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Hail Mary or silver bullet: Perkins, raising questions of fraud in arena bond sale, asks Paterson to put Atlantic Yards on hold

Suggesting that bonds for the Brooklyn arena were issued improperly, state Senator Bill Perkins yesterday asked Governor David Paterson to halt the "master closing" for the project scheduled for Wednesday and to stay condemnation proceedings until "serious questions... are addressed."

Had the bonds been issued by an Empire State Development Corporation (ESDC) subsidiary, they could be repaid via for payments in lieu of taxes (PILOTs), but the issuance would have had to have been approved by the Public Authorities Control Board (PACB), Perkins wrote in a letter. However, in an apparent effort to avoid the PACB, the ESDC created the Brooklyn Arena Local Development Corporation (BALDC), and that murky entity--which issued $511 million in bonds--should not possess a property tax exemption, the letter said.

Perkins, speaking at a public meeting in Harlem this morning, said that last night he spoke to the governor's counsel, Peter Kiernan, who was taking the matter seriously. Perkins said that if the state did not respond, legal action would be considered.

Paterson, interviewed this afternoon at a separate event (a Police Athletic League raffle in Harlem), did not seem aware of the controversy. See video below.

(In photo, Perkins is speaking; next to him are Norman Siegel and David Smith, lawyers who represented plaintiffs challenging eminent domain for the Columbia University expansion.)

Perkins' take

The bond issuance, Perkins said, "prevents [AY] really from going forward," adding that "we consider [the issuance] an illegal action." The letter was a little more circumspect.

Perkins, who has stood out as the legislator most interested in reforming the state's much-criticized eminent domain laws, said he expects to hold hearings on the Columbia case, the Willets Point plan, and even another hearing on Atlantic Yards, in light of the bond issue.

"Essentially what we have here is a situation in which it unfortunately it appears that the government is in cahoots with the developers, that the best interests of the community are not being represented but rather the best interests of, let's say, the elite," he said.

Other speakers at the meeting included those involved in the Columbia and Willets Point fights.

Paterson's response

As shown in the video, I noted that Perkins had sent a letter raising questions about arena financing. (I had shown the letter earlier to his spokeswoman, Marissa Shorenstein, who also appears in the video, so presumably the governor was briefed.)

"Well, the courts ruled on the issues that Senator Perkins addressed," Paterson responded, noting that he'd promised activists that he'd met that he'd listen and "we'll take a look."

Actually, Perkins and the activists had earlier raised questions about the use of eminent domain and the standards for blight, so I asked a follow-up question, noting that Kiernan was aware of the letter.

"Well, if there's information in the letter that's asking us to look to see that everything was done properly, we'd certainly be happy to take a look at it," Paterson said.

The "spectre of fraud"

The letter, citing a unanimous Court of Appeals decision from June, suggests that the arena does not deserve a tax exemption:
In light of this analysis, the BALDC property is not tax exempt if used for arena purposes. Consequently, payments-in-lieu of taxes cannot be used to secure the bonds, and they are effectively worthless. If ESDC knowingly misrepresented the legitimacy of these bonds, this raises the spectre of fraud.
The letter was also sent to Attorney General Andrew Cuomo and state Comptroller Thomas P. DiNapoli.

What next?

I asked Perkins (off camera) what happens now.

"We sent that out yesterday; I spoke with the governor's counsel," he responded. "He seemed to acknowledge that he needs to take a look at it. He indicated that he would get back to me."

And if they don't?

"I'm going to reach out to them again this week," he said. "But in the event that they have a different point of view, we'll see some legal measures we can take."

"As I said to him, the murkiness of this situation flies in the face of the [public authorities reform] legislation we just passed," Perkins said. "This is a representation of the old way of doing business."

The explanation

The issue was unearthed by Amy Lavine, a staff attorney at the Albany Law School's Government Law Center who has been studying public authorities. (She has been advising Perkins on eminent domain issues as part of her job and also offered pro bono help in off-hours for Develop Don't Destroy Brooklyn.)

