As the IBO again suggests NYC could cut Madison Square Garden's tax exemption, City Planning Commission leans toward 15 years for permit renewal

The annual Budget Options for NYC, from the Independent Budget Office, again suggests the possibility of having the state eliminate the property tax exemption for Madison Square Garden, which would bring the city $17.3 million in FY 2014.

From the document:

For three decades, the Garden has enjoyed a full exemption from its tax liability for the property it uses for sports, entertainment, expositions, conventions, and trade shows... When enacted, the exemption was intended to ensure the viability of professional major league sports teams in New York City.

The argument for removal:

Proponents might argue that tax incentives are now unnecessary because the operation of Madison Square Garden is almost certainly profitable. Because Madison Square Garden, L.P., owns the Knicks and Rangers teams, and the Madison Square Garden Network and Fox Sports New York, it receives game-related revenue from tickets, concessions, and cable broadcast advertising. Additionally, the Garden hosts many events, including concerts and circus shows in its arena and theater from which it collects both rent and concession revenue. Proponents also might note that privately owned sports arenas built in recent years in other major cities such as Boston and Chicago, generally do pay real property taxes—as did MSG from 1968 when it opened until 1982—although some have received other government subsidies such as access to tax-exempt financing and public investment in related infrastructure projects. In the case of MSG, the continuing subsidy, long after the construction costs have been recouped, is at odds with the philosophy that guides economic development tax expenditure policy.

The argument against;

Opponents might argue that the presence of the teams continues to benefit the city economically and that foregoing $17.3 million is reasonable compared with the risk that the teams might leave the city. Some also might contend that reneging on the tax exemption would add to the impression that the city is not business-friendly. In recent years the city has entered into agreements with the Nets, Mets, and Yankees to subsidize new facilities for each of these teams. These agreements have leveled the playing field in terms of public subsidies for our major league teams. Eliminating the property tax exemption now for Madison Square Garden would be unfair.

Um, the teams are not going to leave the media capital of the world. The more interesting question is whether the tax break is justified because other sports facilities, including the Barclays Center, recently got a lot of help.

That deserves a lot more analysis--yes, the financing scheme for those new facilities provides hundreds of millions of dollars in tax breaks. Then again, MSG is in Manhattan, over a transit hub, a tremendous advantage for booking events and accommodating visitors... at least for now.

Giving the Garden 15 years

After a public hearing in which some prominent advocacy groups called for the Garden's operating permit to be renewed for only 10 years rather than in perpetuity, the mayoral-controlled City Planning Commission is leaning toward supporting 15 years--surely antagonizing MSG operators.

That's hardly a done deal, because the change requires support not only of the City Council--Speaker Christine Quinn hasn't weighed in--but also of the state legislature, and Assembly Speaker Sheldon Silver, an ally of MSG, does not support it.

Crain's New York Business reported 5/7/13,  City proposes limiting Garden to 15 more years: Limit falls hugely short of owner's insistence that the special permit for "the World's Most Famous Arena" be renewed in "perpetuity." Backers of limit seek way to redevelop site and give Penn Station room to grow.

Crain's reported:

"While Madison Square Garden maintains that the arena special permit should continue in perpetuity, we believe the term is warranted due to the uniqueness of the site and the importance of Penn Station to the city," said Amanda Burden, the head of City Planning Department who also chairs the City Planning Commission.
..."We are recommending today that the commission call for a renewed, multiagency initiative to improve Penn Station," Ms. Burden said. Her notion of a 15-year permit drew vocal support from fellow commissioners, who will officially vote on the plan later in May.
"I think 15 years, in my view, was a good decision and the minimum of what we could do because 10 years is too short and does not give the Garden enough to relocate," said Commissioner Angela Battaglia, who had been skeptical of a limited term during past commission hearings.
"...The Garden is especially sensitive to the imposition of the limited permit because it just spent nearly $1 billion renovating the arena. Some commissioners suggested 15 years would be enough time for the Garden to make back its investment, but even so, there has been talk of the arena operators suing should their permit be limited. The Garden's spokeswoman declined to comment on the prospect of a lawsuit.

An editorial

Crain's followed up with Editorial: Plan for Penn Station's future: As long as Madison Square Garden sits above Penn Station, the transportation hub won't get the major overhaul it desperately needs:

The Garden is an economic engine in its own right and an important part of the city's culture. But its benefits to the local economy are marginal compared with those of Penn Station, which handles more than twice as much traffic as Grand Central Terminal. If one West Side venue had to be sacrificed for the other, the Garden would have to give way.
Fortunately, there need be no sacrifice. Both Penn Station and the Garden could end up winners. And should. Thus, we urge the City Council to affirm the Bloomberg administration's proposal to extend by only 15 years the special permit that allows the Garden to be where it is. That's enough time to come up with a project that expands and modernizes Penn Station, relocates the Garden without interruption and creates a vibrant business district.
Development around the site today doesn't take full advantage of the station's 600,000 daily commuters. Adding office, retail and other space around a renovated Penn Station would be lucrative enough to subsidize a new Garden nearby. The arena's owners, who would see their air rights soar in value, would be effectively compensated for leaving their current building, despite their having spent, by their count, $980 million on its recent upgrade.

Maybe so, but like the tax exemption, it deserves some thorough analysis.

