Stadium Finance: Mayor, Professing to Know Numbers, Should Know He Can’t Have It Both Ways (Unless He’s Keeping Two Sets of Books)

As a mayor who professes special financial expertise and an understanding of finance and the way numbers work, Michael Bloomberg should know that when it comes to stadium and arena finance he can’t have it both ways.

Premise for Tax-exempt Stadium and Arena Is Interception of Taxes: Ergo Two Choices

The whole premise for why bonds issued to finance sports stadiums or arenas can be tax-exempt is that the revenues used to support and pay the bonds are diverted city real estate tax revenues, intercepted before they go into city coffers. In other words, those diverted revenues pay for the stadium/arena bonds rather than being used for anything else for which the city might use sorely needed tax revenues.

Therefore, either:

1.) Stadiums and arenas are financed with diverted city real estate tax revenues and, accordingly, the stadiums and arenas are eligible to be financed with triple-tax-exempt municipal bonds;

or,

2.) The city does not forego any substantial moneys because stadiums and arenas are not financed with diverted city real estate tax revenues and, accordingly, the stadiums and arenas are not eligible to be financed with triple-tax-exempt municipal bonds.

John Gambling Radio Interview: Mayor Wants to Have It Both Ways

Last Friday, (12/12), on the Live from City Hall with Mayor Mike and John Gambling radio show, Bloomberg was trying to have it both ways. He was disingenuously trying to sell the public on the idea that 1.) no substantial city tax revenues are being diverted to pay the bonds and 2.) that the bonds will still be tax-exempt.

If you listened to him he even made it sound as if he had done the calculations himself. If he did, then he did them wrong, or just wants to misrepresent the expense to the public (at 23:50):

It's not city money, other than we would forego the taxes- (Gambling interjects the "revenues") a little bit of revenue, it's a. . .if you do the calculations, it's a very small amount of revenue,- on the interest on those bonds.

Interception of Real estate Taxes Too Substantial to Ignore

In other words, Bloomberg is attempting to represent that bonds will be tax-exempt and that the only revenue the city will be forgoing is income tax revenue that won’t be paid on the bonds. He entirely ignores that diverting the city real estate taxes is the essential foundation and prerequisite for the bonds to be tax-exempt. The diverted real estate taxes are, in fact, the bulk of the tax revenues that will not be collected by the public. For instance, looking to Atlantic Yards arena calculations for some representative figures, when tax-exempt bonds are issued, 84% of the forgone tax revenue would be real estate taxes the city is not collecting.

(The actual total construction costs of the Atlantic Yards arena won’t be known at least until the bonds are issued. The estimated amount of those costs, which are escalating, may be disputable, but no matter what the costs are, the percentages for the underlying bond transaction figures will remain proportional. Assuming the cost of building the arena is $950 million, then the public subsidy costs, in descending order, add up as follows: $950 million as the present value of forgone city real estate taxes, plus $154.6 million in uncollected federal income tax, plus $14.16 million in uncollected state income tax, plus $7.75 million in uncollected city income tax This all adds up to $1.1265 billion.)

Percentagewise all the foregone tax revenue figures break down as follows:

84.33% Present value of real estate tax revenue (forgone by the city measured by amount city could raise with that same or equivalent income stream)
13.72% Federal income tax revenue (forgone by the federal government)
1.26% State income tax revenue (forgone by the state)
.68% City income tax revenue (forgone by the city)

In other words, in terms of foregone tax revenues associated with issuing the tax-exempt bonds, the city is bearing 85% of the burden (84.33% + .68%). These are just the subsidies related to issuing the tax-exempt bonds. In bigger picture terms, the Atlantic Yards arena is getting other public subsides: the MTA and the city are both giving land at below market value and sales tax won’t be collected. There are similar additional subsidies to consider in the case of the Yankee and Mets stadiums.

Why the Mayor Would Not Have Just Forgotten: What Was Crafted at a High Level
It hardly seems likely that Bloomberg should have forgotten about the forgone NYC real estate taxes or their magnitude. Among other things, the city went out on a limb to claim a very high tax assessment and real estate tax value for the Yankee Stadium property. (See: Monday, December 01, 2008, Brutally weird: Why a vacant lot in Alphabet City is (not) like the land under Yankee Stadium.) This required interagency contortions that must have involved coordination at a very high level in the Bloomberg administration. To get things done, no doubt there were some people attributing what was wanted to the mayor. (See: Saturday, October 25, 2008, Testy Kucinich presses city officials on “gaming” Yankee Stadium assessment; big disagreement over “smoking gun”.)

We have written that the numbers the administration came up with do not seem legitimate or honest and that the Yankee Stadium bonds therefore do not seem entitled to the tax exemption claimed. (See Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat and Saturday, November 8, 2008, Does Questionable Assertion of Attorney-client Privilege Point to Yankee Stadium Bond Taxability?)

Bonds; Taxable or Not? Can’t Have It Both Ways

If we are right, the city, with all its shenanigans, will have earned itself substantial potential liability and the dubious distinction of upsetting the tax-exempt bond-buying market with bonds becoming taxable. No doubt Mayor Bloomberg will assert that we are wrong and that the bonds are tax-exempt because taxes are actually collectable on the Yankee Stadium property. But once again, Bloomberg can’t have it both ways; either taxes are collectable on the Yankee Stadium property and the city is forgoing them, or there aren’t collectible taxes on the property, in which case the bonds are taxable.

Intercepted Taxes Ain’t Private $$

It doesn’t make sense for Mayor Bloomberg to argue that these diverted real estate taxes should somehow be disregarded as private payments. The way Assemblyman Richard Brodsky put it at a October 24, 2008 Congressional hearing was:

Congressman, the private payments are the taxes they owe. It’s as though you built an extension on the house and you said to the taxing authority: send my payments to the bank to pay off the mortgage. The notion that this is being paid for by the Yankees is delusional.

(See: Wednesday, December 10, 2008, Brodsky announces expanded inquiry into aid for stadium projects)

We said it similarly:

The setup is basically like paying taxes on your home and then having the government use that money to help you pay off your mortgage.

(See: Your 'Net' Loss, $2B in Taxes to Ratner, by Rich Calder)

Now does Bloomberg want to argue that these ‘synthetic taxes” are just fictional and would never be owed in the first place? Could it somehow be OK to make believe high taxes would be owed on Yankee Stadium because none of the imaginary taxes would ever be paid? Is there supposed to be some kind of notion that we just don’t charge taxes on big projects? Where then is the tax exemption for the bonds coming from?

More in the Gambling Interview: Atlantic Yards Report

It should be noted that the Bloomberg quote from the John Gambling show to the effect that “if you do the calculations, it's a very small amount of revenue” that the city is forgoing, comes from a longer segment of the interview about the Yankee and Mets stadium bonds. In that discussion Bloomberg misrepresented other aspects of the tax-exempt financing for the bonds. Norman Oder wrote about it in Atlantic Yards Report, pointing out some of Bloomberg’s mistakes and contradictions: Bloomberg: "Letting any group have a special deal is not what democracy is about," Saturday, December 13, 2008.

