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AY vs. MSG: a larger tax break, but not for the arena

Even though the City Council is much more exercised about tax breaks for Madison Square Garden than Atlantic Yards, City Council Members Letitia James and David Yassky yesterday again called attention to the city's subsidies for AY. While the Council approved Resolution 90, which asks the state to end the 20-year-old property tax exemption for MSG, James and Yassky introduced an amendment that would withhold tax breaks and subsidies for Atlantic Yards.

"If the Council thinks subsidizing MSG is a bad deal for the City and State, they should take another look at the tax breaks and subsidies being offered to the proposed Atlantic Yards Development: they are even worse," James and Yassky said in a statement. It didn't make it past a council committee, but it may recur in the future.

Such tax breaks and subsidies may indeed be much larger, as MSG pointed out (graphic at right), but they are not quite comparable, because they include a whole suite of breaks.

In fact, the tax exemption that now saves the Garden some $11 million a year is much larger than the exemption anticipated for the Atlantic Yards arena, mainly because much of the land would be tax exempt for decades whatever was built on the arena site, thanks to an as-of-right tax break. And if MSG builds a new arena, well, some new subsidies likely would be on the table, as Metro reported today. (Here's more from the Times.)

IBO account

The Independent Budget Office's (IBO) September 2005 Fiscal Brief cited $100 million in city debt for Atlantic Yards. The amount of direct city subsidy for the project, though not necessarily all for the arena, has since been increased to $205 million.

IBO testimony January 9 regarding Madison Square Garden estimated that "the net present value (40 years with discount of 6 percent) of these city subsidies range from $140 million for the Nets arena..."

How did they get that figure, given that we now think of $205 million as the city's direct subsidy? It turns out the IBO is using only part of that sum, but adding other subsidies.

George Sweeting, deputy director of the IBO, replied, "The $140 million figure for Atlantic Yards that IBO used at the MSG hearing attributed only half of the city’s (now larger) capital contribution [$100 million] directly to the arena. We assume the balance will be supporting the other parts of the AY project. This is a change from our 2005 report." (Arguably, some of that additional $105 million could be attributed to the arena.)

The $140 million, he said, "is the 40 year present value of the items listed in the table. This list excludes certain as-of-right benefits that it is assumed any developer would get there such as ICIP for commercial development, and 421-a and other housing development subsidies," Sweeting said.

Indeed, most of those would be as-of-right, but the IBO's calculations don't account for the "Atlantic Yards carve-out," which provides 421-a benefits not available to other developers.

Foregone property tax

The Fiscal Brief states:
Although FCRC will make what the Memorandum of Understanding refers to as PILOT payments to the LDC, these payments are not the equivalent of city property tax payments. Instead they will cover the construction costs for the arena in the first 30 years—and some arena maintenance if the PILOTs exceed debt service. In a more conventional development model, a developer would need to make both construction financing payments and property tax payments for any property tax liability remaining after applying available abatements and exemptions. In the Atlantic Yards case, while the PILOTs are used to pay financing costs in the first 30 years, FCRC will save the cost of property taxes that would normally be due after as-of-right tax benefits expire.

If we assume that the arena would have a market value of approximately $100 per square foot, then the savings have a present value of $14 million in 2005 dollars.

That has now been recalculated to $19.2 million.

Why aren't the annual property tax savings something close to that saved by MSG--now $11 million+ a year? IBO's Sweeting responded, "We based our foregone property tax calculation on the use of ICIP [Industrial and Commercial Incentive Program] which is an of-right benefit. Because ICIP would be available to anybody building at that site, we did not count it in tally of special benefits being given to the arena project. ICIP in that part of Brooklyn provides for 16 years of full exemption followed by a 9 year phase-in towards full taxes. There is also 'inflation protection' in the first twelve years which means that the underlying assessment remains unchanged, which alters the value as the property becomes taxable. Our reported property tax subsidy reflects the full property tax that would be due beginning in year 26 (after expiration of the ICIP exemption) as well as the partial amount that would be due in years 17 through 25.

More details

Also, the value of the arena seems less than 15% of its $637.2 million cost. Sweeting gave the following calculations:

Market value = $100 per square foot x 850,000 square feet = $85,000,000

Assessed value = Market value x .45 = $38,250,000

Tax = Assessed value * tax rate of .10059 (2008) = $3,846,556

Sweeting noted that full taxes are not in place until year 26: "After accounting for growth in the market value beginning in year 13 (the ICIP 'inflation protection' wipes out the first twelve years of growth), the tax in year 26 would be $5.5 million in nominal dollars [not adjusted for inflation] and it would grow to $7.6 million in the 40th year, again in nominal dollars."

Over 40 years, the net present value of the foregone property tax would be $19.2 million, as compared with the $14 million over 30 years. The 2005 report used 30-year figures, but IBO recomputed the numbers to compare them with the 40-year estimates used regarding the stadiums for the Mets and Yankees.

What the difference?

MSG is totally tax-exempt right now. The difference between the estimates regarding MSG and the Atlantic Yards arena is due to two factors, Sweeting said.

First, the Garden’s market value is higher, given the location, estimated at $219 per square foot in 2005, when AY was estimated at $100 per square foot. Now MSG's market value is $250 per square foot, a 14% increase, which implies that the AY arena would be $114 per square foot--and a commensurate increase in taxes.

Second, the MSG is larger: 1,048,620 square feet, compared to 850,000 square feet for the AY arena.