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"Night of the living tax break": Forest City Ratner among big beneficiaries of canceled but still operating ICIP

The watchdog site New York World yesterday published Night of the living tax break:

Five years after state lawmakers killed a corporate property tax exemption that had outlived its original purpose, it’s still stalking New York City’s finances, to the tune of more than $650 million this year.
...Other windfalls went to the headquarters of News Corporation — the owner of the New York Post — whose tax bill is cut by some $2.2 million this year, and Manhattan’s East River Plaza mall, a project co-owned by real estate giant Forest City Ratner, which got two breaks totaling $8.1 million.
...These are among the more than 7,000 properties that continue to receive abatements on property taxes under the city’s Industrial and Commercial Incentive Program, or ICIP, first launched in the 1980s to encourage businesses to locate or remain in New York City.
That program was open to a wide array of business that built or made improvements to their properties. It expired in 2008, amid widespread criticism that it was too generous. But any company that had successfully applied for the break before then would continue to get it — for as long as 25 years.
In fact, the cost of the tax break to the city has swelled since it supposedly died, rising from $512 million in 2008 to a peak of $682 million in 2012. That’s because the properties, as a condition of the tax break, have undergone improvements that increase their value over time.

Forest City's totals

Forest City Ratner has three properties on the top 20 list: Forest City Myrtle Associates at 115 Myrtle Avenue (MetroTech), with a $5.9 million tax abatement; Tiago Holdings (a co-venture with Blumenfeld Development Group), with $8.1 million granted; and FC Queens Place, with $2.6 million from the Queens Place mall, of which Forest City sold 49% in 2011.

But that's not all. According to the database provided The New York World by Good Jobs New York, there are numerous Forest City properties (mostly retail properties, with that 49% share sold in 2011) on the list.

Note that the first column below is the tax abatement, the second the taxes paid, and that the abatement does not precisely match the number in the chart above. That's because the chart shows the 2013 abatements, while the downloaded info covers 2012.

What it means

As the New York World's Nathaniel Herz reported, the program "effectively reallocates the commercial property tax burden to other property tax payers,” said James Parrott of the Fiscal Policy Institute.

Former city official Alair Townsend described the tax incentive as a tactic launched by the struggling city to keep businesses in the late 1970s and early 1980s from moving to New Jersey or other suburbs:

The idea was to encourage job-producing construction — either new buildings, or renovations — by not immediately taxing owners on improvements to their property. Projects qualified on an “as-of-right basis,” not based on need — meaning that as long as they met a certain set of criteria based on location, use, and size of investment, they’d get the subsidy.
Following scathing audits of the program, the Bloomberg administration took a hard look at what all the tax breaks were paying for. A 2007 study by the city’s Economic Development Corporation revealed that more than 75 percent of participating projects — which cost some $2.8 billion in subsidies — would have gone ahead even without the ICIP exemption.

As with the 421-a tax relief program for market-rate construction, the program was not tinkered with until the city had clearly recovered. The NY World reports:

“This is an example of an as-of-right program run amok,” said Bettina Damiani, project director for the advocacy group Good Jobs New York, which supplied the New York World with ICIP data acquired from the Department of Finance through a public records request. (Download the data in CSV format.) “When you start subsidizing midtown retail and midtown office buildings, things have clearly gone awry.”
The exemptions also extend to several large Queens malls, where visitors and workers were surprised to hear about the value of the tax breaks being extended to corporate owners.
...After ICIP’s demise in 2008, the city replaced it with the Industrial and Commercial Abatement Program, which is more discerning in handing out property tax breaks — just over $5 million this year.
But Parrott said that lawmakers should be watching the new program closely, given the lingering cost of ICIP — which he noted was more than enough to cover the city Parks Department’s annual budget.

The East River Plaza announcement

A 7/26/2010 Forest City Ratner press release headlined East River Plaza grand opening:

New York City Mayor Michael Bloomberg and Bruce C. Ratner, chairman and CEO, Forest City Ratner Companies, were joined by public officials and business partners on Tuesday, July 20, for the official grand opening of East River Plaza.
Bringing Manhattan its first Costco and Target, East River Plaza represents a groundbreaking investment in the East Harlem Community and will contribute to the neighborhood’s continued revitalization. To date, the project has created over 1,100 construction jobs and over 1,000 permanent retail jobs. The development team and retailers have worked closely with New York City Council member Melissa Mark-Viverito, Manhattan Borough President Scott Stringer, the Upper Manhattan Empowerment Zone, the New York City Department of Small Business Services/Workforce 1 and the STRIVE non-profit organization to implement a local hiring program to maximize employment opportunities for local residents. Approximately 70 percent of the new jobs created have gone to residents of Upper Manhattan.
“The opening of East River Plaza culminates the historic transformation of a long vacant and polluted site into a vibrant retail center that is bringing a thousand permanent jobs, tens of millions of dollars in private investment and new shopping opportunities to East Harlem,” said Mayor Bloomberg. “With East River Plaza complete and construction of the nearby East Harlem Media, Entertainment and Cultural Center underway, East Harlem is undergoing a renaissance that will provide new housing, office and retail space and job opportunities for the local community.”
Bruce C. Ratner, chairman and CEO of Forest City Ratner Companies said, “East River Plaza represents the best of public-private partnerships in action. Given the tough economic times we are facing, East River Plaza offers a much needed boost to the economy of New York City, bringing new jobs and generating tax revenues for the City and State. The center also provides new shopping opportunities for East Harlem residents.”
East River Plaza, developed through a joint venture between subsidiaries of Blumenfeld Development Group and Forest City Ratner Companies, is a five-level, 527,000-square-foot retail center in East Harlem. Located on the FDR Drive between 116th Street and 119th Street with direct access to the 1,248-car attached parking facility. In addition to Costco and Target, East River Plaza tenants include national retailers Best Buy, Marshalls, Bob’s Discount Furniture, PetSmart, Kidstown, Old Navy, Verizon and GameStop.
Blumenfeld Development Group and Forest City Ratner Companies, working closely with the leadership of public agencies including the Upper Manhattan Empowerment Zone, Empire State Development Corporation and the New York City Economic Development Corporation, were able to turn this former Brownfield site, once occupied by the Washburn Wire Factory, into a great new shopping destination for all New Yorkers. East River Plaza again shows what is possible when all parties are committed to a successful outcome.