Bloomberg’s Fictional Federal Program: Really Quite the Opposite

One misrepresentation that Bloomberg made during the Gambling interview was that the stadiums were being financed pursuant to a federal “plan” and/or “program.” In fact, quite the opposite is the case. In 1986 Congress passed the Tax Reform Act of 1986 which took away tax exemption for private activity bonds that were used to finance stadium construction. According to Senator Daniel Patrick Moynihan, who was instrumental in getting those 1986 provisions passed, the subsequent "Issuance of [tax-exempt bonds] contravenes the clear and expressed intent of Congress." (See: Is the sun setting on tax-exempt stadium financing? Janet Ward, Oct 1, 1996.) Moynihan introduced a new bill in 1996 to prevent the post-1986 financings that were occurring knowing that Yankee and Mets stadium financing swould be prevented by his corrective legislation. (See: Moynihan's Tax-Break Bill Could Foil Dreams of Fields, by Thomas J. Lueck, July 14, 1996)

What Bloomberg describes as a program is regarded as merely a loophole the use of which by Bloomberg is all the more questionable because of his administration’s abuse of the real estate tax assessment process. (See: Monday, June 16, 2008, As IRS moves to close "loophole," ESDC fights for AY funding scheme.)

Fictional Federal Program has Fictional Bloombergian Purposes to Go With It

Having created a fictional federal program (which as noted above Bloomberg seems to theorize can be run with fictional real estate assessment figures), Bloomberg then ascribes a fictional purpose to the program:

Why does the federal government have a program? It stimulates construction jobs and economic activity. They might not do these things, build stadiums, or in this case some infrastructure around it, if it costs them more. The economics might not work.

. . . .we'll get less income from taxing the interest that the bondholders would pay, but in return there's more construction, more jobs, and that's good for society.

Stadiums and Arenas Don’t Provide Benefit. . .

The fictional purpose Bloomberg ascribes to the fictional program is especially off-base because the economics in this area don’t work. They fail the test of providing benefit on multiple levels. Stadiums and arenas are not “good for society” since the studies show that they don’t provide a net benefit for the particular localities that construct them. (See: Monday, July 14, 2008, FCR consultant Zimbalist (in 2003): "no rationale" for federal subsidy of projects like AY arena)

. . . And Financing Them Would Not Make a Good Federal Program

Even supposing that stadiums or arenas did somewhat benefit localities that get them, a program subsidizing the construction of stadiums and arenas would not make sense as a federal program. That is because the team ownership franchise structure limits the number of professional sports teams that can exist. Consequently, all negotiating power resides with the team owners who play localities off against each other. It is never a good idea when the entity to receive subsidy has all the negotiating power since that entity can pocket the subsidy giving little or nothing in return. That might be bad enough for any level of government handing out a subsidy; the reason subsidizing stadiums and arenas makes particularly little sense as a federal program is because as, Atlantic Yards Report quotes Assemblyman Brodsky testifying on the subject in October before Kucinich's subcommittee:

“There’s no value to the economy of the United States when the state of New York buys off a corporation to move from Pennsylvania.”

A Cynical Ploy? The Good of the Few Outweighs the Good of the Many Taxpayers?

In Bloomberg’s Gambling interview it is possible to detect that Bloomberg is trying to sell NYC residents the unattractive notion that the heavy government expenditures subsidizing the stadiums might be all right if it is “not city money” and the expenses are instead being footed by a higher level of government, federal or state. But how would that work? We are all of us, as New York City residents, part of each level of government and we should be expecting responsible conduct from every level of government of which we are a part. Even allowing that taxing the many to benefit a certain few might have a cynically selfish attraction, that attraction is completely dependent upon the identified few to whom such benefit will flow. Certainly benefits do not flow to the average New Yorker or even to the average sports fan: for one thing, these construction projects have only boosted ticket prices. (New Stadiums: Prices, and Outrage, Escalate, by Richard Sandomir, August 25, 2008) Who are the few to whom the benefit flow? In its coverage of the Gambling interview, Atlantic Yards Report provides the answer with this quote from Rep. Dennis Kucinich:

the practice of providing taxpayer subsidies to the building of sports stadiums is a transfer of wealth from the many taxpayers to the few wealthy owners.

Bloomberg, Professed Financial Expert, Getting It Wrong Because . . .

How could Mayor Bloomberg, who professes special financial expertise and an understanding of finance and the way numbers work, be so off-base about all of the above? Part of the answer may be that his financial acumen is overrated. We have made that case: Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer! Thursday, October 23, 2008 and More Discredit of Bloomberg as Qualified Financial Crisis Leader, Saturday, October 25, 2008. There are other possible contributing explanations. The mayor’s focus may be in the wrong place: Mayor’s Focus on City Planning Matters: Some Quantified Analysis, Wednesday, December 3, 2008. Or his motivations may have more to do with honoring deals he has made or commitments he feels he has to keep, perhaps in connection with contributions his charities have collected: Are the Atlantic Yards Land Grab and City Official Fraud Being Used to Finance Bloomberg’s Bid for Billionaire Term Limit Exceptionalism? Wednesday, October 22, 2008

Two Points From Atlantic Yards Reports as Cappers

The Atlantic Yards Report article on the Gambling interview (which is much shorter than this article) efficiently points out two other things of pertinence respecting the overspending of public monies on the stadiums.

First, in the interview, Mayor Bloomberg was able to talk at some length about how the MTA is short of both operating and capital budget funds without noting that a substantial portion of the gap of several hundred million dollars would be closed if the MTA were not selling its Vanderbilt Yard property to the Atlantic Yards developer for substantially less than the property’s market value.

Second, immediately on the heels of his pontification about the value of stadium financings where the stadium owners don’t have to pay collectable taxes, Mayor Bloomberg said:

The bottom line is that the state should collect the taxes. It is money we need, number one. Number two, letting any group have a special deal is not what democracy is about. It breeds contempt for our laws.

The only problem is that Bloomberg, having shifted gears, was now no longer talking about the stadium owners with whom he has struck deals to let them intercept, uncollected, all their “tax payments” to cover their private sports business expenses. Instead he was talking about New York State collecting cigarette taxes from Native Americans. (Bloomberg also spoke derisively about possible hard feelings that might exist concerning the acquisition of New York’s land from the original native population.)- Did we happen to mention that Mayor Bloomberg likes to have it both ways?- - Yes, that’s where we began. . .

Forewarned and Forearmed: “A Big Fat Pitch”

Here for perusal at length is the entire portion of the Gambling/Bloomberg interview where stadium finance is discussed (at about 22:40), aptly described by Atlantic Yards Report as “a big fat pitch” on the controversial issue:

JOHN GAMBLING: Speaking of things that are expensive, I'm reading that our stadiums, our baseball stadiums are getting more and more expensive, and they've looked for more money or the right to bonds, to rent. . loan bonds or let (Gambling probably meant to say “get the benefit of borrowing from an issuance of”) bonds . . . .

MAYOR BLOOMBERG: The issue here is the federal government has a plan where, and the city has an agency that helps decide who gets it, there are tax-exempt bonds, they typically are free of state, city, and federal taxes. And since they are, you can sell the bonds at a lower rate. So something like the Yankees or the Mets organization would like to use these bonds, 'cause the interest costs to them would be lower, so that’s why they want to do it…

Why does the federal government have a program? It stimulates construction jobs and economic activity. They might not do these things, build stadiums, or in this case some infrastructure around it, if it costs them more. The economics might not work.

