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.
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