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Development officials fight back against Times portrayal of tax-exempt bonds for private projects; is there rationale to subsidize the poaching of sports teams?

In response to that tough March 5 New York Times lead story about tax-exempt bonds for private projects like the Barclays Center, Toby Rittner, President & CEO, Council of Development Finance Agencies (CDFA) has issued a statement titled New York Times Rebuttal: Private Activity Bonds Support Job Creation & Economic Development--Flawed, Inaccurate New York Times Article Debunked:

The New York Times article, A Stealth Tax Subsidy for Business Faces New Scrutiny, is riddled with inaccuracies and misinterpretations of one of the nation’s most important economic development tools: qualified private activity bonds (PABs). The story, sensational and misleading throughout, highlights perceived misuses and infers abuses of the U.S. tax code, all the while ignoring the essential public purpose that these bonds serve. PABs are exactly as they sound, a bond instrument, supported and endorsed by the United States Congress since 1914, that catalyze private investment in projects and industries that may otherwise not receive conventional financing. PABs are one of the oldest tax policies on record and were included in our Nation’s first formal tax code.

(Emphases added)

Consider by contrast the observation by sports economist Andrew Zimbalist in his 2003 book, May the Best Team Win: Baseball Economics and Public Policy, where he wrote:

While one may legitimately question the costs and benefits to a particular metropolitan area of attracting a professional sports team, there appears to be no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host ball clubs. If there is a global welfare gain from the relocation of a team from city A to city B (because city B may be larger or wealthier or have more avid sports fans), then city B ought to able to pay for that gain without a subvention from Washington, D.C.

Of course Zimbalist did not raise that point in the 2004 and 2005 reports on Atlantic Yards that he produced at the behest of developer Forest City Ratner.

Conventional financing preferred?

Rittner writes:

Let’s address the article’s inaccuracies. First, the Times states that the 1986 tax code created a “stealth subsidy for private enterprise”. Stealth? The tax exempt bond section of the Internal Revenue Code is very well established, dating back 100 years, and it allows over 50,000 state and local bond issuers throughout the country access to this critical financing tool. The PAB market amounts to just a fraction of the total market for tax-exempt bonds. This tool is decisively not stealth, and in fact is one of the most well understood and well regulated parts of the tax code. They were, as the article indicates,
well vetted during the long and transparent tax reform process of 1986. The end result was an improved development finance tool – not a “stealth subsidy”. The inference that PABs are a secret or a loophole that allows large private business interests to benefit where others would not is either naïve or purposefully misleading. Most private businesses would prefer to use conventional lending tools, but given market and project economics, some require alternative lending options to access capital. The private activity bond market provides this critical access to capital.

Why would they prefer to use conventional lending tools if they can save enormous sums via tax-exempt bonds? Forest City Ratner will save perhaps $150 million from the federal tax subsidy for the arena bonds.

A few bad apples?

Rittner writes:

Second, the article identifies a handful of potentially alarming projects – a golf course, museum, basketball arena and office buildings for two financial institutions. There are two substantive flaws in the Times article. While these projects may seem less worthy of tax-exempt financing on their face, such a cursory review is irresponsible at best. To begin, the identified projects represent a mere fraction of the overall number of projects that benefit from PABs. PABs are issued on behalf of thousands of private enterprises like small manufacturers, non-profits, veterans, housing developers, universities, first time farmers, cultural institutions, hospitals and renewable energy providers annually. Further, each of these projects were supported and approved for PAB financing by state or local governments with their understanding that the projects were important to the economic development and long range stability of their communities.

Or, alternatively, they were supported because local economic development officials knew they could offer a carrot to a sports facility developer--as with the new stadiums for the Mets and Yankees--with little cost to local taxpayers.

No loss to the feds?

Rittner writes:

Third, the Times article implies that the federal government is forgoing tax revenue by offering lower interest rates and interest free income through PABs. This could not be further from the truth. Little is lost by the federal government because, in the vast majority of these deals, the projects would not have otherwise proceeded without the tax-exempt bond financing authorized by the federal government and issued by local governments. More plainly stated, how can the federal government lose revenue when they never had it in the first place? The notion that the projects would have happened anyway and that investors would have otherwise invested in taxable instruments is not supported by data or by any reputable development finance professional – it is an academic theory.

Wait a sec: had there been no federal tax-exempt bonds, would that have stopped the Atlantic Yards arena, able to take advantage of a new media market and luxury suites, and to offer a home for the woebegone Jersey-based Nets?

Wouldn't Bruce Ratner and his partners simply been forced to take on some additional partners, or to hold back on some of the bells and whistles?

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Now they tell us: Times says federal tax break that enabled the Barclays Center (and other businesses) comes "at the expense of American taxpayers"; Forbes cover guy Prokhorov is a beneficiary

From the lead story in today's New York Times, A Stealth Tax Subsidy for Business Faces New Scrutiny:

The last time the nation’s tax code was overhauled, in 1986, Congress tried to end a big corporate giveaway.
But this valuable perk — the ability to finance a variety of business projects cheaply with bonds that are exempt from federal taxes — has not only endured, it has grown, in what amounts to a stealth subsidy for private enterprise.
A winery in North Carolina, a golf resort in Puerto Rico and a Corvette museum in Kentucky, as well as the Barclays Center in Brooklyn and the offices of the Goldman Sachs Group and the Bank of America Tower in New York — all of these projects, and many more, have been built using the tax-exempt bonds that are more conventionally used by cities and states to pay for roads, bridges and schools.
In all, more than $65 billion of these bonds have been issued by state and local governments on behalf of corporations since 2003, according to an analysis of Bloomberg bond data by The New York Times.
At a time when Washington is rent by the politics of taxes and deficits, select companies are enjoying a tax break normally reserved for public works. This style of financing, called “qualified private activity bonds,” saves businesses money, because they can borrow at relatively low interest rates. But those savings come at the expense of American taxpayers, because the interest paid to bondholders is exempt from taxes.