So everybody says, look, we'll get less income from taxing the interest that the bondholders would pay, but in return there's more construction, more jobs, and that's good for society. It's not city money, other than we would forego the taxes- (Gambling interjects the “revenues”) a little bit of revenue, it’s a. . .if you do the calculations, it’s a very small amount of revenue,- on the interest on those bonds. So would the state, so would the federal government. But our development bank is set up to do this, and you do it for big projects, and the federal governments [sic] approve these projects, and we'll go on with them.

Mayor’s Focus on City Planning Matters: Some Quantified Analysis

No matter who we are, there is only so much of us to go around. Psychologists will tell you that the attention and focus human beings can give to things is limited. There is, for instance, what is refereed to as the “rule of seven;” the idea that is that the human mind can only remember or give focus to a limited number of items at one time. This idea of human limitations jumped into our thoughts when we read the recent New York Times article that reported what was important to Mayor Bloomberg and his top lieutenants when they negotiated the financing and development of the new Yankee Stadium. (City Pressed Hard for Use of Yankee Luxury Suite, by David W. Chen, November 29, 2008) The article confirms our concerns generally about where the Bloomberg administration’s focus is placed when negotiating all the multiple deals and trade-offs that are shaping this city.

The Illusions of “Free” for a High Price

The Times article is about how the Bloomberg administration paid a very, very high price for a “free” luxury suite for its own use at Yankee Stadium including, but not limited to, giving the Yankees 250 parking spaces in exchange.

Very Important to the Mayor and His Top City Urban Development Lieutenants

According to the Times, in one 2006 e-mail, Seth W. Pinsky, then the executive vice president of the city’s Economic Development Corporation wrote:

“This is a big issue to the mayor.”

Fascinatingly, Bloomberg had his top lieutenants in charge of development for the entire city giving their attention to this matter with Mr. Pinsky exchanging e-mails on negotiation decisions with Daniel Doctoroff, Bloomberg’s powerful Deputy Mayor for Development, concerning giving the parking spaces in exchange for the luxury suite. The administration was even negotiating for “free” food with the suite.

$56,250,000.00: An Unfair Assessment of What the 250 Parking Spaces Given Away Were Worth

How much were those 250 parking spaces Mayor Bloomberg gave away worth?

We are going to do something quite unfair here. We are going to point out that parking spaces in Manhattan, circa summer of 2007, were worth $225,000. (Waiting List for $225,000 Parking Space in Manhattan, In the Space-Starved City, a Spot to Keep Your Car Is Money in the Bank, July 13, 2007.) So that means that the 250 parking spaces were worth $56.25 million dollars?

250 spaces x $225,000 = $56,250,000.00

Why is that calculation unfair? Because the $225,000 parking space in question is in Chelsea and the parking spaces the mayor and his city lieutenants gave up to the Yankees are in the Bronx. Why are we doing this anyway? Because, when it comes to valuing the land up at Yankee Stadium to get a good deal out of the IRS and fleecing the taxpayers, the mayor and cohorts had no compunction about letting Downtown Manhattan land values serve as comparables for land values in the Bronx. Of course, this is quite bogus; see: Monday, December 01, 2008, Brutally weird: Why a vacant lot in Alphabet City is (not) like the land under Yankee Stadium. For our own thoughts on why this kind of mendacity is likely to make taxable, bonds issued for Yankee Stadium that were supposed to be tax-exempt see: Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat and Saturday, November 8, 2008, Does Questionable Assertion of Attorney-client Privilege Point to Yankee Stadium Bond Taxability?

But If Alphabet City Land Can Stand in for the Bronx, Why Not Chelsea?

So the Bloomberg administration thinks that Alphabet City land values can stand in for real estate values in the far away Bronx. Alphabet City is just a brisk walk across 14th Street from Chelsea. Seems fair then, to compare those $225,000 parking spaces to land in the Bronx. (The specific Chelsea condominium written about was at 28th Street and Eighth Avenue: For Parking Space, the Price Is Right at $225,000, by Vivian S. Toy, July 12, 2007)

Fairer, More Wonky, Calculations of the Parking Spaces Worth

Figures from the New York Times Bagli Article

Here are some, perhaps fairer, calculations to put in perspective what those 250 parking spaces were worth. Part of the Yankee Stadium deal was construction of garages to create additional parking spaces. There were three garages with, we understand, 3,600 new parking spaces.

Charles Bagli of the Times reported that initially, “the city and state would contribute $208.6 million for parks and garages” and “The state contributed $70 million toward the $240 million cost of building three garages with 3,610 spaces at the new Yankee Stadium. And the city issued $170 million in tax-exempt bonds on behalf of the private garage operator.” (See: As Stadiums’ Costs Swell, Benefits in Question, by Charles V. Bagli, November 3, 2008)

Exclusive of land the cost per parking space then comes to $66,666 per parking space or $16.667 million for the 250 spaces.

Field of Schemes Revenue Assessment: Bloomberg Administration “Got Rolled”

But is that a good total calculation? Field of Schemes has

But is that a good total calculation? Field of Schemes has itemized costs for Yankee Stadium available on its website, but using them to come up with a total per parking space cost is a challenge. Easier to understand is the income valuation of the spaces which Field of Dreams’ Neil deMause did and which is available at his post: The Yanks' Suite Deal With Bloomberg November 30, 2008. He uses a figure (from a Daily News story: Throwin' stadium tantrum City demanded free suite, food from Yankees, e-mails reveal, by Juan Gonzalez and Greg B. Smith, November 29th 2008) that the 250 parking spots are worth $820,000 a year in revenue. But then, as the Times story pointed out and deMause notes, the city also turned over to the Yankees three new billboards along the Major Deegan with an estimated revenue value of $750,000 a year. DeMause concludes:

Then there's the tax-exempt bonds, which, according to the e-mail trail, city lawyers threatened to withhold if they didn't get their free suite. ("'No nothin' can go both ways," wrote city lawyer Joseph Gunn.) According to the latest figures from the city Independent Budget Office, the subsidized bonds will cost the city treasury about $100,000 a year in lost tax revenue.

Add it all up, and the city handed over more than $1.6 million a year worth of goodies in exchange for a single suite out near the left-field foul pole. Given that suites down the foul lines at the new stadium are selling for $600,000 a year -- or not selling, as the case may be -- it looks like the city got rolled like the Pittsburgh Pirates.

The $1.6 million revenue figures, however, are recurring annual figures that will go on for many years. Even netted against the $600,000 per year that suites are going for, that leaves a revenue stream of $1 million a year. When the total number of years involved is known, those figures convert to a present value of what?

The Myths Fall Away: Revelations About What Bloomberg Really Cares about

Now that we know where Mayor Bloomberg’s focus was, it further debunks the mythology of what he cares about. Once upon a time the myth was promulgated that Bloomberg was so wealthy that he would not be distracted, as the rest of us, by the lure of money and fame; that he could address himself to public goals with businesslike efficiency, staying on track to protect the public interest, and that he was eager to give of his wealth for the sake of giving. We might have looked at his substantial charitable giving as evidence of his generosity and thought he had no petty needs to satisfy. Perhaps we naively ascribed these traits to him imagining that we ourselves might be so selfless if we had millions at our disposal. But if we bought that myth then, perhaps we inadequately understood the preoccupations that have gotten Mr. Bloomberg where he is and perhaps we ignore what drives him to covet a third term.

