Foregone property taxes for Barclays Center continue to rise, now reaching $85 million. It's all part of "NYC's Perpetual Corporate Tax Break Machine."

The new web site Hell Gate on 5/16/22 published Albany Problems: NYC's Perpetual Corporate Tax Break Machine, by Doug Turetsky, formerly of the city's Independent Budget Office (IBO).

Starting with the 421-a tax break, he notes that "tax expenditures, or tax dollars the City forgoes, make up a sizable hunk of the City's budget—about $7 billion this year." And while some "seem intuitive, like forgoing property tax from the city's public housing authority," others are far more questionable.

One prime example:

Take Barclays Center. The arena hasn't paid property taxes since it opened in 2012. It's a tax expenditure that will cost the city $85 million this year alone, according to the City's Department of Finance Annual Tax Expenditure Report.

Barclays' property tax break is part of a financing scheme that helped the arena's developers get around a 1986 federal law aiming to limit the use of tax-exempt bonds to finance stadium construction. By transferring the ownership of the land the arena sits on to the state, the bill for property tax to the city was canceled. Instead of paying the city, the arena's owner [technically the arena company owner], Joe Tsai, a cofounder of the e-commerce giant Alibaba, makes a payment in lieu of taxes, known as a PILOT. This payment, which approximates the amount of the forgone tax bill, goes to pay the annual debt service on the bonds used to finance the arena's construction. This is on top of tens of millions of dollars in other direct subsidies the city provided for the arena’s construction.

(Emphasis added)

Note that the city's two baseball teams take advantage of a tax break similar to that benefitting the Brooklyn arena. As Turetsky notes:

It's an arrangement that the Times columnist Michael Powell likened to a new homeowner persuading the city to let them use their property taxes to instead pay their mortgage.

About MSG

And, as Turetsky writes:

Of course, Barclays isn't the only arena in town. Madison Square Garden, the home of the Knicks and the Rangers, which are each estimated to be the most valuable teams in their respective leagues, benefits from politicians' largesse too. MSG's tax break is worth about $42 million this year, according to the Finance Department report

MSG's tax break is unrelated to financing--it was a gift from the city and state after the owners threatened to move the New York Knicks and New York Rangers away from the nation's media capital. Team values have continued to skyrocket, and the IBO annual lists removing that tax break as an option.

About Barclays

Note that the PILOT no longer "approximates the amount of the forgone tax bill." But the PILOTs scheme requires that the annual payment is no larger than that imaginary tax bill, and the rising tide of valuations makes that ever unlikely:

The city Department of Finance's Division of Tax Policy issues an annual report on tax expenditures, which I've excerpted further below. These are the last six annual figures (previous figures are not available from the commensurate reports):

2017: $61.3 million
2018: $53.7 million
2019: $58.9 million
2020: $58.3 million
2021: $72.1 million
2022: $85.2 million

In its September 2009 fiscal analysis of Atlantic Yards, the IBO raised a question about whether the financing structure would work:

Even if Forest City Ratner is able to beat the deadline before its grandfathered approval to use the now-banned payment in lieu of taxes, or PILOT, financing structure expires, the arrangement may face scrutiny based on the amount of the PILOT. If a PILOT is to be used for debt service, it cannot exceed the regular property tax that would apply if the property were not tax-exempt. 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.

...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.... In contrast, IBO’s estimate of the annual debt service payment for the arena’s tax-exempt bonds—assuming a 7.0 percent interest rate, 30-year term, and level payments—is $55 million.

Though the IBO projected "that PILOTs generated by the arena would still fall short of the payments needed to finance the arena’s debt service," that analysis assumed that $678 million in tax-exempt bonds would be marketed, rather than, ultimately, $511 million.

The gap was filled, in part, by a loan from Brooklyn Nets majority owner Mikhail Prokhorov, who also bought a 45% share of the arena company.

Annual PILOTs

As shown in the document below, from the 2016 refinancing of the arena bonds, PILOTs are scheduled to peak at $55 million in 2043.

Remember that, while the main component of PILOTs is debt service, paying off the tax-exempt bonds, the refinancing at lower interest rates left an even larger amount of the PILOTs to be reserved to pay the arena's operations and maintenance (O&M) costs.

About arena profits

The arena's been losing money recently, and never has met projected profits. In the last fiscal year, ArenaCo suffered a net operating loss of $23 million--and that's before having to pay another $19.4 million in interest on construction bonds, part of a PILOTs package that exceeds $37 million.

The arena is supposed to have net operating income (NOI) sufficient to cover those bonds, as well as the full PILOTs.

That said, I suspect that the losses, compounded by the paper loss of depreciation and amortization--which puts the arena in the red even after a good year--helps defray taxes for the arena company's owner, which is today Tsai.

And, of course, the presence of the arena can't be divorced from the skyrocketing valuation of the Brooklyn Nets.

So how long should sports teams use their property taxes to instead pay their mortgage?

From the NYC Department of Finance reports

Fiscal Year 2022

Fiscal Year 2021