About the arena

While the article actually says nothing about the Barclays Center beyond the first mention, the lead photo on the jump page (left) shows the arena. Maybe the Times is making up for its very odd omission of the arena and the Atlantic Yards project last December in its "United States of Subsidies" series.

For the Atlantic Yards arena, the New York City Independent Budget Office in 2009 estimated $194 million in federal tax breaks on tax-exempt bonds, based on $678 million sold. Given that $511 million in bonds were sold, the federal tax break was likely cut about 25%.

The city and state tax savings on the bonds is minor, though there are significant other direct subsidies and tax breaks.

Times commenter Michael A. Livingston wrote:

I worked on tax-exempt bonds in Congress in the 1980s and it is quite astounding what they are used for. When it is for schools roads and court houses I don't think most people object. But for Barclays Center?

This tax break was also used to build the new stadiums for the Yankees and the Mets. (Here's an interview with Neil deMause of Field of Schemes regarding this financing scheme.)

What next

Killing the subsidy "could bring in $50 billion for the federal government over 10 years," the Times reports, though the Obama administration instead would cap the value of the tax break, which has an unspecified benefit. (There's no indication it would be retroactive.)

Field of Schemes's Neil deMause is skeptical, pointing out that such talk in the past has gone nowhere.

Who benefits? Prokhorov

Not only does developer Forest City Ratner benefit from the tax break, so does Nets majority owner Mikhail Prokhorov, who also owns 45% of the Barclays Center operating company.

He's on the cover of the latest Forbes World Billionaires issue, with a respectful profile describing his political ambitions, Russian Billionaire Mikhail Prokhorov: From Oligarch To President?:

We cross the East River and head down Atlantic Avenue to Barclays Center. A car elevator dumps Prokhorov right in the center of the building, designed by Ellerbe Becket and SHoP Architects. On the way to his private box he is mobbed by strangers–as with his players, he’s hard to miss. Prokhorov waves, shakes hands, promises two kids in Nets jerseys he’ll give them an autograph later. “You’ve put your tie on! Do I need a tie now?” asks his partner in the Brooklyn venture, real estate developer Bruce Ratner, who pulls a cravat out of his own jacket pocket and playfully waves it in the air.
...The third member of an odd trio is hip-hop sensation Jay-Z, who performed at the opening of the center last September. (He has a reported cut of the action.) Or maybe not so odd: They’re all self-made, outsize successes. Prokhorov says there is “a natural bond” between him and Jay-Z. :

Self-made? Mike Taibbi wrote in 2010:

The auctions, at least by American standards, were shamelessly, transparently, hilariously rigged. The essence of the scam was the transfer of the state-controlled industrial jewels of the Soviet empire into the hands of a very small group of politically connected individuals. And the best example of them involved Norilsk Nickel... Prokhorov's bank, Oneximbank, helped run the auction, then got itself declared the winner after bidding $170 million to manage a 38 percent stake in a company then worth $1.2 billion. Irrelevant was the fact that another firm had bid twice as much.

Prokhorov's the 69th richest man in the world at $13 billion and the 10th richest in Russia, according to Forbes. Those numbers are down from an $18 billion peak in 2011, but surely leave a great cushion.

Forbes describes him admiringly:

Mikhail Prokhorov has been, by turns, banker, athlete, metals mogul, playboy, investor, media player, politician, NBA owner (the Brooklyn Nets) and now, again, politician. He rocked Russia when he jumped into its 2012 presidential race against strongman Vladimir Putin. No one expected him to win but he managed to get 8% of the vote, even though he ran an unexceptional campaign. (He did, however, rap on TV, perhaps suggesting that some of his friendship with Jay-Z is rubbing off). While the 6-foot-8-inch bachelor and martial arts enthusiast moved the Nets to a new arena in Brooklyn's Atlantic Yards, and often jets in to watch a game, he has no plans to settle in the U.S. He insists that his serious interest is Russian politics, and he has created a new party, the Civic Platform, that he intends to expand until it's strong enough to go head-to-head with Putin's United Russia. He has the money to see it through. In late February 2013 he sold his 37.8% share of Polyus Gold International Ltd. for $3.6 billion.

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As New York vies for marquee sports events, a good deal for the public or just good business for owners?

From a New York Times Sports section article today headlined New York Builds Momentum in Sports:

In the next few years, though, the New York metropolitan area will host numerous marquee events that will thrust it into the sports spotlight. This summer, the major league baseball All-Star Game will be played at Citi Field, followed next year by the first outdoor cold-weather Super Bowl, at MetLife Stadium. A few weeks later, basketball fans will head to Madison Square Garden to see the final rounds of the East Regional of the N.C.A.A. men’s basketball tournament. By then, the N.B.A. will probably have decided whether the 2015 All-Star Game will be played at the Garden or at Barclays Center in Brooklyn.

Throw in the N.F.L. and N.B.A. drafts in Manhattan and the N.H.L. draft at Prudential Center in Newark, as well as annual events like the United States Open tennis tournament and the New York City Marathon, and New Yorkers will have a full slate of top-flight sports to attend.

The Barclays Center perspective

The article explains what's good business for the Brooklyn arena:

Brett Yormark, the chief executive of Barclays Center and the Nets, said that hosting boxing matches, college basketball games and other events helped put his arena on the map outside the city.

“We want to host events with national appeal,” he said. “It creates value for our naming rights partner, and it’s important to be seen nationally because boxers, artists and others will aspire to perform on our court and stage.”

In other words, it's all about the bottom line.

A good deal for the public?

The article equivocates:

For all of sports’ appeal, critics contend that stadiums and arenas rarely generate the economic benefits that their backers claim because cities, including New York, provide builders with hundreds of millions of dollars in tax breaks and other subsidies that could be used for other things, like hospitals and schools. Others argue that New York is already one of the most visited cities and does not need an All-Star Game, for instance, to boost tourism.