At least lately, those who are paying attention are realizing that Bloomberg’s use of charities is not purely “charitable.” The revelations have come out partly in connection with Bloomberg’s use of charities as he engaged in his other strong-arm tactics to roll back term limits and secure a third term. Bloomberg manipulates charities for political gain. (See: Monday, October 20, 2008, “Charity?” We Begin to Groan and Wednesday, October 22, 2008, Are the Atlantic Yards Land Grab and City Official Fraud Being Used to Finance Bloomberg’s Bid for Billionaire Term Limit Exceptionalism?)

But aside from their misuse we must ask, if when it comes to charities, was it ever an altruistic love of giving that attracted him? Consider to what else we may ascribe Bloomberg’s affection for the world of charities. Bloomberg’s hell-bent pursuit of the Yankee Stadium luxury suite at any cost bespeaks much about the values of a man who overlooked the public trust because for him a luxury suite was the “big issue” in the Yankee Stadium transaction upon which he focused. It reveals a man transfixed by pomp and hobnobbing with the powerful. We can’t help but note that it’s the same kind of pomp and hobnobbing often seen in the world of charitable events.

Considering the Price (Multiplied) of Misplaced Focus

The Yankee Stadium transaction presented other issues upon which a mayor should have focused. Yankee Stadium is being built atop what were once two popular public parks. There are now serious issues about replacing those parks for the community. There were also multiple questions about saving money for the city, maximizing revenue and dealing honestly with the IRS. And it should have been a concern whether the bonds would be safely qualify as tax-exempt.

There is a high price to pay with respect to misplaced focus. Since we are quantifying, we must remember to multiply: The list of prices paid with respect to misplaced focus goes on with respect to Yankee Stadium and the other sports venues with which the city has been making sweetheart deals: the Mets new Citifield Stadium, the proposed Nets arena, the intercepted Jets stadium deal. It doesn’t stop there; the question of the Bloomberg’s misplaced focus likely extends to the negotiation of all the grandly conceived, huge-scale real estate megadeals in which the administration has been involved.

Does Questionable Assertion of Attorney-client Privilege Point to Yankee Stadium Bond Taxability?

Rep. Dennis J. Kucinich has been holding congressional hearings as to whether New York City officials improperly inflated property values in order to secure more tax-exempt bonds for the construction of the new Yankee Stadium. If so, the city would have been centrally involved in making inaccurate, likely illegal, representations to the Internal Revenue Service and prospective bond purchasers in order to make “synthetic real property taxes” in the Yankee Stadium transaction appear artificially higher by a very substantial amount. The assessment for the land under Yankee Stadium leaped sixfold in a day, according to New York State Assemblyman Richard L. Brodsky, from $26.8 million to $204 million (on consecutive days in 2006). See our previous piece on this: Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat.

Overstatement of Real Estate Values Makes Yankee Stadium Bonds Taxable

If, as it very strongly appears, the city overstated the value of the property, it can reasonably be concluded that the bonds issued for Yankee Stadium should be declared taxable; in other words they would lose their federal, state and local tipple tax-exempt status. A lot has happened with respect to the Kucinich hearings since we last wrote. What interests us a lot right now is that the city is asserting attorney-client privilege to refuse to provide the Kucinich investigation with information about the suspiciously changing land values.

Questionable Assertion of Attorney-client Privilege Points to Problem

The assertion of attorney-client privilege seems highly questionable and has us wondering. That it is being grasped at seems to point to the fact that the city had inadequate grounds for the inflated statement of property values; (that they, yes, were pulled like a rabbit out of a hat, per picture above). New York City attorney Terri Sasanow said that rather than furnishing the actual documents about the land values supposedly supporting the bonds and their tax-exempt status, the city will asset privilege because it wants merely to provide a log of the documents. So are the bonds going to be declared taxable? (For reports of the assertion of privilege see: Atlantic Yards Report, Saturday, October 25, 2008, Testy Kucinich presses city officials on “gaming” Yankee Stadium assessment; big disagreement over “smoking gun,” the New York Times, Yankees Say They Would Have Left Bronx if Pushed, by Richard Sandomir, October 24, 2008 and most recently, New York Metro, City balks over Yankee Stadium documents, by Patrick Arden, Nov 6, 2008)

Attorney-client Privilege Unlikely

Congressman Kucinich is saying that the claim of attorney-client privilege doesn’t apply to Congress. Application of the special consideration of attorney-client privilege to Congress aside, we wonder whether it would apply at all in any situation?

Is the privilege is being applied in connection with a bond counsel opinion that the bonds were being properly issued with due authority under state law; or that they were actually tax- exempt? Or is the privilege being asserted because the city approached a lawyer other than bond counsel for a land valuation opinion? One would think a legal opinion on land valuation would be unusual and that it would only be sought because the city knew its approach to the overstated valuation of the property was highly questionable to begin with.

But who is to say that the city’s assertion of attorney-client privilege is in good faith at all?

Reasons Attorney-client Privilege Wouldn’t Apply

Attorney-client privilege doesn’t extend to facts. You can’t take facts that are not privileged and magically cloak them with privilege by communicating them to an attorney. It is also questionable whether this privilege of secrecy can apply at all to the public process of issuing bonds and taxing property. When it comes to bonds, almost the reverse is true; rather than being able to conceal negative information there is a special obligation to disclose it.

Bond transactions involve a multiplicity of parties, all of whom are supposed to be privy to the central risks of the transaction. In this case, the risk of land valuation would be such a risk. Attorney-client privilege does not apply when third parties other than lawyers have been privy to the information sought to be cloaked in privilege. It is unlikely that any information relied upon by co-participants in the transaction can be privileged. The transactions involve all sorts of non-lawyer certifications and representations, such as highly detailed issuer certificates. What is not specifically in actual certificates is nevertheless backed up with, and subject to, due-diligence communications and interactions beforehand. In theory, it is doubtful that anything that was “on the table” as part of the deal, anything that was accessible to other participants in the transaction should be subject to privilege. That includes parties like the rating agencies who are supposed to ask a lot of questions and should have been asking about the land and building valuations central to support of the transaction.

Who Can Assert the Privilege?

If the privilege is being asserted in connection with one of the bond counsel opinions, it raises the question of whether the city is a proper party to assert the privilege. (Certainly the Yankees are not.) Privilege can only be asserted by the client of the attorney. It may be a badly kept secret but, strictly speaking, the bond issuer (the city or nominee issuing authority) is not the client. Bond counsel is supposed to represent the “propriety” of the bond transaction. Accordingly, people who know their stuff would tell you this means that in an instance like this, bond counsel’s duty is to the bond holders who have so far been ill-served. The bond holders will be best served going forward if their privilege is not usurped to conceal facts adverse to them and on which they now need to act.

Assertion of Privilege Raises Liability Questions for Transaction Participants

There are interesting liability questions associated with the city’s assertion of privilege. Implicating an “attorney” (has the attorney or attorneys yet been identified?) in the setting of the likely fictitious property values exposes that attorney to a claim of malpractice. Asserting the privilege is also tantamount to broadcasting an assertion that a large number of other parties to the bond transaction, such as underwriters, underwriters’ counsel, and rating agencies did not share in information they certainly should have had. If those parties did not have the information they should have had at the time of bond issuance, does that betoken liability for them?

Stalling & Obfuscation Not in Good Faith?

