the city’s general fund, but instead will go to repay the bonds. So effectively, the city will be in exactly the same position with respect to real estate taxes, both before and after this transaction, that is, it has not received money in real estate taxes from the Yankees and will not receive money from real estate taxes from the Yankees.

The AY contrast

In the case of the Atlantic Yards arena, should it be built, the city would take a loss regarding taxes on the arena block, given the presence of taxpaying homes and businesses on part of the site. Presumably city officials would argue that the arena, and the project as a whole, are worth it.

Then again, the IBO says the arena would be a loss for the city.

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