Consider a 9/7/10 article by the same reporter, headlined As Stadiums Vanish, Their Debt Lives On:

How municipalities acquire so much debt on buildings that have been torn down or are underused illustrates the excesses of publicly financed stadiums and the almost mystical sway professional sports teams have over politicians, voters and fans.

Rather than confront teams, they have often buckled when owners — usually threatening to move — have demanded that the public pay for new suites, parking or arenas and stadiums.

Or a 10/11/09 article by the same reporter, headlined In East Rutherford, N.J., New Football Stadium, but at Whose Cost?:

But critics remain unrepentant. George Zoffinger, then the authority’s chief executive, who opposed the deal, said that the authority might ultimately need to ask lawmakers in Trenton to help make its payment to East Rutherford.

“It’s a travesty that no one is focused on them building a $1.5 billion stadium and that they don’t pay any more in taxes,” he said. “At the end of the day, the authority is going to have to go back to the state for subsidies.”

Zoffinger said that while the teams liked to claim that they built their stadium with private funds, New Jersey taxpayers are on the hook for about $400 million in road improvements, a new rail link from Secaucus and more than $100 million to retire the debt on the old stadium after it is torn down.

[East Rutherford Mayor James] Cassella added that under the terms of the authority’s agreement with the teams, the Jets and the Giants can keep any money from stadium naming rights, parking and other revenue that is sometimes shared with local governments that subsidize sports complexes.

Ditto for the Barclays Center, but there's no authoritative local official to protest about a decision made by a larger political entity. And while the arena is not publicly funded through a bond issue, the nearly $300 million in direct subsidies, more than $100 million in free land, and other tax breaks/assistance add up to significant advantage.

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Daily News editorial: a "great mayor" means a city where businesses risk capital; is that the story of new sports facilities?

From a Daily News editorial yesterday headlined The stuff of a great mayor: The Democrats running to replace Bloomberg have shown zero willingness to make tough choices:

It’s not whether the city will go on, it’s what kind of city we’ll have.
One with rising crime, or one with only 400 murders annually.
One in which new business are willing to risk capital, or one in which companies stagnate or, worse, flee.
One where employment grows, even in the boroughs, or one that falls behind the national trend.
One of rising, vibrant neighborhoods, or one that sees the return of urban blight.
Far too casually, de Blasio and Democratic rivals Christine Quinn, Bill Thompson and John Liu dismiss the possibility that New York could go into decline. They campaign with collective amnesia about how hard it was for the city to climb up from ashes and lawlessness, and they take for granted that all will live happily ever after.

Tough choices and risk capital

Another excerpt:

Over these past 12 years, it was not through the path of least resistance that thousands of illegal guns were taken off the streets.
Or that the city has been kept safe from terrorism. Or that a private developer brought the Nets and a great new arena to Brooklyn.
Or that Columbia University is expanding uptown while Cornell is building a high-tech campus on Roosevelt Island.
Or that the No. 7 subway line will soon run all the way to 34th St. and 11th Ave.
Or that a new neighborhood will sprout from the miasma of Willets Point, Queens. Or that the Yankees and Mets have new stadiums.

(Emphasis added)

Whether or not you agree with the editorial's challenge that the candidates should take risks, it's flabbergasting to think that "new business [sic] risk capital" has anything to do with the deals negotiated by the backers of new stadiums and that "great new arena." (Don't forget that the Daily News is a sponsor of the arena plaza.)

That "private developer" wouldn't have "brought" the Nets and the arena without a whole lot of public support, some not even calculated by anyone official. My estimate: perhaps $124 million in free city land and public streets.

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Uncounted savings on the Barclays Center: perhaps $124 million in free land for developer Forest City Ratner

Today, Mayor Mike Bloomberg delivers his final State of the City address at the new Barclays Center arena, chosen because it has generated “unprecedented economic activity in the area.”

He may even salute some well-publicized elements: an award to the 1 millionth visitor, a new gallery honoring black basketball in Brooklyn, a mural at the Dean Street entrance.

Surely he won't specify how much the arena has cost city taxpayers, and whether that money might have been directed at real public goods, things like open libraries and Head Start.

The city acknowledges $179 million in direct subsidies for land and infrastructure. But the city contribution is far greater than previously analyzed.

As I detail below, free land for the project has been vastly undervalued or not even counted, adding up to nearly $80 million, at least, and likely more than $124 million. The beneficiary: developer Forest City Ratner.

The first two lines in the graphic above regard property the city had long planned to give away. The third line--the streetbed of Pacific Street between Carlton and Vanderbilt avenue--was supposed to be paid for, at least initially. Now, neither the city nor Forest City Ratner will say whether anything was paid.

Beyond that, of course, there are numerous other public subsidies and tax breaks, including $100 million from the state, tax-free bonds, and the rights to develop the MTA's Vanderbilt Yard well below the appraised value, with the cash component of the bid well below that of the one rival bidder.

What we know: from IBO

Yes, people have a vague idea that something's wrong. Just yesterday, New York Times columnist Jim Dwyer made light of the fact that the Barclays Center, which is tax-exempt, was incorrectly listed on city tax rolls. (The New York City Independent Budget Office, or IBO, first pointed that out.)

From IBO 2009 report

How much might the arena cost the city? The best effort--though somewhat dated--to reckon with the arena's fiscal impact came from the IBO in September 2009.

It concluded that the arena would be a net loss to the city over 30 years, as the costs to the current budget--including direct subsidies used for land and infrastructure--would exceed expected tax revenues by $39.5 million.

Beyond that, the city would lose $180.5 million in opportunity costs--mainly from unpaid property taxes on the arena.

