THE BLOG
03/18/2010 05:12 am ET | Updated May 25, 2011

Wrong Way PILOTs Would Crash into Atlantic Yards

Payments in Lieu of Taxes or “PILOTS” and tax-exempt bond
financing may not sound sexy, but scratch the surface and the IRS-regulated
payment structures have a history of revealing scams.

What
is a PILOT? It is a financing structure sometimes used to pay off tax-exempt
bonds with a payment commensurate with foregone, generally property taxes. The
PILOT is supposed to be the equivalent of the assessed taxes for the property,
and no more than that assessment.

Imagine
the city told you, that instead of paying property taxes on your home you could
take the equivalent of the tax you would pay and use it for your mortgage.

Not
a bad deal…for the homeowner.

Now, lets say—the New York City Department of Finance (DOF), for example—worked
with you to inflate the tax assessment of your property because the mortgage
was $200,000 but your property taxes would only amount to $50,000 over the same
time period. So, the DOF increased the tax assessment you won’t have to pay in
order to meet the mortgage payments.

Even
better…for the homeowner. For the City’s treasury, it’s all money down the
drain.

The
Yankees and Mets used this scheme which let taxpayers help pay for their new
stadiums. Unfortunately, the Yankees financing was investigated, after the stadium was nearly
completed, by New York Assemblyman
Richard Brodsky and Congressman Dennis Kucinich
. Plenty of evidence was found
that the Yankees and the DOF were gaming the system by inflating tax
assessments like the homeowner scenario above. In order to inflate the PILOT to
meet the bond issuance the Yankees wanted, comparables
for the Bronx assessment
were found in a far-flung, and much more expensive
area—Alphabet City. But nobody did anything about it.  (Last month The Village Voice’s Wayne Barrett started
looking more in-depth
into this Bloomberg-favored scheme.)

Next
up on the tax-exempt bonds tour is developer Forest City Ratner’s proposed Nets
arena in Brooklyn. The big difference between Ratner’s arena and Yankee Stadium
is that Ratner has yet to be approved for the bonds from the state or start
construction, which means a political Sullenberger could (and should) swoop in
to stop the scam before it happens.

Ratner
got “lucky” last year when the
IRS approved new regulations
for the Yankees and Mets that govern
tax-exempt financing and PILOTS and grandfathered
the politically influential developer’s prospective Atlantic Yards Barclays
Center arena. (The full force of New York State and City, and lobbyist Al
D’Amato likely helped more than luck did.) The IRS now forbids fixed annual payment
PILOTs (frightening to bond buyers) to fund tax-exempt financing schemes, but
allows the scheme for Ratner as long as the Barclays bond is issued by the end
of 2009.

The
Empire State Development Corporation has formed a subsidiary Local Development
Corporation to issue the arena bond, yet that LDC has yet to hold a public
meeting or even announce its existence and governance. It will have to hold a
public hearing or meeting before and if it attempts to issue the bond before
the December 31st deadline. When it does, City taxpayers should turn
out in force. 

The
arena cost is now estimated at about $900 million and most press reports have
suggested a $700 million tax-exempt bond. The state hasn’t released any details
about the impending bond issuance but the New York City Independent Budget
Office has estimated this would cost the federal taxpayer nearly $200 million
in lost taxes (See page 3 of the IBO analysis.)
In the same analysis, the IBO took a closer look at how the land under the
proposed arena has been assessed by the City recently (see page 5).
The IBO wrote:

Although the Department of Finance has sharply increased its
assessments on land (particularly vacant land) throughout the city over the
past year, the increases elsewhere in the city are just a fraction of those at
the [arena] site. Citywide, the average increase in assessments on vacant land
from 2009 to 2010 was 63 percent; for Brooklyn as a whole, vacant land values
grew by 100 percent. Over the same period, the aggregate assessment increase
for the three tax blocks that will be at least partially covered by the arena
at Atlantic Yards has grown by 238 percent, while the assessment on the arena
site’s vacant land has risen 702 percent—an eight-fold increase.

Despite the steep rise
in assessments for Atlantic Yards, IBO estimates that the increases this year
bring the city’s current land assessments for the arena blocks more closely in
line with sales prices.

The
IBO was too polite to say it (or even imply it), but it appears that the arena
land assessments have been unduly inflated. At the very least, they are fishy.
Norman Oder, on his Atlantic Yards Report, found that some lots for the proposed
arena site have seen their assessments
increase 17, 20 and 34 times
in the past year alone.

But even if we take the IBO analysis at face value, there
is a problem brewing because it states:

Even at the current
assessment levels, however, we project that PILOTs generated by the arena would
still fall short of the payments needed to finance the arena’s debt service.

The
implication is that the assessments would have to be inflated further to
increase the PILOTs to meet the desired debt service or Ratner would have to
float fewer bonds than he desires. These are two ugly choices for Ratner and
his partners at the Empire State Development Corporation: one breaks the law
and the other could break the project. (And this doesn’t even take into account the fact
that the arena revenue model may not be able to fulfill the PILOT and debt service.)

Control
tower to Assemblyman Brodsky, come
in Assemblyman Brodsky
. Let’s not wait for the black box to reveal the
scam.