Of course, it is quite likely that the city neither believes that attorney-client privilege applies, nor that they will prevail in the end when asserting it. Attorney-client privilege is a quick, reliable grab when you are stalling for time to prevent disclosure. It sounds plausible and, as you can see from the above, can take a little time to sort out. (I’m sure the PR people like it a lot better than pleading the Fifth Amendment’s privilege against self-incrimination.)

Is the city simply stalling for time and trying to stymie the congressional investigation? Yes, absolutely. Consider the following, as reported in the above-linked Atlantic Yards Report story: Representative Kucinich pointed out that the city had argued that his Congressional investigation should be halted simply because the city (and the Yankees) were not providing the documents they say they are, in fact, unwilling to provide. Kucinch (on October 25, 2008):

the Yankees and the city declined to testify at the Subcommittee’s hearing last month, “because they argued it was unfair to proceed before the Subcommittee could complete its investigation with the benefit of documents on the issue. No matter that the Yankees and City had withheld precisely these documents from the Subcommittee for two months.”

Fascinating! And, of course, they are still withholding those documents. So the city’s premise is that they can use attorney-client privilege to completely halt an investigation by Congress. One clear indication that attorney-client privilege simply does not apply in this situation is that we have two independent non-attorney parties, the city and the Yankees, coordinating to jointly withhold shared information and documents. (Remember, information shared with a non-attorney third party is not privileged information.)

How Weak is City’s Defense Against Bonds Being Declared Taxable?

Stalling and obfuscating with a privilege that it can’t legitimately assert indicates that the city doesn’t have a good defense against the Yankee Stadium bonds being declared taxable. For more on what it would mean to have the bonds declared taxable, see our last piece Safety in the Numbers You Pull out of a Hat. (It would put the bond holders in jeopardy for back income taxes to the federal, state and city government with the ultimate liability probably coming around through litigation to the city.)

Seeking Atlantic Yards Favors from an Already Duped IRS

There is another reason the Bloomberg administration was stalling the congressional investigation, though that reason now seems to be past-tense. The Bloomberg administration was lobbying the IRS for loophole regulations principally to permit the issuance of the same kind of bonds that already issued for the Yankee and Mets Stadiums for the proposed Atlantic Yards Nets arena. (See: Tuesday, October 21, 2008, New Treasury Department regulations would grandfather in tax-free bonds for Atlantic Yards arena.) Loophole regulations were, in fact, issued October 21, 2008.

It is brazen to be lobbying the IRS for a loophole concerning the exact sort of transaction where one has already committed the abuse of furnishing factitious facts to the IRS. The brazenness was starkly obvious as the Bloomberg administration lobbied the IRS, because Congressman Kucinich publicly requested that the IRS refrain from issuing the regulations until the IRS could proceed fully informed with all the facts that will be forthcoming as a result of his investigation. The IRS issued the regulations ahead of time anyway. Really? The loophole regulations for Atlantic Yards have been referred to, perhaps inaccurately, as “grandfathering” in nature: It is not clear that they permit something that was previously properly permitted as would be necessary to appropriately consider the regulation as “grandfathering.” (Noticing New York strongly suggests that if it turns out that any elected officials were helping the Bloomberg administration lobby the IRS for the regulations, those officials should be rooted out for appropriately severe castigation.)

Are New IRS Regulations of Value for Atlantic Yards?

It is not clear that the new loophole regulations will serve, as intended, to facilitate issuance of tax-exempt R-TFIC-PILOT bonds (pronounced “Artifice- PILOT”) for the Atlantic Yard Arena. The amount of the bonds will be limited because the regulations won’t permit the setting of fictitiously high real estate taxes. Everyone, including all prospective bond purchasers, should now be extraordinarily wary about such scenarios. There are also technical problems which mean that the Atlantic Yards arena may not qualify for the regulation’s loophole. For a discussion of one technical problem see: Thursday, October 23, 2008, When AY GPP was "released" in July 2006, was that preliminary approval?

Question of Bloombergian Competence to Handle Financial Affairs

In covering the latest New York Metro story on this yesterday, No Land Grab commented:

Aside from the fact that the deal may have cheated the federal government of future tax revenue, note that the high land valuation benefits the Yankees and the low land valuation cheats the community.

Is this why we need this Mayor more than ever to steer the City through these tough financial times?

We have previously provided analysis concluding that Bloomberg is absolutely not the mayor we need to steer us through these financial times. (See: Thursday, October 23, 2008, Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer! and Saturday, October 25, 2008, More Discredit of Bloomberg as Qualified Financial Crisis Leader)

The city went out on a limb to make these bonds tax-exempt with spuriously elevated real estate tax values. Given that the financial risk so casually undertaken may now put the city in the hole for millions, why was the risk undertaken? We offer two likely answers: first, the Bloomberg administration probably decided it just liked doing sports deals; the other answer is that the administration was attracted to the gimmicky Wall Street excitement of the deal. Each answer, particularly the second, is consistent with the point we made when we said that as a Wall Street crisis-insider, Bloomberg lacks perspective and is exactly the opposite of the kind of leader we need in a financial crisis.

More Wondering about Bloombergain Financial Competence

This just in: New York Times columnist Jim Dwyer is also questioning Michael R. Bloomberg’s competence to lead the city “during financial hard times.” (See: Today’s For Sports Teams, Mayors Play Ball at the City’s Expense.)

Mr. Dwyer catalogues various ways that the city under Bloomberg has been shortchanged in its dealings with the Yankees and the Mets while at the same time “Mr. Bloomberg says he has to close health clinics, shut libraries one day a week, not hire a new class of cops and raise property taxes.” Mr. Dwyer points out that this includes the piling on of an extraordinary additional $659 million or more in recently identified extra costs related to new Yankee and Mets stadiums. Dwyer observes that The Wall Street Journal reported recently that there “are signs that the air is going out of the sports industry bubble” while the originally purported (bubble) benefits of these stadium transactions were flimsy and likely hallucinated from the outset. Dwyer equates Bloomberg’s sports transaction mistakes with “the assumptions that drove Wall Street to sink trillions into financial instruments that no one actually understood but all the right people agreed were worth tons of money.” (We welcome Mr. Dwyer’s confirming insights. The inability of Michael-Financial-Whiz-Kid-Bloomberg to discern Wall Street blundering group think in advance was something we testified about at the City Council term limit hearings: Tuesday, October 21, 2008, Time to Report on the Best City Council Hearing Testimony)

Mr. Dwyer concludes:

The full reckoning on Mr. Bloomberg’s judgment about these major investments of public funds will most likely not come for a few years, long after he has run for a third term as mayor by arguing that he has been the wisest and steadiest of stewards — just the man for the city during hard financial times.

Under The Rug of Privilege

These are not Mr. Bloomberg’s past mistakes. Mr. Bloomberg, unwilling to learn from his mistakes, is dogmatically committed to pursuing, exactly the same sort of misguided course with the proposed Atlantic Yards Nets arena that he pursued with Yankee Stadium. Mr. Bloomberg is already over-privileged but one way Mr. Bloomberg apparently hopes to hold to his errant course is by sweeping his administration’s calculated misdeeds under the rug of improperly asserted attorney-client privilege.

Safety in the Numbers You Pull out of a Hat

Who among us would consider it safe to come up with fictional numbers to present to the IRS?

I am thinking about this because I was reading another attorney’s anonymously offered justifications for the transcendently artificial stratagems currently being used to divert public moneys to the financing of sports venues like Yankee Stadium. In connection with this it seems that some rather fictional numbers were submitted to the IRS. It is doubtful that the numbers are any more substantiated than if they were simply pulled out of hat.