That $180.5 million total includes $9.7 million in city property and streets transferred to Forest City. I estimate that number instead at $124.1 million, which would make the opportunity cost total $294.9 million.

Update needed

That report surely could use an update. For one thing, the IBO overestimated the savings--mainly on federal taxes, not city ones--to Forest City Ratner on tax-exempt bonds, because only $511 million in bonds were issued, as opposed to a projected $678 million.

From IBO 2009 report

Also, given the number of expected arena events should increase significantly with the move of the New York Islanders in 2015, local revenues should rise.

Costs missing

Then again, some significant costs were ignored or downplayed.

As the graphic at right indicates, the IBO valued the transfer of city property to Forest City Ratner at $6 million and city streets at $3.7 million.

Those numbers, as I explain below, significantly undervalue the properties. Moreover, the IBO made no attempt to assess the value to Forest City of other city streets transferred to the developer, because the IBO assumed that Forest City would pay fair market value for the land.

There's no evidence Forest City did so.

(Forest City's partnership with Russian billionaire Mikhail Prokhorov, who owns 45% of the arena operating company, means that the Russian oligarch now shares some of the costs and benefits.)

Valuable land, big savings

New York City Economic Development Corporation President Seth Pinsky, in testimony at a May 2009 state Senate oversight hearing, claimed, “Finally, the city has committed to contribute to the project at agreed-upon discounts certain real estate assets for which there are unlikely to be other opportunities for monetization."

Forest City paid dearly for property on the site, and the city just gives it away? Land on the arena block was very valuable--as detailed below--and land nearby is also valuable. Retail rents are skyrocketing. Consider that, as the Wall Street Journal reported 9/16/12:

RedSky Capital LLC paid $4.1 million, or $900 a square foot, for the building at the intersection of Flatbush and Fifth avenues that's housed Triangle Sports a retailer of shoes and sporting goods.

Divide that sum by $900 and the total is about 4556 square feet over three stories, which suggests the plot itself is 1500 square feet. That suggests $300/sf for land. But you can't build high-rise there.

How much is land worth?

Land on the project site is likely worth well more than $300/sf.

At Floor Area Ratio (FAR) of 10--the same FAR used for the appraisal of the Vanderbilt Yard--and a price of $75 per buildable square foot (the assumption in the Vanderbilt Yard appraisal), the land is worth $750/sf.

Both those numbers need adjustments. The approved FAR of the arena block, according to the Land Use chapter of the Atlantic Yards Final Environmental Impact Statement (FEIS), is 8.6, including the streetbeds.

And land is no longer worth $75 per buildable square foot. In 2008, one developer said, the price per buildable sf (PBSF) sought by the city was $150. In 2008, a real estate professional told me, the PBSF was between $110 and $200.

In 2011, according to an analysis from TerraCRG, the PBSF for residential land in Downtown Brooklyn was $161, with an average of $125 for the overall category of Downtown Brooklyn and Park Slope. In 2012, according to TerraCRG, the numbers were $113 and $147, respectively.

Let's use $125 PBSF, a relatively conservative assumption given that the Atlantic Yards site is likely more valuable given its proximity to transit. That suggests land on the arena block is worth 8.6 times $125, or $1075/sf. For convenience, let's round down to $1000/sf.

The MOU's promise

From MOU

According to the 2/18/05 Memorandum of Understanding (MOU) between the city, state, and Forest City, the developer was to get the "City Properties and the City Streets underlying the arena for just $1. (The full MOU is at bottom.)

Initially, the city property on the arena block underneath the adjacent "commercial office building sites"--now, mostly, housing sites--was supposed to generate cash.

Maybe. The MOU cited payment "fair market value... based on an independent appraisal," which took into account "any extraordinary cost" to the developer. In other words, a potential wash.

The IBO, in its first report on Atlantic Yards, in September 2005, low-balled the value of the property under the arena, valuing the streets at only $56,400, based on $20/sf Department of Finance values applied to adjacent land, applied to an area--clearly undercounted--of approximately 2,820 square feet.

The other land on the site, including city properties and streetbeds, was supposed to reap fair market value.

That didn't last.

The deal changes

From 2006 GPP

According to the July 2006 Atlantic Yards General Project Plan (GPP, below), as approved by the Empire State Development Corporation (ESDC), the equation changed somewhat. Property under "the Arena" apparently encompassed the entire arena block. There was no mention of the land underlying the adjacent "commercial office building sites" generating revenue to the city.

However, the other city property within the Atlantic Yards site--the bed of Pacific Street between Carlton and Vanderbilt avenue-- would be acquired "at their fair market appraised value," paid by Forest City.

That didn't last, either.

The deal changes, again

In 2009, Forest City Ratner asked the MTA to revise the Vanderbilt Yard deal and asked the ESDC to agree to acquire the Atlantic Yards site via eminent domain in stages, thus saving the developer on land it didn't need.

From 2009 MGPP

Also, a subtle but key change in the June 2009 Modified General Project Plan (GPP, below) likely hid an additional subsidy.

No longer would the other city property--the aforementioned streetbeds outside the arena block--be acquired "at their fair market appraised value." Alternatively, the payment would be for "such other value as shall be agreed to by the City and FCRC."

How much was the saving on arena block streetbeds? 

Forest City wasn't saving just $56,400 on those streetbeds. In September 2009, the IBO updated its analysis:

The city will provide some property for the project at no cost. According to the latest modified project plan, this will include the street bed of Fifth Avenue between Flatbush and Atlantic Avenues and the street bed of Pacific street between Flatbush and Sixth Avenues, as well as a small traffic triangle at the intersection of Fifth Avenue and Pacific street. Based on recent sales prices in the area, IBO estimates that the 2010 sales value of this property is $3.7 million.

