Monday, June 16, 2008

Moderately Epic Return To The Arena-Blogging Fray

Yes, there's a whole host of ructions surrounding the financing of stadium projects, and I haven't been around to pontificate. Well I've been busy growing a child-baby, so sue me.

I'll recap the news, very briefly, for you. Stadium projects, as supposed spurs to economic growth, and as occasionally useful bits of civic infrastructure (somewhere between subway stations and libraries, at least in terms of popularity), have often been able to get interest payments on their debt exempt from taxes, through mechanisms too complicated to explain in detail (it's called PILOT, and after hearing some responses to my last few posts on the subject of stadium finance, I've opted against doing so. Someone who can write about it, without making any eyes bleed, is Neil deMause. Go.)

But because they are some distance from being essential bits of civic infrastructure, it's been common for the Internal Revenue Service to keep an eye on how sports teams go about getting tax exemption. What's roiled the hapless Yankee Stadium project, the victim of the fact that Steinbrenner does not know one end of a cinder block from the other, is it bumping into one of the several restrictions that the IRS imposes on such for-profit borrower.

The Yankees want more money to complete their farcical orange-hued disneyland of a ballpark because their Nixon-funding, ship-building, somewhat detached owner doesn't know how to manage a construction project.

[Can I digress for a moment? I watched the entirety of the Mets double-header, listened to an awful amount of speculation about their manager Willie Randolph's job, and wanted to remark again on just how canny the Met's owners, the Wilpons, are. Randolph has been forced to do as well as he can with the old busted line-up inflicted on him by general manager Omar Minaya. Minaya has been awfully good at extending the Mets' appeal, making money from their very own cable channel, SNY and rebranding them as a more dynamic force in the city's baseball (they get a much better shake from the NY Times' sport section these days, for instance). Picking line-ups? Not so much. Randolph is a very unsuitable fall-guy, but then so is Minaya, so the Wilpons keep reminding Minaya that he's welcome to deal with Randolph as he sees fit, and are happy for the fans to think that the Wilpons have their interests at heart. But I'm not convinced they want anything to change, because that would involve flinging money at their farm system, among other financially unpalatable moves[UPDATE: God you're a jackass, Gringcorp. Wilie just got axed. He shouldn't have been]]

The Yankees' woes are important, because among the rules that were adopted since their financing closed are restrictions on total debt size and the relationship between debt service and the nominal tax payments on which (under the current rules) the debt service is said to be predicated. None of them would prevent Bruce Ratner's Nets arena financing happening, and none of them would prevent some kind of tax-exempt financing happening. What might prevent a tax-exempt deal from happening would be some drastic move from the IRS and its congressional overlords to end the practice altogether. Rep Kucinich's growling to the contrary, this looks unlikely.

I am a little disappointed, though, in the way nolandgrab's Lumi spun one of FCR's statements on the project. I think that it is theoretically possible to do a financing for the Nets arena without exempting its bonds from tax on their interest. My main justification for saying this is that the Jets/Giants managed to do it, though I'll grant you their franchises are much stronger than a relocated Nets. If though, I have missed a place where FCR has said that the project cannot go ahead without a tax exemption, I apologise copiously, Lumi.

In any case, if I have any overriding quibble, it's that we're still seeing the financing as this kind of binary, on/off-type creature. FCR is probably intermingling its returns from the various projects at the Vanderbilt Rail Yards site and its surroundings as much as it intermingles the PR. The opportunities for bits of the AY project to cross-subsidise each other, much as bits of a sports teams operations cross-subsidise each other, and bits of wealthy sports teams owners holdings subsidise each other, are legion. Changes to the ways that one component raises financing have subtle knock-on effects on FCR's profits rather than one catastrophic result.

Given that Oder's numbers show the arena project throwing off decent amounts of cash, even under some fairly conservative assumptions, these hikes in debt service costs mostly eat into FCR's returns on the project, or at least the returns of the Nets owners and the stadium's economic owners. With the AY office tower projects, if you don't get anchor tenants, you don;t go ahead. But with the arena, the fact there will be at least some people willing to go to a basketball game, and at least some corporations with a debased enough brand image to want to be associated with such a pastime (you can tell I'm a huuuuge basketball fan) provides you with that kind of cushion.

FCR and its investors have some kind of pain-point, a little like that global nuclear annihilation game in Never Say Never Again. We don't know what it is, and they will try not to give us any idea of where it is. The carrying costs of this portfolio of properties in a gentrifying part of Brooklyn is one factor, chipping away at their debt services subsidies is another. But their willingness to throw up their hands and saunter off in the direction of the real estate industry's equivalent of the blackjack table.

But let me repeat: the financing of Atlantic Yards does not have an on-off switch. Atlantic Yards does. And Ratner's hand is on it. He'll take it off as a result of a multitude of cuts, not just one.


At 4:40 AM, Blogger NoLandGrab said...

You're right. Ratner didn't say that Forest City COULDN'T do the arena or the project without the bond financing.

Obviously I was unclear -- I only meant to explain that EVEN the developer says that it can build the project without the triple tax-free bonds, ergo, the additional "subsidy" is unnecessary from a public-benefit standpoint and only contributes to padding the bottom line, as you point out.

Maybe if you chimed in earlier, you could have saved me from my own feeblemindedness!

-- lumi

At 12:17 PM, Blogger Gringcorp said...

I wanted to chime in earlier, but I was raising this tiny excrement machine that the government says is my son....

Here you touch on one of those difficult questions at the heart of any public infrastructure project, essential or not. What constitutes a reasonable return for a private developer?

Ratner's probably not saying he'll earn NO return on his money without a tax-exempt allocation, he's saying that he will be earning a return on equity that while positive, would be very displeasing to his (OK, well, FCE's) shareholders.

This is not, obviously, a figure that FCR or FCE would much like to disclose, partly because he doesn't want to make any specific promises to his shareholders that he can't keep (and securities laws might be on his side here), but also because Ratner and his supporters are rather squeamish about discussing making a profit on a subsidised project at all. Probably because the project is the feeblest justification for the use of eminent domain that could possibly be arrived at after consultation with the brain trust that constitutes New York's political class.


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