Federal Stadium Financing Hearings

The anonymously offered justifications appeared in Foul Ball: Congressional Committee Criticizes New Yankee Stadium Deal, by Brian Baxter which appeared in The Am Law Daily, September 21, 2008. The article was about hearings Congressman Dennis Kucinich, chairman of the House Oversight and Government Reform Committee, is holding concerning the tax-exempt financing of Yankee Stadium, about which there is much to criticize and much to investigate.

The Yankee Stadium financing presents an excellent example of what is wrong with sports stadium and arena financing in the country in general and in New York in particular. The proposed Atlantic Yards Nets arena is on obvious analog and cousin to the Yankee Stadium financing. I was led to The Am Law Daily by a post in Atlantic Yards Report, (Monday, September 22, 2008, An architect of the Yankee Stadium deal was an IRS insider), which picked up the information in the AM Law article that a primary architect of the Yankees's financing strategy, Bruce Serchuk, a Nixon Peabody law firm partner, worked in the office of tax policy at the Treasury Department and in the IRS's chief counsel office.


Artificially Inflated Statement of Land Value to Issue Tax-Exempt Bonds

Congressman Kucinich and New York State Assemblyman Richard Brodsky are alleging what is pretty clearly true, that the Yankees and the city deliberately inflated the ostensible value of the city parkland where the new stadium is being constructed. The reason for doing this was to issue far more tax-exempt bonds than would otherwise have been permitted. Among other things, the New York City Department of Finance provided a $275 per square foot assessment for the parkland so they could tell the IRS that the land under the new stadium was worth $200 million, while the state was told it was worth just $21 million. (A Daily News analysis showed nearby property was valued at $25 per square foot: Yanks land deal ain't fair ball, September 12th 2008.) Think about the number of multiples (almost 10 times or possibly even more) by which the correct valuation of the land was overstated and you can conceive the proportionate quantity of bonds issued that should never have been sold as tax-exempt. There is a greater challenge in figuring out how overstated the land valuation is since the New York City government, ducking the issue, didn’t send officials to testify at the hearing. (See: Wednesday, September 17, 2008 In Brodsky’s report slamming Yankee Stadium deal, major questions implied about Atlantic Yards arena plan and Saturday, July 26, 2008 Was Yankee Stadium value "gamed" to issue PILOTs? Congressional probe could affect AY.)

Anonymous Justification Litany

Though no New York City officials showed up in Washington to defend the financing at the Kucinich hearings, perhaps there was solace for the die-hard stadium acolytes when The Am Law Daily quoted justifications for the financing from that anonymous lawyer.

Public finance is a very small industry so I probably know the lawyer who was being quoted. I can understand the impulse to speak out on behalf of industry colleagues though I don’t agree with him. (I have often counseled that public finance is such a small community that what goes around comes around far faster than in other industries.)

The anonymous lawyer dutifully recited the standard litany of industry rationales for these devices that plunder taxpayer funds to further enrich the superwealthy. (Were the Yankees really going to move to Connecticut?) Those justifications have been so comprehensively refuted I will not take space to restate the refutations here. If you want a quick reference to my point of view, see my More Money for the Very Rich: An Unsporting Pursuit? March 17, 2008.(This Huffington Post piece appeared just days before a massive increase in the cost of the Nets arena was announced, so though the principles are correct, the already huge numbers are understated.)

“Many, Many Lawyers”

What interested me was the anonymous lawyer’s description of the multiple lawyers working on the transaction:

"We're talking about many, many teams of lawyers working with the IRS, which issued a private letter approving the structure because it was grounded in established law," the lawyer says. "The federal government was fully involved in approving this transaction, which couldn't have been more public."

The comment was likely meant to reassure the reporter or his Am Law Daily readers. Indeed, a lot of lawyers do work on municipal bond financings.

If you are not familiar with public finance it may be hard to imagine how many lawyers are involved in these transactions. (If you saw the film Michael Clayton, an interesting corporate morality tale, the roomful of people in the scene showing the law firm closing a deal looked much like a tax-exempt bond issuance closing. Sometimes it can take not one room but two or three.) A crowd of professionals milling around dotting i’s and crossing t’s can give everyone a collective feeling of safety and assurance that all is within the realm of the condoned. There may be a feeling of safety in numbers, but it is not that simple.

Individual Responsibilities vs. the Herd

Current Wall Street events underscore the herd mentality and group-think to which the Street is susceptible. That includes not only runs on banks but also unjustified complacency about what is right in the first place. Notwithstanding, I have been in situations when the emperor is declared to have no clothes. I have seen that a single individual expressing himself can still bring to a halt a deal that is flawed by lurking vice. Further, when you come down to it, though there were probably “many, many teams of lawyers” working on Yankee Stadium, only a very few individuals would have been responsible for misrepresentations about the land valuation numbers. The individuals most responsible for any misrepresentations were probably not even lawyers.

However large the crowd, the responsibility when municipal bonds are issued is sliced and diced in almost as many separate pieces as the mortgage-backed securities which are carved into the multiple tranches and derivatives that are now perplexing Wall Street. Slews of different opinions and certificates are signed by different parties. That doesn’t mean that you can blithely ignore the unreliability of other transaction participants. Almost everyone is held to a standard of being responsible for what they “knew or should have known” to be inaccurate or unfounded. General “due diligence” responsibilities are distributed throughout the parties to the transaction. (BTW, “due diligence” it is cracked, is the “diligence that is due.”)

Assurance from Bond Counsel

When tax-exempt bonds are issued, bond counsel plays the key role of blessing that the transactions are being executed properly. The role of bond counsel was created when the railroad-building boom collapsed in the late 1800s. During that boom period government officials were cavalier in the issuance of huge amounts of debt. (Sound familiar?) With the ensuing bust, (the Panic of 1873) bond holders were jilted when the cavalier transactions were disavowed as the acts of irresponsible government functionaries acting without due authority and proper formality. (It happens.) Ergo, Wall Street law firms stepped in and afterward debt was no longer issued without an established and reliable law firm soberly opining that sufficiently binding legal procedures had been properly observed. To this day, this is one of the legal opinions that bond counsel still issues.

More recently, the role of bond counsel for tax-exempt transactions has grown and bond counsel now issues another separate opinion specifically directed to the validity of the thinking pursuant to which interest paid on the bonds will be considered exempt from federal income tax. The tax specialist lawyers who offer the thinking as to why the bonds should be tax-exempt do not provide the facts necessary to support the conclusion; they rely on certifications from the government officials and private parties involved in the transactions, though they are supposed to be alert for falsifications.

Infallible Lawyers?

Bond counsel lawyers assure against fallibility, but they are fallible human beings themselves. The most famous example perhaps is that John Mitchell, once one of the best known bond counsel to the New York State finance authorities, entangled himself in Nixonian politics and became the first United States Attorney General ever to be convicted and imprisoned for illegal activities. (Recent events with respect to the appointment of a special prosecutor indicate that Alberto Gonzales may become the second United States Attorney General to achieve this dishonor.) If there is ever a time to discover human fallibility, you will probably find it most easily at the end of boom cycles; it is so hard to let principle restrain you when those around you seem to be cashing in on risk without negative repercussion.