How was that calculated? The IBO said:

The property amounts to approximately 61,625 square feet. The value is based on a price of $60 per square foot, which takes into account the citywide drop in property prices.
In IBO’s 2005 fiscal brief a calculation error led to a significant underestimate of the value of street beds to be transferred.

The calculation error related to the square footage. But the valuation surely was a lowball figure, geared to a city assessment rather than any recognition of the market.

As stated above, the value was likely closer to $1000/sf, given the FAR of 8.6 and the $125 PBSF.

With property covering 61,625 sf--a bit more than 1.4 acres--that suggests the savings on streets is $61,625,000.

What about the other properties?

There were other properties on the arena block. The 2005 IBO report described the transfer of an FDNY site at Block 1127, Lot 33, valued at $93,800 by the Department of Finance.

City property records indicate that the plot was 25 feet x 110 feet, or 2750 square feet. Multiple that by $1000/sf, and the value is $2,750,000.

That sum doesn't looks out of line when compared with that another small property on Block 1127, Lot 20, purchased by Forest City Ratner for $3 million in 2006. (The payment was reimbursed via city taxpayers' $100 million subsidy for land.) Lot 20 looks marginally wider but not as deep.

A footnote in that first IBO report stated that  another city-owned parcel at the tip of the site (Block 1118, Lot 6) was part of Phase 1, but appeared to "be outside the arena building footprint" and thus would be sold at fair market value.

Nope.

The 2009 IBO report acknowledged that the latter property would be included in the city's giveaway, and nudged up the value of the first site. It stated:

The city will also transfer two city-owned parcels to the Empire State Development Corporation (ESDC) at no cost, which will then be leased to FCRC, that appear to be included in the arena site. The first (Block 1127, Lot 33) is valued by the Department of Finance at $124,000 on the current tax roll, and the second (Block 1118, Lot 6) has a reported full market value of $5.8 million.
Based on these market values, the value of the subsidy from ignoring the opportunity to sell these properties is $6.0 million.

That deserves an adjustment. Block 1118, Lot 6, according to property records, covers 13,500 sf, or about .31 of an acre. It's the tip of the arena plaza and the future tip of the area in front of the flagship office tower. It's a prime site.

Even the city, when it assessed the property at $5.8 million, valued it at nearly $430/sf. It's likely worth more. At $1000/sf, given the FAR, it's worth $13,500,000.

Adding it up

The savings on these two city properties is estimated at $16,250,000,

The savings on the streets is estimated at $61,625,000.

Estimated Phase 1 total savings: $77,875,000.

What about Pacific Street in Phase 2?

Another key piece of land is Pacific Street between Carlton and Vanderbilt avenues, demapped for construction staging (trucks line up there), access to the adjacent surface parking lot, and, ultimately, open space to serve the towers surrounding it. This is part of the Phase 2 site but integral to arena operations.

The approved FAR for the project site east of 6th Avenue (Phase 2) is 7.4, including the streetbeds, according to the Final Environmental Impact Statement. Multiply that by $125 PBSF, and the value is $925/sf.

How big is that stretch of Pacific Street (outlined in red)?

It seems roughly commensurate to the Phase 1 streetbeds (blue + yellow) that total 61,625 square feet.

However, just to be conservative, let's call Pacific Street 50,000 square feet, or about 1.15 acres. Multiply that by $925, and the estimated value is $46,250,000.

Total estimated savings: $77,875,000 +  $46,250,000 = $124,125,000.

Of course, a different PBSF would adjust the numbers. Consider: a 20% decrease, with a value of $100 PBSF, would mean total savings of $99.3 million. A 20% increase, with a value of $150 PBSF, would mean total savings of $148.95 million. Also, of course, an adjusted total of Pacific Street square footage would tweak the formula.

How much did Forest City pay?

We don't know exactly what happened with this Phase 2 property. (That street was indeed condemned, addressed in a 9/17/09 board memo and a later legal petition.)

According to the 2005 GPP,  other city property within the Atlantic Yards site was to be acquired "at their fair market appraised value." However, the 2009 MGPP offered a loophole, allowing payment for "such other value as shall be agreed to by the City and FCRC."

What was that value?

It's a mystery. My queries to the mayor's press office, the New York City Economic Development Corporation, and Forest City Ratner have been ignored. A Freedom of Information Law (FOIL) request to the Empire State Development Corporation returned no relevant documents. Other FOIL requests remain pending.

Maybe another city agency, or elected officials, can probe further.

For now, however, my working assumption is that Forest City didn't pay and that the developer, with its allies in the Bloomberg administration, has assumed no one would check.

Atlantic Yards General Project Plan, July 2006 by

Atlantic Yards, Modified General Project Plan, June 2009 by

IBO Atlantic Yards 2009 Fiscal Brief by Eliot Brown / New York Observer

Atlantic Yards Memorandum of Understanding, Feb. 18, 2005 by

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Times editorial on subsidies: "politicians and officials are trying to pick winners and losers, almost exclusively to the benefit of big corporations"

So, on the heels of its series on subsidies (which unaccountably ignored Atlantic Yards in its database), the New York Times on 12/6/12 offered an editorial headlined Race to the Bottom:

Competition among states and cities to lure businesses in hopes of creating jobs is not new, but it has become more fierce in recent years. An investigation by The Times found that state and local governments are giving out $80 billion a year in tax breaks and other subsidies in a foolhardy, shortsighted race to attract companies. That money could go a long way to improving education, transportation and other public services that would have a far better shot at promoting real economic growth.

Instead, with these giveaways, politicians and officials are trying to pick winners and losers, almost exclusively to the benefit of big corporations (aided by highly paid lobbyists) at the expense of small businesses. Though they promise that the subsidies are smart investments, far too often the jobs either don’t materialize or are short-lived, leaving the communities no better off.

