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March 05, 2005

Nets arena to cost public $500M?

Okay, I now have the Nets MOUs with the city of New York and the Metropolitan Transportation Authority (PDFs downloadable here and here respectively), and I can shed a little more light on what's in them:

As noted earlier, the only public cash involved would be $100 million apiece from the city and from the Empire State Development Corporation, the state agency that would be spearheading the arena project. (The ESDC, coincidentally or not, currently has its offices in Nets owner Bruce Ratner's mall across the street from the proposed arena site.) Interestingly, after the slush fund debacle with the proposed Jets stadium in Manhattan, the Nets MOU specifically says the $200 million would be "subject to appropriation," and that the ESDC money "is expressly contingent on a legislative appropriation (or bond authorization) approved by the Governor, State Senate and State Assembly." No end runs here, in other words.

That's the good news. The less good news is that the MOU also spells out that "all or a portion of the cost of constructing the arena" shall be financed by state tax-exempt bonds - which would be paid off by Ratner's payments in lieu of property taxes (PILOTs) on the site. This is the same deal that the Jets are hoping to get in Manhattan - and just like the Jets, Ratner would get to deduct the cost of the PILOTs from his land payments. (The MTA MOU says Ratner's price for the rail yard land would be fair market value, but "must take into account" the PILOT costs "prior to the fair market value determination.")

This is, quite simply, having your cake and eating it too: Ratner could put his money into the arena instead of paying property taxes, yet would only be assessed a land price as if he were paying property taxes. And just as I discussed vis-a-vis the Jets plan, this makes the city's forgone PILOT revenues an additional subsidy towards the arena plan. (Allowing Ratner to use tax-exempt bonds adds a small but non-trivial amount to the public subsidy as well.)

So what's the taxpayers' damage? The MOU doesn't include a figure for the diverted PILOTs, but we can make some guesses. The Jets are expecting to "pay" about $400 million worth (in present value) of PILOTs on their site, which is in pricier Manhattan, but is also a much smaller parcel - about 12 acres compared to the Brooklyn site's 21 acres. To be conservative, assume that Ratner could only finance $300 million worth of arena bonds with his PILOTs. Add in the $200 million in cash and the cost of using tax-exempt bonds (probably $25 million or so), and it's likely that in the end, the Nets project would cost New York taxpayers upwards of half a billion dollars.

That's a lot of cheesecake. It's a good thing the city council and state legislature are guaranteed to have a say on this deal, because it's going to take a lot of public hearings (hi, Assemblymember Brodsky!) to get to the bottom of this one.

COMMENTS

I read the MOA and the Nets are using a "shell company" to front as a non-profit company so they can issue tax-exempt bonds. Is this acceptable to the IRS? I thought I heard recently the IRS was cracking down on this.

Posted by pdaddy on March 11, 2005 03:36 PM

The IRS is okay with tax-exempt bonds for stadiums so long as they're paid off with "generally applicable taxes," and PILOTs apparently count here. (If the Ratner were to pay off the tax-exempt arena bonds with his own cash, though, it'd be illegal.) From what I can tell, the "shell company" is actually another state agency that will be spun off from ESDC to issue the bonds; no clue what the advantage is of doing it this way, but it's the same mechanism being considered for the Jets stadium.

Posted by Neil on March 11, 2005 05:42 PM

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