But where do those numbers come from? Sweeting explained that the city's Finance Department lowballs some figures: "The market value we used in our analysis ($100 per square foot) was estimated in 2005. It was based loosely on the Department of Finance’s official market value for MSG at the time, discounting for differences in land value. It is probably true that neither the MSG value assigned by the city, nor the AY arena value estimated by IBO, reflect the actual cost somebody would pay to buy the land and build a new arena. We based our value on an assumption that whatever the Finance Department is doing when valuing MSG, they would do for AY."

What the MOU said

According to the 2/05 Memorandum of Understanding between the developer, city, and state:
The Public Parties and FCRC intend that the LDC will issue tax-exempt bonds to finance all or a portion of constructing the Arena and the on-site Arena garage. The LDC bonds shall be... payable solely from PILOT....

ESDC will lease... the site on which the Arena building... is to be constructed... to a not-for-profit local development corporation ("LDC")... The lease shall be for a term of 99 years and the rent will be $1.00.

ESDC will lease to FCRC, for $1.00 by 99-year ground lease... the Development Sites, and the Arena Site, excluding the Arena Building Site. The lease shall require FCRC to pay a PILOT equal to full real property taxes on the Development Sites and the Arena Development site and improvements, subject to applicable as-of-right tax exemptions.

The Arena Building Site and the Arena and on-site Arena garage will be exempt from real estate taxes and sales taxes on materials used to construct the improvements thereon. ESDC, LDC, and FCRC will enter a PILOT Agreement with a term of 99 years pursuant to which (i) FCRC will pay a semi-annual PILOT not to exceed the full real estate taxes which the City would access were the Arena Building Site and the Arena not exempt from such taxes and (ii) the LDC shall have the right to pledge such PILOT payments to service the LDC tax-exempt bonds as described below... For any annual period during which the LDC's tax exempt bonds are outstanding, if PILOT exceeds the total debt service payments for such annual period, such excess shall be applied as follows: (i) 10% of the annual debt service payments... to pay the cost of maintenance and repair.. of the Arena and (ii) the remaining PILOT shall be paid to the ESDC.

From the IBO Fiscal Brief

The IBO's Fiscal Brief raises several questions that remain unresolved:
Low-Cost Financing and Property Tax Savings for the Arena. To provide low-cost financing for construction of the arena and its parking garage, tax-exempt private activity bonds will be issued by a not-for-profit local development corporation (LDC)... The bonds will be an obligation of the LDC—neither the city nor the state can be held legally responsible for repayment. Instead they will be backed by semi-annual payments-in-lieu-of-taxes (PILOTs) from Forest City Ratner Companies to the LDC. The MOU states that the PILOTs may not exceed the property taxes that would be paid if the property was not tax exempt, although the agreement offers no indication as to what if any discount from regular property tax would be used.
(Emphases added)

In the event that the PILOT payments exceed the debt service, 10 percent will go toward maintenance and capital reserves for the arena and the rest will go to ESDC; the city will receive none of the excess. If the PILOT is too small to cover debt service on the full $555.3 million cost of construction, taxable bonds will be sold to cover the difference and FCRC will pay the debt service on these taxable bonds.

Savings for the developer

The IBO stated:
Forest City Ratner Companies will save money from this financing arrangement in two ways: First, financing using the tax-exempt bonds will be cheaper than private financing because bondholders are willing to accept lower interest rates when interest earnings are not taxable. Using the current spread of 1.5 percentage points between interest rates for tax exempt economic development bonds and corporate bonds and assuming that the entire $555.3 million cost of constructing the arena is debt financed over 30 years, this subsidy has a present value of $91 million (in 2005 dollars) over the financing period. If only a portion of the $555.3 million is financed with tax exempt bonds, then the subsidy would be smaller.

Note that only a fraction of this tax break, which has surely grown as the arena cost has grown to $637.2 million, shows up on the chart above because the costs are borne mostly by federal rather than city and state taxpayers.

The IBO continued:
This cost would be borne primarily by federal taxpayers, with relatively little impact on New York City or State. City and state personal income tax revenues would be affected only to the extent that LDC bondholders are residents of the city or state.

Although the city will not make an outlay in this financing arrangement, the city will give up resources. Under federal law, there is a limited allocation of tax exempt private activity bonding authority available to each state for residential and other economic development projects. Although in recent years, New York State has not exhausted its allocation, future competition for private activity bonding authority will depend on the construction timetables for alternative projects.

PILOTs not taxes

The Fiscal Brief states:
There is a second source of savings for Forest City Ratner Companies from this financing arrangement. Although FCRC will make what the Memorandum of Understanding refers to as PILOT payments to the LDC, these payments are not the equivalent of city property tax payments. Instead they will cover the construction costs for the arena in the first 30 years—and some arena maintenance if the PILOTs exceed debt service. In a more conventional development model, a developer would need to make both construction financing payments and property tax payments for any property tax liability remaining after applying available abatements and exemptions. In the Atlantic Yards case, while the PILOTs are used to pay financing costs in the first 30 years, FCRC will save the cost of property taxes that would normally be due after as-of-right tax benefits expire.

If we assume that the arena would have a market value of approximately $100 per square foot, then the savings have a present value of $14 million in 2005 dollars.

As noted, that has now been recalculated to $19.2 million.

In the remaining 69 years, when there is no debt service, 10 percent of the PILOT payment will cover arena maintenance costs stemming from operation of the arena for the private benefit of FCRC, with the balance going to ESDC. The city would get no portion of the PILOT from the arena building.

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.


  1. I can't help but notice that Yassky's support for anything anti-atlantic yards only seems to pop up on symbolic measures that are destined to fail. Nice try David.


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