...Local governments would be much better off investing tax dollars in education and public works that would deliver long-term benefits to both businesses and workers. California, for instance, is among the least generous of the larger states in doling out tax breaks. It gave out just $112 per capita compared with $759 in Texas, $672 in Michigan, and $210 in New York. Its experience leaves no doubt that investments made in public institutions like the University of California system can remain critically important to economic growth decades later.

Here's the key paragraph:

The trouble with targeted incentives is that they are little more than transfers of wealth to a handful of powerful corporations from all other taxpayers, including other businesses. If the problem is excessive tax burdens on businesses in general, then the solution is broad tax reform that also benefits small business owners, who are more likely to stick around if the regional economy weakens and who are unlikely to hopscotch around the country in search of a bigger tax break.

Remember when the editorial page was at least semi-skeptical about subsidies for Atlantic Yards?

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In Times series on "United States of Subsidies," a glaring gap: no mention of Atlantic Yards or Forest City Ratner, which should lead the pack in New York State

The New York Times today begins a three-part series, UNITED STATES OF SUBSIDIES, A series examining business incentives and their impact on jobs and local economies.

The first installment, which dominates the front page, is headlined As Companies Seek Tax Deals, Governments Pay High Price.

Surprising, though Brooklyn-based developer Forest City Ratner has collected hundreds of millions of dollars in subsidies and other support for the Atlantic Yards project, neither the firm nor its parent, Forest City Enterprises, appears among those company that have received more than $100 million.

In fact, as I explain below, Forest City Ratner, rather than being absent from the list of firms taking advantage of subsidies in New York State, should be at the top of the list, as it gains far more than the $157 million attributed to JP Morgan Chase.

(Here's my posted comment, which responded to another commenter's statement that "Atlantic Yards is a perfect example of the worst kind of corporate welfare..."

The Times summary of the article:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.
“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
The Times analyzed more than 150,000 awards and created a searchable database of incentive spending. The survey was supplemented by interviews with more than 100 officials in government and business organizations as well as corporate executives and consultants.
A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them.

Who benefits?

The Times reports:

Far and away the most incentive money is spent on manufacturing, about $25.5 billion a year, followed by agriculture. The oil, gas and mining industries come in third, and the film business fourth.

Location is crucial:

Even big retailers and hotels, whose business depends on being in specific locations, bargain for incentives as if they can move anywhere. The same can be said for many movie productions, which almost never come to town without local subsidies.

This recalls the New York Yankees' threat to leave the Bronx, the Bronx Bombers' storied location. And it puts into perspective Forest City Ratner's desperation to move the money-losing Nets from an antiquated arena in New Jersey to a new arena in the country's media capital.

However, oddly enough, there's no reference to Forest City Ratner in the database, and only a piddling mention of parent Forest City Enterprises, below.

Fuzzy data, including on New York


According to the Times, the leading beneficiary of subsidies in New York is JP Morgan Chase, which gained $157 million in a property tax abatement. The Yankees and the Mets, via their corporate entities, each gained about $100 million in a property tax abatements.

The Times reports:

Collecting data on property tax abatements is the most difficult because only a handful of states track the amounts given by cities and counties. Among them is New York, where businesses save an estimated $1.1 billion a year in property taxes. The American International Group, the insurance company at the center of the 2008 financial crisis, continued to benefit from a $23.8 million abatement from New York City at the same time it was being bailed out with $180 billion in federal money.
Since 2000, The New York Times Company has received more than $24 million from the city and state.

What about Atlantic Yards?

The best summary, though imperfect, regarding Atlantic Yards, comes from the New York City Independent Budget Office's (IBO) September 2009 report, titled The Proposed Arena at Atlantic Yards: An Analysis of City Fiscal Gains and Losses.

The IBO delineated $169.4 million in direct costs to the city budget, and $104.3 million in costs to the state budget. Beyond that, for example, it counted $146 million in city costs for the arena property tax exemption and $193.9 million in federal costs regarding tax-exempt financing.

(As I described, because the IBO predicted $678 million in tax-exempt financing rather than the ultimate $511 million, the savings on such financing should be cut by about one-fourth. Thus the IBO's assertion that the net gain to Forest City was some $726 million should be dialed back by at least $50 million--one-fourth of the $200.3 million in projected savings on the financing. Then again, as noted below, Forest City achieved other savings unmentioned in the report.)

The methodology

The Times describes its methodology:

The Times included incentives of many types: cash grants, corporate income tax credits, sales tax exemptions or refunds, property tax abatements, low-cost loans or loan guarantees and free services like worker training. The database does not reflect the savings businesses receive in states with minimal or no corporate income tax or sales tax.
The $80 billion figure is based on more than 100 records requests to state agencies nationwide and on an examination of numerous government reports. The Times identified 1,950 incentives programs and compiled figures on benefits used by businesses in the most recent year available.
Since many state programs The Times examined did not identify the names of specific beneficiaries, examples of companies were obtained from several sources, including Investment Consulting Associates and Good Jobs First, a non-profit policy center that focuses on economic development. (For some of those examples, the dollar figures reflect the initial award; it is not known whether the entire benefit will be used.)

Apparently because Atlantic Yards benefits come from rather unusual "pots" compared to most other corporate incentives--they're absent from databases regarding the NYC Industrial Development Authority nor state PILOTs (payments in lieu of taxes)--they didn't show up in the Good Jobs First/Good Jobs New York database the Times consulted.

Even so, among the "numerous government reports" could have been that from the IBO, which would have been a good start.

I don't think the Times was trying to protect Forest City because it was the newspaper company's partner in the Times Tower. However, as I've said before, I think the newspaper has an obligation to cover Forest City Ratner exactingly, and it has often fallen short.

More Atlantic Yards savings

And that IBO report, for example, doesn't even get to the giveaway of arena naming rights, worth more than $200 million, or the state and city help in getting Forest City Ratner low-cost loans via the federal government's EB-5 program of investment immigration, likely saving more than $100 million.

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