Andrew Zimbalist, the sports economist Forest City Ratner hired to produce a dubious study of Atlantic Yards costs and benefits, mostly dismissed a very big thing: the economic value of the tax-exempt bonds used to build the arena. And when writing about a very similar financing plan for the West Side Stadium, he called such bonds the equivalent of a public contribution.
So, would the $800 million in tax-exempt bonds for AY count as a public subsidy? Not under Zimbalist's logic, given that, in a 1/22/06 New York Times op-ed, he blessed a similar financing plan for the new Yankees Stadium, contrasting it with the West Side Stadium by noting that "the Bronx is already in a tax abatement zone."
But maybe that's not quite right--and it deserves scrutiny as the State Assembly takes up tax-exempt financing for the Yankees, if not the Nets, during a hearing on Wednesday.
There's increasingly less justification for such tax exemptions. Just as the city's longstanding 421-a tax exemption for outer-borough residential construction recently got an overhaul, given that the residential market had long since improved in certain neighborhoods, so have there been recent calls to reform the city's Industrial and Commercial Incentive Program (ICIP), on which the AY arena tax exemption would rely.
The PILOTs game
Let's recap. Neither Zimbalist's May 2004 report nor his June 2005 update looked deeply at the financing arrangement: the use of tax-exempt bonds repaid via PILOTs, or payments in lieu of taxes. Atlantic Yards critics, notably lawyer and urban planner Michael D.D. White, have argued that this essentially would give Forest City Ratner the arena for free, since it would be paying only the equivalent of real estate taxes, rather than both taxes and construction bond repayments.
The government's argument is that the waiving of taxes is an inducement to build (of course that should've raised the value of the railyard bid), while the PILOT arrangement--now questioned by federal regulators--allows the issuance of bonds. In fact, the Independent Budget Office, in its September 2005 report, did not treat it as the equivalent of a direct subsidy.
Zimbalist on the West Side Stadium
However, consider this contrast. In an 11/14/04 New York Times op-ed on the West Side Stadium headlined Games People Play, Zimbalist attacked PILOTs:
The proposed financing plan for the stadium contains other hidden public costs. Under the plan, the city and state would form a local development corporation. Among other things, this quasi-public entity would issue bonds to finance roughly $400 million of the Jets' $800 million contribution. The team would cover the debt service on those bonds. But it would do so under a financial arrangement known as a "pilot," or payment in lieu of taxes. To the extent that this payback scheme is in place of the Jets' paying sales and property taxes, doesn't it make sense for the $400 million to be considered a public, rather than a private, contribution?
(Emphasis added)
Note that, of the projected $950 million cost of the Atlantic Yards arena, Forest City Ratner CEO Bruce Ratner told the New York Times that $800 million in tax-exempt bonds would be sought.
Zimbalist didn't address that issue in his report. Rather, he suggested that only $200 million in direct contributions was expected and also inaccurately speculated that additional contributions were unlikely.
Foregone property taxes?
Zimbalist stated in his report on AY:
Second, FCRC will pay no property tax on the improved value (the arena) on the land. Nonetheless, to be cautious, I add the foregone property taxes as a cost to the city, after taking account of the as-of-right ICIP tax abatement program that would apply to any commercial building project on the site.
Zimbalist calculated a 2006 net present value of $24.6 million for those foregone property taxes; the only property taxes that would count would be the modest ones outside of the ICIP abatement. Thus the PILOTs disappear.
IBO's George Sweeting explained the arena tax benefit:
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.
ICIP reform
ICIP, which was created in November 1984 (its precursor was created in 1976), was due to expire today: June 30, 2008. A report, titled Senseless Subsidies, issued 5/29/08 by Manhattan Borough President Scott Stringer criticized the tax break:
Finally, in the spring of 2007, prior to the most recent reauthorization of ICIP, the City's Economic Development Corporation working with the Office of Management and Budget and Department of Finance, completed a study that identified ways to restructure and streamline ICIP to better target the types of development most in need of incentives. While the proposed reforms were not widely released, reportedly because of fear that they would be unpopular with developers, they were cheered by progressive and good-government groups. In the end, the state and the City failed to adopt the proposed reforms and passed legislation extending ICIP in its current form for one year, until June 30, 2008.
Stringer's report recommended some changes:
Already, in a large portion of Manhattan, ICIP exemptions are available only to businesses making a construction expenditure that is proportionally larger than expenditures made elsewhere in New York City. Other parts of the City benefiting in past years from strong real estate development should be similarly identified, and the qualification criteria for ICIP exemptions in these areas should be expanded to include a determination of need made by the NYC Economic Development Corporation. Such a determination of need would temper ICIP's unrestrained as-of-right approach, which has produced enormous fiscal losses for the City.
