October 22, 2008

More on the IRS ruling

It appears that my article on the IRS tax-free bond ruling didn't actually make it over to the Voice - they still haven't worked all the bugs out of this "email" thing - so I instead post it here, for your edification:

Dennis Kucinich's hearing on the legality of the Yankees stadium project may be only days away, but apparently the Internal Revenue Service waits for no man. The T-men have already finalized their long-awaited new regulations (PDF here) governing the use of tax-exempt bonds for development projects, and the Yankees appear to have come up winners, while for the Nets and their Atlantic Yards project, the consequences are less clear.

The story so far: Back in 2006, Mayor Bloomberg and the Yanks' owners put forward a plan to make the team's $1-billion-or-so stadium project eligible for tax-exempt bonds, which are normally not allowed for private projects. The trick? Even though the Steinbrenner clan will be paying for all construction costs for the stadium itself (the city gets to pay for a few hundred million in exciting stuff like underpasses and sewer lines), they're calling those expenses "payments in lieu of property taxes" (PILOTs) in order to meet the feds' requirement that tax-free bonds be paid for with public tax revenues. (The Mets used a similar scheme for Citi Field.) While many tax experts looked askance at the dodge, the IRS (after lobbying by Charles Rangel) okayed it, and the Yanks broke ground a few weeks later.

Since then, the Yankees have asked for another $350 million in tax-free bonds (to pay for, among other things, a snazzier scoreboard), while Nets owner Bruce Ratner has proposed floating $800 million in tax-exempt bonds for his planned Brooklyn arena via the same PILOT dodge. The IRS, however, has spent the last two years trying to concoct new regulations that would reconcile the PILOT scheme with existing law.

The final regulations, obtained today and provided to the Voice by Norman Oder of the Atlantic Yards Report, require that stadium PILOTs float with the property's tax assessment - which makes sense, since for IRS purposes they're supposedly really property taxes operating under deep cover. That would significantly reduce the benefits to teams, since bondholders tend not to be thrilled about having their bond payments fluctuate with the real estate market. The IRS does, however, include a couple of outs for projects already in the works:

• The new regs provide "broader flexibility for phased adjustments to PILOTs during the development, construction, or initial start-up period of the property." This could be used to justify the Yanks' use of additional bonds under the same rules as they got in 2006, as an "adjustment" of their previous PILOTs.
• The old anything-goes rules remain in place for any project that meets two criteria: The project got "preliminary approval," with PILOTs planned for the financing, by October 19, 2006; and "significant expenditures were paid or incurred with respect to the project" (or a contract was in place to do the same) by the same date. This would only help the Yanks if their new scoreboard and such is considered part of the original stadium project, though they weren't announced until early this year. The Nets, meanwhile, would likely clear the first hurdle (Ratner signed a Memorandum of Understanding with the city and state in early 2005), but the latter would depend on how the IRS defines "significant expenditures," given that very little work has taken place to date on the site. (Oder, for his part, thinks the IRS means to give its blessing to the Nets plan, though an agency spokesperson wouldn't comment directly on it.)

In any case, none of this affects the questions raised about whether New York City cooked the books on the Yankees' land valuation, which could make their whole PILOT scheme illegal under either the old or new IRS regs. It should make for quite the hearing on Friday - tune in on the committee website for the webcast, or on the Voice website for my live-blogging of the proceedings, if I can get the technology working.