Tax-exemption of bonds is predicated upon abstract premises plus facts and numbers which are supposed to be real. In the case of the Yankee Stadium financing, the theory of the tax exemption was a pretty ploy in itself for which a limited number of tax lawyers working on the transaction must vouch. Fewer individuals had the responsibility to see that the numbers that plugged into that theory were accurate.

Club for Safety Speaks Louder

Is there ever safety in numbers? Yes, sometimes that is exactly how it works with respect to getting legal theories accepted. I remember as a young lawyer near the beginning of my public finance career being quite bewildered as I studied a section of the tax regulations: The better I thought I understood them the clearer it seemed to me they didn’t say anything actually comporting with the way those regulations were interpreted in the industry. It was then that one of my favorite tax lawyers asked me whether I hadn’t heard of the “103 Club.” (When I put up this post it will be the first time that “103 Club” Googles.)

My friend and colleague explained that the “103 Club’ was the term by which municipal bond tax lawyers from the city’s different firms referred to themselves when they periodically met for lunch to discuss the tax code and regulations. “103" refers to the section of the IRS Code pursuant to which most tax-exempt bonds attain their tax-exempt status.

The purpose of the 103 Club was to discuss what the tax code and regulations said and what they should be declared to say. The tax code and regulations don’t always say what they perhaps meant to say. The IRS is understaffed, the provisions are complex and certainly hard to write. When they don’t say what they mean or are sufficiently vague as to require interpretation, the industry lawyers can steer the IRS by agreeing upon what the IRS should be told the provisions mean. Enough industry lawyers communicating that they interpret something a particular way will generally persuade the IRS to agree unless the tax code provisions are explicitly contrary in both word and spirit to what the IRS meant to write. This approach naturally also applies when it appears that discovery of a loophole might be exploited. By definition, a loophole is when the spirit of a law can be evaded. So, you see, getting your way with the IRS is not only about hiring away from the IRS someone who one worked for them as was noted above.

I should observe that this kind of industry input is probably little different in other heavily regulated industries.

The last time I checked, not all that long ago, the 103 Club was still at it. Though I can’t think that its business would ever become unimportant, I can’t swear to you that they still refer to themselves using the “103 Club” term. After all, it is not a formally chartered group.

Poor IRS

This then is background when you consider the anonymous lawyer’s statement that "the federal government was fully involved in approving this transaction.” He is no doubt referring to how an IRS letter ruling was obtained providing comfort for the use of a loophole to evade the spirit of the law that Congress passed prohibiting sports stadium and arena financing. The poor IRS. The letter ruling was a stretch in itself, but when it was not satisfactory, based upon available facts, fictitious numbers were supplied to bootstrap it into workability.

Declaring Bonds Taxable: A City Expense

Noticing New York previously addressed itself (Friday, September 19, 2008, Contrivance in the service of creating blight, real blight- Listen again- REAL blight) to speculation that the tax-exempt bonds that have been issued for Yankee Stadium (and certainly any similar bonds) may be declared taxable based on the misrepresentations made to the IRS in obtaining private letter rulings from the IRS. (See also Atlantic Yards Report: Friday, September 19, 2008, At Congressional hearing, criticism of Yankees deal and stadium funding; IRS says final regulation coming soon.)

The bonds would almost certainly be declared taxable retroactively to the date of issuance, which would mean that taxes would be owed by bond holders not only going forward but for past years as well. Because the IRS ruling would be invalidated due to the contrived fictions of city government officials, it is envisioned that the city would be called upon to step in with payments to financially compensate the aggrieved bond holders. As I noted earlier, some individuals are more responsible than others for certain things even if a roomful of lawyers was involved.

Bond counsel on the transactions are probably predicting that the IRS would seek to negotiate a compromise. There is a persuasive argument that the IRS might just want to collect money straight from the city rather than having to chase down and reopen the tax returns of multiple bond holders. Maximum liability to the city might be somewhat circumscribed to the extent that the bonds can be made subject to an early call, with or without paying an early call premium. As we noted before, though the payments required from the city could be very substantial; this is not to say that they wouldn’t be proportionate to the arrogant carefreeness with which officials were willing to contrive fictive data at the expense of the public.

Away with Fictions, Scot-free?

Let me return again to the theme with which I began this essay: When there is money to be grabbed, do public finance and development professionals feel it safe to act with corporate collectivity to present fictions to the IRS? Forest City Ratner, thoroughly in the habit of making misrepresentations about Atlantic Yards and Nets Arena to the press and public, seems to have considered it safe to extend the habit to misrepresentations it is willing to make to the IRS. Much like the Yankee Stadium situation, other professionals (including officials with the city and state) seem willingly complicit or unwilling to due diligence information coming from FCR. The New York City Industrial Development Agency and the Empire State Development Corporation wrote a May 8, 2008 letter to the IRS urging that federal government allow R-TIFC PILOT (“Return Total Intercepted For Costs-Payment In Lieu Of Taxes” ) financing be used for the planned Atlantic Yards arena. In a July 14, 2008 letter to the IRS, Develop Don’t Destroy discredited that May 8th letter for its inaccuracies and fictive slant. (See: Monday, July 21, 2008, Asking feds not to approve tax-exempt bonds for AY arena, DDDB criticizes city/state letter.)

If the standard is not truth, but what can be gotten away with, do all these professionals feel safe presupposing that the IRS will tolerate their misrepresentations?

SELLING OUT THE COMMUNITY FOR BEANS (A GIANT WRONG)

Re: As groups lobby against tax-exempt bonds for sports facilities, is WFP hamstrung by ACORN's AY deal?

SELLING OUT THE COMMUNITY FOR BEANS (A GIANT WRONG)
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MAY 17, 2005: WHAT HAS BEEN SINCE THAT DAY

Bertha Lewis and her ACORN organization signed themselves out as responsible or credible community participants on May 17, 2005 when they signed the Memorandum of Understanding (“MOU”) with Bruce Ratner. That was early on in the whole Atlantic Yards saga and I am surprised that since then it hasn’t been routinely pointed out in all coverage of Ms. Lewis’s “support” for the project. “Staunch” support? Replace that adjective with “contractual” support. That contractual support was given away by Ms. Lewis and ACORN for virtually nothing. When Ms. Lewis speaks in favor of the project it means virtually nothing- it might as well be Bruce Ratner himself speaking.

Since May 17, 2005 Ms. Lewis and ACORN have not been free to criticize the project in any respect. No matter that Lewis/ACORN might have a criticism of the project, they must instead support the project. If they think the project is getting too much subsidy they must instead support the project no matter how bloated the proposed subsidy is. If they think that ACORN has better projects in its own pipeline that can make better use of substantial subsidies that are being diverted into Atlantic Yards, Lewis/ACORN have contractually precluded themselves from saying so. If they think the developer has prioritized his arena over "affordable" housing, they must remain silent and support the project. They must support the megaproject no matter what. And, since May 17, 2005, if Ms. Lewis or ACORN possess negative information about the project that none of the rest of us have or information about the project that would be valuable for the community, Ms. Lewis and ACORN must keep that information to themselves. They must not share it because the agreement that they signed contains a confidentiality provision to prevent such sharing. It looks like Ratner’s lawyers took pains to make that confidentially provision the singular most enforceable provision of the agreement drafting it so that a mute Ms. Lewis/ACORN is the only thing “specifically enforceable” under the MOU terms.