"We've been trying to reform public authorities for the last few years," Lavine explained, citing the legislature's recent--and finally successful efforts. "So it's really important that we control these entities and make sure they're acting in a transparent and accountable way."

Typically, public authorities have to get their bonds approved by the Public Authorities Control Board--the governor, Senate Majority Leader, and Assembly Speaker hold the controlling votes--and the state Comptroller.

The BALDC was authorized under § 1411 of the Not-For-Profit Corporation Law. The PACB approves the financing and construction of any project proposed by the ESDC or the sibling Job Development Authority, which created the BALDC.

(The BALDC is the Issuer in the chart at right, from the Barclays Center Arena Preliminary Official Statement prepared by Goldman Sachs. Click to enlarge.)

"ESDC apparently did not want to go through this process," she said, and thus it created the BALDC, to which it will lease the arena land. The BALDC in turn will lease the land to the private company that will manage the arena.

The ESDC, she said, does have the authority to issue bonds, but "by skirting the process that's supposed to be followed, it seems that the bonds may have been issued illegally."

"Basically, the LDC is not a public entity," she said. "And it's controlled by different sections of the tax code in New York State. Either ESDC didn't think of the implications of this or they didn't think anyone would notice, because it is rather esoteric. It seems that, under the tax section that applies to the LDC, they're not eligible for exemption from property taxes." (The LDC is subject to §420-a of the property tax code.)

According to the recent Court of Appeals decision in Lackawanna LDC v. Krakowski, the LDC leased property to a for-profit manufacturing company and the property was considered taxable, because manufacturing and economic development is not a tax-exempt purpose. Had the Legislature intended a blanket property tax exemption for LDCs, it would have done so expressly, as it has in other contexts, the court said.

And if they're not exempt from property taxes, she said, there's no way to divert property taxes to pay for the arena bonds, via PILOTs (payments in lieu of taxes), and so nothing backing the bonds.

"To go forward, I believe that the process has to start over and ESDC will have to do this properly and get it reviewed by the Public Authorities Control Board and the state Comptroller," she said.

And that means they'd have to review the financial merits of the bonds, which hasn't happened, she said.

I'd add that the BALDC was also apparently set up to ensure that the bonds would be issued before the end of the year, beating a December 31 deadline, after which the arena would not have been eligible for such bonds.

The hockey loophole

One section of the tax code, § 429, was written for Madison Square Garden and exempts property used by both a major league basketball team and hockey team, as long as the teams signed a ten-year commitment.

The letter

On Tuesday, December 15, 2009, the Brooklyn Arena Local Development Corporation (BALDC) sold $511 million of tax exempt bonds to help finance the Atlantic Yards arena. BALDC is a not-for-profit corporation and was created by the Job Development Authority under section 1411 of the Not-For-Profit Corporation Law. The Job Development Authority (JDA) is a mostly defunct public authority that exists, along with the Urban Development Corporation, as part of Empire State Development Corporation (ESDC).

It appears that ESDC chose to have the JDA create the BALDC so as to avoid creating an ESDC subsidiary, which would have required approval from the Public Authorities Control Board (PACB) and the Comptroller to issue the arena bonds. Pub. Auth. § 51. PACB approval in this case would have been disadvantageous for two reasons: (1) it would have required the PACB to undertake a substantive review of the financial merits of the bond issue, which are questionable; and (2) it would have delayed the bond issue, likely past the December 31 deadline set by the IRS for issuing tax exempt bonds (after December 31, a rule change will not permit tax exempt bonds to be issued for stadiums).

However, as a local development corporation, and not an ESDC subsidiary, the BALDC cannot legally finance the arena using the convoluted financing methods applied in this case. Of particular importance, the BALDC does not have the authority to grant a real property tax exemption for the land that it will lease to Arena Co., which is Forest City Ratner’s arena management company. The BALDC is subject to Real Property Tax Law (RPTL) § 420-a, a different section than the one that applies to public authorities and their subsidiaries, § 412. Under § 420-a, not-for-profit property is tax exempt only if the corporation is “organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes”.

