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July 20, 2004

Jets bond mystery solved?

The enduring mystery of how the New York Jets would be eligible for tax-exempt bonds for a privately built stadium - normally a big IRS no-no - may be solved. According to notes buried deep in Citigroup's proposal to underwrite the stadium bonds, stadium revenues such as naming-rights fees and luxury suite sales would be funneled through a "trustee or lockbox agent," which would then pay PILOTs (payment in lieu of taxes) to pay off the bond debt. (As explained in this simple diagram.)

While using private stadium revenues like this would normally be illegal, Citigroup continues:

The applicable regulations provide that payments in lieu of taxes are not private payments if (a) the payment is commensurate with and not greater than the amount that would have been paid under the applicable tax of general application. ... The first requirement will be met if the PILOT does not at any time exceed the amount that would be imposed on the related property if it had been subject to New York City property taxes.

And there's the gimmick. Sales and income taxes from the stadium have already been pledged to compensate the state and city for their $600 million share of the construction cost. Property taxes, though, haven't been - because the stadium, being built on state-owned land, wouldn't be paying any property taxes. According to Citigroup's bond attorneys, however, the Jets could claim their bond payments were "in lieu of" these phantom property taxes, and so qualify for a tax-exempt bond rate.

None of the economic development experts I reached could say for certain whether this sort of dodge would be legal, though the Congressional Budget Office's Dennis Zimmerman had earlier implied that it wouldn't be. (Zimmerman appears to be out of the office this week.) Assuming it is legal, though, what sort of dollar figures are we then talking about? Yankee Stadium has a current assessed value of $50 million, according to the invaluable Propertyshark.com; Madison Square Garden's assessed value is $76 million. Let's be generous, and give the new Jets stadium an assessed value of $150 million. Since MSG is currently ducking $11.7 million a year in property taxes thanks to a 20-year-old tax break, according to the city Independent Budget Office, applying the same tax rate to a Jets stadium would result in ... let's see ... about $23 million a year. And given that the stadium's valuation (and so its phantom property taxes) would rise over time, over the course of 30 years that would likely be enough to cover $600 million in stadium bonds.

Props to Citigroup's number-crunchers for their math skills, then. As for their tax-law skills, that may be for the IRS - or the courts - to decide.

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