October 20, 2006

New IRS bond regs could affect Nets arena

In the wake of the possibly illegal stadium finance deals worked out by the New York Yankees and Mets earlier this year, the Internal Revenue Service has proposed new regulations governing the use of payments in lieu of taxes (PILOTs) to pay off tax-exempt bonds. If the new regs go into effect following a scheduled public hearing on February 17, developers would no longer be allowed to use federally subsidized low-interest bonds for projects repaid via PILOTs unless the payments represent "a fixed percentage of, or reflect a fixed adjustment to, the amount of generally applicable taxes in each year, based on comparable current valuation assessments."

What on earth does that mean in English? First off, the basic dodge of the Yanks and Mets deals would still be intact: Developers could still use tax-exempt bonds for privately financed projects - normally a no-no - by calling their rent payments "payments in lieu of" property taxes they wouldn't have to pay regardless. What they couldn't do is set out a fixed schedule of PILOT payments ahead of time based on projected property-tax payments, as the baseball teams did. Instead, the PILOT payments would have to be pegged to actual annual property assessments, and would float year to year as the value of the property rose and fell. And since bond buyers really really don't like uncertainty in their bond payments, they'd doubtless demand that either the developer sell a smaller amount of bonds for the same projected PILOTs (to create a cushion in case of a shortfall), or buy bond insurance - either one of which would make the project more expensive to finance.

The Yanks and Mets bonds are long since sold, but the new IRS regs could come into play for the proposed Brooklyn Nets arena, which would use a similar tax-exempt bond plan. Matthew Schuerman of the New York Observer goes so far as to speculate that they may "imperil" the entire Atlantic Yards finance plan, but really, this is just a matter of forcing Ratner (or the public) to pay more to borrow the funds for it. Though it's worth recalling that this same problem - that bond buyers want to know where their money is coming from - is the same one that forced the New York Jets' Manhattan stadium plan to switch from tax-increment financing to fixed PILOT payments back in 2003. At what point might Atlantic Yards be too rich for Ratner's blood? That's between the man and his fleet of accountants.