In June, 2009, the Court of Appeals addressed § 420-a and its application to LDCs. The court held that land leased by an LDC to a manufacturing company, for economic development purposes, was not eligible for the property tax exemption. Lackawanna LDC v. Krakowski, 12 N.Y.3d 578 (2009). Accordingly, if economic development does not fall within § 420-a as a basis for an LDC’s tax exemption, there would seem to be little basis for the BALDC to claim tax exempt status for the Atlantic Yards arena land.1

[1. It should be pointed out that the BALDC’s bond issue was only for the arena block, and not for the entire Atlantic Yards project, so it does not encompass the bulk of the affordable housing planned as part of the development (which could possibly be considered “charitable”).]

Additional support for the arena not having a valid tax exemption is provided by two Fourth Department cases involving stadiums. In the first, County of Erie v. Kerr, 49 A.D.2d 174 (4th Dept. 1975), the court held that the county-owned facility was tax exempt because it served the “public” purpose of providing entertainment facilities for Erie County residents. However, being a “public use” for purposes of RPTL §406 does not automatically satisfy the more restrictive provisions of § 420-a. In Syracuse University v. Syracuse, 92 A.D.2d 46 (4th Dept. 1983), the court acknowledged as much by holding that the university was not entitled to a full tax exemption under § 420-a where the stadium was used for commercial events, in addition to events connected with the university’s educational purposes. Moreover, there are separate exemptions in the RPTL for stadium uses. In particular, subsection 10 of § 420-a exempts stadium facilities owned by educational institutions. Basic tenets of statutory construction indicate that had the legislature intended to generally exempt not-for-profit property used for stadiums from property taxes, it would have done so. Furthermore, RPTL § 429 exempts stadiums housing both: (1) a professional basketball team; and (2) a major league hockey team. Not only will the Atlantic Yards arena be too small to support a major league hockey team, there is no such contractual obligation, as required under § 429.

In light of this analysis, the BALDC property is not tax exempt if used for arena purposes. Consequently, payments-in-lieu of taxes cannot be used to secure the bonds, and they are effectively worthless. If ESDC knowingly misrepresented the legitimacy of these bonds, this raises the spectre of fraud.

ESDC could have easily avoided this result if it had created the BALDC as a formal subsidiary under section 12 of the Urban Development Corporation Act, as it would then qualify for a tax exemption under RPTL § 412. There is no reason for using the JDA to create an independent non-subsidiary local development corporation, except to create a loophole and avoid review by the PACB and the New York State Comptroller.

Although ESDC has not represented the BALDC as one of its subsidiaries, the exact corporate nature of the BALDC is unclear. It is clear that the BALDC is either a subsidiary or not a subsidiary, and in either case, the bond issuance is illegal. If it is a subsidiary, the Public Authorities Law required approval by the PACB as a precondition to the bond issuance. There was no such approval. If BALDC is not a subsidiary, it has no real property tax exemption to back the bonds.

In the Lackawanna case, the Court of Appeals “decline[d] LCDC's invitation to read the Real Property Tax Law together with the Not-for-Profit Corporation Law in such a manner as to establish a ‘tax loophole’ where one would not otherwise exist”. The same logic applies here: ESDC should not be permitted to establish a loophole to avoid PACB review where no loophole should exist.

ESDC’s murky and exotic financing methods vitiate the longstanding efforts of the Legislature to reform public authorities and make them more accountable and transparent.

On December 2, you promised “an objective and thorough review” of the Atlantic Yards project and its financing. I urge you now to keep that promise. You should also act immediately to halt the closing of the bond issuance scheduled for next Wednesday, and to stay the condemnation proceedings. The project should not be permitted to go forward until the serious questions raised in this letter are addressed.

Thank you for your attention to the very important matter. I look forward to hearing from you at your earliest convenience.