Sunday, February 22, 2015

For the Barclays Center, "Actual Taxes" are $41 million (and not paid)

Here's a question: what are the property taxes associated with the Barclays Center?

Answer: 0.

Here's another way to phrase the question: what are the Actual Taxes?

Answer: $41 million.

Does the arena pay those Actual Taxes?

No.

"It's Orwellian," sort of.

Drilling down

See, to enable the arena, a complicated series of transactions, with a fig leaf of public ownership, allowed the issuance of tax-exempt bonds, which have a lower interest rate. (The bondholders don't pay tax on interest received, so they accept a lower rate.)

The tax-exempt financing on $511 million of arena bonds saves arena developer Forest City Ratner and partners perhaps $150 million, with the hit going mostly to federal taxpayers.

As explained in the Atlantic Yards 2009 Modified General Project Plan, Empire State Development Corporation owns the land, and a subsidiary, the Brooklyn Arena Local Development Corporation (BALDC) owns the arena, thus exempting it from taxes.

The BALDC then leases the arena to the arena holding company, Brooklyn Events Center (a Forest City Ratner affiliate), which, to pay for arena construction in the most advantageous way, agreed to make payments in lieu of taxes (PILOTs) "not to exceed the amount that full real estate taxes would be if the land and improvements were not exempt from such taxes as a result of ESDC's ownership thereof."

Hence the need for Actual Taxes, which were reported to bondholders in January 2014 at $41 million, as noted in the document above right. (Presumably a new calculation is forthcoming.)

In 2013 and 2014, the developer paid $30-$31 million in PILOTs, which rise to more than $50 million by 2035 and are fully paid off in 2047.

So Actual Taxes will have to rise. Remember, in this case, they want a higher assessment, which made it bizarre that Forest City Ratner lawyers in 2012 attempted to lower various assessments, including that of the arena. 

A smaller bond issuance, for tax reasons

Note that the only $511 million in tax-exempt bonds were issued in late 2010, though the New York City Independent Budget Office (IBO), in its September 2009 report on the arena, estimated that the developer would aim at $678 million.

A major factor in the smaller bond issuance was the additional risk the larger number posed to generating an investment-grade rating. (Larger annual payments require more guaranteed income streams.)

Also, a larger bond issuance might have meant annual PILOTs would exceed Actual Taxes, which would be unacceptable.

“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,” the IBO said, citing the Yankee Stadium example. “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."

At that point, IBO was estimating a $55 million annual debt service payment for a $678 million bond. So that had to shrink.

The value of the subsidy?

Note that the IBO does not consider the tax-exempt financing for the arena to be a full subsidy, in the way former Assemblyman Richard Brodsky considered tax-exempt financing for Yankee Stadium to be a full subsidy. (As does Michael D.D. White, regarding the arena.)

Rather, the IBO only counts the difference between taxable and tax-exempt financing, as well as the lost property taxes on formerly taxable property within the arena site.

It also argues that the Metropolitan Transportation Authority took a hit by not maximizing the price it could have gotten for the railyard portion of the arena, suggesting that the price should have been higher because the buyer would be able to maintain the advantageous tax-exempt status of the site.

Future payments
From the December 2009 Official Statement for the arena bonds

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