(Emphasis added)
Among the provisions driving the fiscal loss to the city, according to NYC EDC's report, include long benefit periods and inflation protection, both of which can cost the city but are worth little to developers as they make their decisions. The report recommends a shorter benefit period and elimination of inflation protection.
Both could shrink the tax exemption for the arena site, and thus could cap the amount of the PILOTs that would essentially be subsidies.
Only modest changes
As it turns out, the city supported only modest reforms, according to the New York Observer, citing both political pressure and the fear of slowing development. Mayor Mike Bloomberg, however, called the changes the result of "a hard look." (Here's the bill.)
Still, it's worth recalculating the amount of foregone property tax. And, as Zimbalist should have done, it's worth analyzing whether such incentives are in fact necessary for building on what Forest City Enterprises executive Chuck Ratner calls "a great piece of real estate."
In other words, if the financing for the West Side Stadium was a "payback scheme," wouldn't the same apply to the financing for the AY arena?
Zimbalist on democracy
In the West Side Stadium op-ed, Zimbalist wrote:
When Rudolph W. Giuliani was mayor, he opposed the idea of a referendum on public financing for a new Yankee Stadium on Manhattan's West Side. His reasoning was that were it put to a referendum, New Yorkers would vote it down.
Now Mayor Michael R. Bloomberg is doing Mayor Giuliani one better. He plans not only to avoid a popular vote but also to bypass a budgetary vote of the people's elected representatives on the City Council.
If the stadium's economic benefits are as obvious as Joe Namath asserts, the project's supporters should have no problem with standard democratic operating procedures and full disclosure.
Of course, with Atlantic Yards, the financing was not put to a referendum.
Nor did the City Council get a vote, as the project bypassed ULURP, the city's Uniform Land Use Review Procedure. If the arena's economic benefits are as obvious as the city, state, and developer assert, then there should have been full disclosure and democratic oversight, according to Zimbalist's logic.
But he's said nothing of the sort regarding Atlantic Yards.
So, would the $800 million in tax-exempt bonds for AY count as a public subsidy? Not under Zimbalist's logic, given that, in a 1/22/06 New York Times op-ed, he blessed a similar financing plan for the new Yankees Stadium, contrasting it with the West Side Stadium by noting that "the Bronx is already in a tax abatement zone."
But maybe that's not quite right--and it deserves scrutiny as the State Assembly takes up tax-exempt financing for the Yankees, if not the Nets, during a hearing on Wednesday.
There's increasingly less justification for such tax exemptions. Just as the city's longstanding 421-a tax exemption for outer-borough residential construction recently got an overhaul, given that the residential market had long since improved in certain neighborhoods, so have there been recent calls to reform the city's Industrial and Commercial Incentive Program (ICIP), on which the AY arena tax exemption would rely.
The PILOTs game
Let's recap. Neither Zimbalist's May 2004 report nor his June 2005 update looked deeply at the financing arrangement: the use of tax-exempt bonds repaid via PILOTs, or payments in lieu of taxes. Atlantic Yards critics, notably lawyer and urban planner Michael D.D. White, have argued that this essentially would give Forest City Ratner the arena for free, since it would be paying only the equivalent of real estate taxes, rather than both taxes and construction bond repayments.
The government's argument is that the waiving of taxes is an inducement to build (of course that should've raised the value of the railyard bid), while the PILOT arrangement--now questioned by federal regulators--allows the issuance of bonds. In fact, the Independent Budget Office, in its September 2005 report, did not treat it as the equivalent of a direct subsidy.
Zimbalist on the West Side Stadium
However, consider this contrast. In an 11/14/04 New York Times op-ed on the West Side Stadium headlined Games People Play, Zimbalist attacked PILOTs:
The proposed financing plan for the stadium contains other hidden public costs. Under the plan, the city and state would form a local development corporation. Among other things, this quasi-public entity would issue bonds to finance roughly $400 million of the Jets' $800 million contribution. The team would cover the debt service on those bonds. But it would do so under a financial arrangement known as a "pilot," or payment in lieu of taxes. To the extent that this payback scheme is in place of the Jets' paying sales and property taxes, doesn't it make sense for the $400 million to be considered a public, rather than a private, contribution?
(Emphasis added)
Note that, of the projected $950 million cost of the Atlantic Yards arena, Forest City Ratner CEO Bruce Ratner told the New York Times that $800 million in tax-exempt bonds would be sought.
Zimbalist didn't address that issue in his report. Rather, he suggested that only $200 million in direct contributions was expected and also inaccurately speculated that additional contributions were unlikely.Foregone property taxes?
Zimbalist stated in his report on AY:
Second, FCRC will pay no property tax on the improved value (the arena) on the land. Nonetheless, to be cautious, I add the foregone property taxes as a cost to the city, after taking account of the as-of-right ICIP tax abatement program that would apply to any commercial building project on the site.
Zimbalist calculated a 2006 net present value of $24.6 million for those foregone property taxes; the only property taxes that would count would be the modest ones outside of the ICIP abatement. Thus the PILOTs disappear.
IBO's George Sweeting explained the arena tax benefit:
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.
ICIP reform
ICIP, which was created in November 1984 (its precursor was created in 1976), was due to expire today: June 30, 2008. A report, titled Senseless Subsidies, issued 5/29/08 by Manhattan Borough President Scott Stringer criticized the tax break:
Finally, in the spring of 2007, prior to the most recent reauthorization of ICIP, the City's Economic Development Corporation working with the Office of Management and Budget and Department of Finance, completed a study that identified ways to restructure and streamline ICIP to better target the types of development most in need of incentives. While the proposed reforms were not widely released, reportedly because of fear that they would be unpopular with developers, they were cheered by progressive and good-government groups. In the end, the state and the City failed to adopt the proposed reforms and passed legislation extending ICIP in its current form for one year, until June 30, 2008.
Stringer's report recommended some changes:
Already, in a large portion of Manhattan, ICIP exemptions are available only to businesses making a construction expenditure that is proportionally larger than expenditures made elsewhere in New York City. Other parts of the City benefiting in past years from strong real estate development should be similarly identified, and the qualification criteria for ICIP exemptions in these areas should be expanded to include a determination of need made by the NYC Economic Development Corporation. Such a determination of need would temper ICIP's unrestrained as-of-right approach, which has produced enormous fiscal losses for the City.
(Emphasis added)
Among the provisions driving the fiscal loss to the city, according to NYC EDC's report, include long benefit periods and inflation protection, both of which can cost the city but are worth little to developers as they make their decisions. The report recommends a shorter benefit period and elimination of inflation protection.
Both could shrink the tax exemption for the arena site, and thus could cap the amount of the PILOTs that would essentially be subsidies.
Only modest changes
As it turns out, the city supported only modest reforms, according to the New York Observer, citing both political pressure and the fear of slowing development. Mayor Mike Bloomberg, however, called the changes the result of "a hard look." (Here's the bill.)
Still, it's worth recalculating the amount of foregone property tax. And, as Zimbalist should have done, it's worth analyzing whether such incentives are in fact necessary for building on what Forest City Enterprises executive Chuck Ratner calls "a great piece of real estate."
In other words, if the financing for the West Side Stadium was a "payback scheme," wouldn't the same apply to the financing for the AY arena?
Zimbalist on democracy
In the West Side Stadium op-ed, Zimbalist wrote:
When Rudolph W. Giuliani was mayor, he opposed the idea of a referendum on public financing for a new Yankee Stadium on Manhattan's West Side. His reasoning was that were it put to a referendum, New Yorkers would vote it down.
Now Mayor Michael R. Bloomberg is doing Mayor Giuliani one better. He plans not only to avoid a popular vote but also to bypass a budgetary vote of the people's elected representatives on the City Council.
If the stadium's economic benefits are as obvious as Joe Namath asserts, the project's supporters should have no problem with standard democratic operating procedures and full disclosure.
Of course, with Atlantic Yards, the financing was not put to a referendum.
Nor did the City Council get a vote, as the project bypassed ULURP, the city's Uniform Land Use Review Procedure. If the arena's economic benefits are as obvious as the city, state, and developer assert, then there should have been full disclosure and democratic oversight, according to Zimbalist's logic.
But he's said nothing of the sort regarding Atlantic Yards.
This post refers to a possible $800 million in tax-exempt bonds for the Atlantic Yards arena. That may not be the amount that will be issued. It may be too low.
ReplyDeleteThe documents encompass the possibility that tax-exempt bonds would be issued for the entire cost of the arena. The entire cost was most recently estimated as $950 million (“Slow Economy Likely to Stall Atlantic Yards” by Charles V. Bagli, published March 21, 2008). I am not aware of anything that has been provided to the public that assures or reliably indicates that the bonds would not be issued in this higher $950 million amount (or the amount to which it may still rise). Notably, when the Ratner people had an earlier opportunity to provide assurance that the amount of the taxable bonds would be in some way limited (or, in fact, less than $950 million) they did not provide it. What I have observed with respect to the Ratner people and the tallying of subsides is that even when figures are quite identifiable and their bottom minimums easy to figure out with a high degree of definiteness the Ratner people want to argue that the amount of subsidy that will be needed is still vague and indeterminate. My observation is that they do not want the people to have a legitimate idea of the total amount of the subsidies they are aiming at pulling down. (Like fake global-warming scientists they are happy to muddy the waters.)
The issuance of $950 million in tax-exempt bonds for the Atlantic Yards arena translates to a bottom-line minimum of $1.315 billion in tax-payer subsidies just for the Ratner arena.
Possibly the lower $800 figure for tax-exempt bonds, non-specifically referred to as `hoped’ for, was part of the Charles Bagli interview that preceded his March 21, 2008 “Slow Economy Likely to Stall Atlantic Yards” but I believe it publicly surfaced only recently and concurrently with Ratner’s lobbying to have the federal tax loophole apply to his arena in Bagli’s, June 13, 2008 “A Question Mark Looms Over 3 Expensive Projects” linked to here. (That June 13th article says; “In an interview this year, Bruce C. Ratner of Forest City said that he hoped to raise about $800 million through tax-exempt bonds.”) The lower amount makes it appear as if the federal subsidy will be lower. But why should we not expect that Ratner would try to fly low on the radar screen by `projecting’ a lower `hoped-for’ amount and then ultimately cash in for a greater amount if he gets the IRS to approve the federal tax loophole?
While $950 million in tax-exempt bonds for the Atlantic Yards arena translates in to a bottom-line minimum of $1.315 billion in tax-payer subsidies just for the Ratner arena, lowering the amount of the triple tax-exempt bonds to $800 million does not lower the overall minimum tax-payer subsidy for the arena that much. It lowers it only to a minimum of only $1.045 billion in total tax-payer subsidies. (That figure does not include a number of figures listed at the end of this comment after the asterisks.)
- - - - -
I have found myself wondering whether politicians are on top of these figures. This prompted me to call State Senator Carl Kruger’s office to find out what information the Senator had available about Atlantic Yards costs when he stood on the steps of Brooklyn’s Borough Hall as part of the June 5th “Brooklyn Day” rally which I had interpreted to be purely an exercise in support of Atlantic Yards. (See: http://atlanticyardsreport.blogspot.com/2008/06/fun-day-at-fcrs-brooklyn-day-rally-dj.html)
At the rally Senator Kruger referred to being entitled to a “piece of the pie.” (See; quote: “Today we’re entitled to our piece of the pie,”)
In my communications with Senator Kruger’s office they advised me that the office could not furnish information about the public cost of Atlantic Yards,- BUT- they said that it was irrelevant to the Senator's remarks because the Senator was NOT speaking in favor of Atlantic Yards receiving any funds. I was told that the meaning of the Senator's "piece of the pie" remark was that he believes that Brooklyn, as opposed to Atlantic Yards, should receive its share of development funds and that he did not have any particular funds or amounts in mind.
For clarification I asked whether that meant that the Senator would be happy with Brooklyn’s "piece of the pie" funds going to other projects instead of Atlantic Yards. I was told that was the case.
I asked if that meant the Senator Kruger would be happy if Brooklyn development funds went to another version of Atlantic Yards that could involve a developer other than Ratner (perhaps bidding it out to multiple developers). I was told that would be the case.
Michael D. D. White
Noticing New York
********
NOT INCLUDED IN THE $1.315 BILLION AND $1.045 BILLION MINIMUM AMOUNTS BEING PAID TO RATNER BY TAX-PAYERS:
* The $305 million from the city and state for infrastructure. People are usually quick to include this public subsidy number and it IS part of the OVERALL project’s subsidy but only a portion of it should be attributed to the arena.
* The 10% possible "overage" cover on the R-TIFC-PILOT since it is hard to calculate or know what amount exactly it would be. These are payments specified to go to Ratner for operation of his arena. Again, the "PILOT" provisions of the General Project Plan specify that the intercepted payments going to Ratner will be in lieu of taxes and have to less than the TAXES would otherwise be. - The figure could be over $70 million.
* Any other reduction of taxes below what would normally be paid during the first 30-40 years. That reduction, which may likely exist, has not been made public.)
* Intercepted tax revenues after the 30-40 year bonds are retired. The General Project Plan provides that after the 30-40 year term of the bonds has run Ratner can extend its lease up to a total of 99 years during which period continued tax exemption is provided for on a locked-in basis.
* The subsidy of below market acquisition of land and other property rights through eminent domain and the threat of eminent domain. These figures also do not include possible unrecognized subsidy due to the zoning overrides the public is donating to Ratner at the expense of neighboring properties. The benefit of the up-zoning is also not going to original owners being deprived of their property. There may be other subsidies going unrecognized in the above figures but these are the definite and easy to identify figures.)
* The naming rights public is also donating to Ratner the “naming rights” for this publicly paid for section of the city. Barclay’s is paying Ratner $400 million for these naming rights. To be fair in these calculations, the value of these naming rights have to be discounted since the $400 million will be paid over time. $20 million a year will be paid for 20 years. (Ratner may securitize this to take his money up front.) - If the naming rights income stream is converted to its present value, its value should be approximately $187.30 million.