And yet, how often Ms. Lewis’ lack of freedom goes by without mention. When Ms. Lewis speaks and her remarks are reported upon there is the inference of an informed individual who would be forthcoming with information beneficial to the community and who should be ready to offer a balanced perspective in assessing all the multiplistic evolving issues and iterations of this megadevelopment we have seen since May 17, 2005. Maybe we infer that she could likewise be of service in interpreting the community input, expert reviews and technical data with respect to the project (nearly all which is of value- environmental analysis- superior better leveraged alternatives including Extel’s- has only been available since May 17, 2005). But no one mentions that Ms. Lewis and ACORN when they speak and interact with us are contractually precluded from being an aid to the community as they might be inferred to be. They cannot criticize the project. They must obey Ratner’s dictates and hew to his contractually imposed secrecy. Ratner issues bullying threats to the community saying that the neighborhood scorched by his unnecessary demolitions (buildings like the Ward Bakery) will have decades of parking lots unless the public opens its checkbook for more and more subsidy demands- - And when he demands subsidy, how much might that subsidy be?- - Is there a ceiling to it?- - Do Lewis and ACORN know?- - If they do, they are precluded from telling us. They are contractually obligated to support all of this whether it is reasonable or not.

The MOU is incorporated into the Community Benefits Agreements (“CBA”) which includes and extends essentially the same objectionable provisions, structure and concepts. Among other things, the CBA sets up a “Governing Council” with respect to which ACORN has responsibilities associated with the seeming exercise of some influence. But how can ACORN or Lewis have influence if they have relinquished the most effective potential tool for influence? How can one exercise influence without being able to freely and publicly criticize and speak one’s mind while marshaling available facts to make a cogent argument? Long ago, on May 17, 2005 Lewis and ACORN relinquished these things. As per the MOU, they are conscripted: “ACORN will . . . appear with the Project Developer before government agencies, community organizations and the media as part of a coordinated effort to realize and advance the Project.”

I suggest again that the press should routinely mention that they are so conscripted. - In essence this form of indentured servitude- this contractual silencing and total lack of freedom to act conscientiously is indefensible and it is interesting that Crains’ could have concluded that Ms. Lewis, so locked in as she is, is one the 100 most influential women in NYC business because, as stated in their analysis she ‘assisted’ Atlantic Yards while conscripted by that agreement to do so. Perhaps this schizoid exercise where Ms. Lewis is now opposing inflated IRS-loophole subsidies for Yankee Stadium while obviously constrained from making parallels about the use of the same subsidies for Ratner’s sports arena will now call attention to Ms. Lewis’ constricted and limited status for all future occasions.

NOTHING BEEN ASKED FOR, NOTHING BEEN GAINED- THE LEWIS/ACORN MOU WITH RATNER

Perhaps Ms. Lewis’ contractual obligation would make sense if back in May of 2005 she had contracted for something actual from Ratner or defined true and ascertainable benefits the community was to receive. The Bertha Lewis/ACORN agreement with Ratner contractually obligates Lewis and ACORN to support Ratner as the monopoly developer of Atlantic Yards. It obligates them to support the specific humongous density of 7.799 million square zoning feet for the project- (what business is it of Lewis’ or ACORN’s to circumvent the community and contract for the city’s density to be set without the standard procedures and public participation of ULURP?)- That MOU mentions that Ratner is to receive an unspecified amount of subsidy with the clear implication that Lewis/ACORN are obligated to support it! Was there any ceiling to the amount of subsidy for the project they would have to support? No! Could they object if the massive misdirection of subsidy was depriving ACORN’s own projects of subsidy? As noted above, “No!” The MOU was virtually a blank check for Ratner and the fealty Lewis and ACORN must keep paying him.

By contrast, Ratner committed to give the community virtually nothing under the ACORN MOU Lewis signed with Ratner.

∙ The agreement has some very silly provisions- For instance, there are programs in New York City like the New York City Housing Partnership program for the production of owner-occupied housing in which all sorts of developers happily participate because they make a profit. (City and State subsidies are involved.) In the so-called community benefits agreement the Forest City Ratner organizations represent that they might join all the other firms electively participating in this program if they get subsidy (unspecified) to deliver the kind of profit they want to get. That is not a commitment but is an excuse to try to get first in line for subsidized profit. Would they jump the line ahead of other firms with a more legitimate interest in the program?

∙ How about the affordable low income rental units themselves which are the crux of the agreement? There are State and City programs for 80/20 housing under which Ratner is surely going to proceed to provide any housing that might eventually happen. The MOU negotiated by Lewis and ACORN doesn’t obligate Ratner to provide any more than would conventionally be provided under such programs. In fact, it apparently obligates far less.

∙ Does the agreement obligate Ratner to devote a minium amount of square footage to the low income units? Nope, not at all. In fact, the information available is that the size of the affordable units will be rather small, with 400 square feet as the minimum size for studios. (See: “AY snug or stingy? 575 sf for 1BR, 775 sf for 2BR”.) There isn’t anything in the agreement that prevents these units from being this small and there isn’t even anything in the agreement that prevents them from being smaller.

∙ Is there anything in the MOU that requires proportional distribution of the units or otherwise ensures that the obligation to provide low income units won’t be satisfied by only the very smallest units aggregating a small overall percentage of the megadevelopment? Nope, not at all! (See: Would half of the affordable apartments be 2br & 3br? No way (read the fine print) ) By my calculations, Ratner can meet the terms of what Lewis/ACORN obligated him to under the MOU by providing the 900 units he is obligated to provide for conventional low income units by providing 900 400 square foot studios. The square footage associated with that (900x400=360,000) is 5.66% of the approximately 6.36 square million feet of residential space in the project. Those government agencies paying out subsidies might insist on something more but the ACORN agreement doesn’t require anything more and might be used as a basis for Ratner to try to deliver less than he would otherwise have to.

∙ The residential space in the project includes condominium units (which would not receive 80/20 tax exempt financing). Excluding all the square footage going to the condominium units would make the square footage associated with the low income units greater than 5.66%, but since the MOU fails to limit how much space can be siphoned off for luxury condominium space, it doesn’t allow calculations of the projects’s rental space or any percentages in favor of ACORN.

∙ Likewise, a requirement (separate and apart from which units should be low income) that half the units provided as ACORN identified benefit be studios and one-bedrooms and half of the units be two and three bedrooms - not all of which need be such low income units- can be met by Ratner’s provision of 1483 studios, 1 one bedroom, 765 two bedrooms and 1 three bedroom. Of course, if Ratner wanted to deliver smaller units than have currently surfaced as probabilities, the ACORN agreement doesn’t prevent him from doing so and the numbers could be more abysmal than this.

∙ What about rents? Does the ACORN MOU serve to limit the rents to a reasonable amount per square foot? No, it doesn’t do this either. In fact, it appears that Ratner may proceed to rent the “affordable apartments” at higher per square foot rents than the market rate apartments. (See: “Affordable” studio would cost more (per square foot) than market-rate studio)

∙ In fact, the Lewis/ACORN agreement seems to have gone out of its way to accommodate Ratner’s unwillingness to make any commitment to public benefit that would actually exact from him a commitment to charge lower rents. ACORN negotiated for only 900 units of what are classically considered low income units for those with incomes at or below 50% AMI. Most of these will be occupied by people within a thin $7,680 range income band which is generally what developers prefer when they comply with the basic requirements of the Federal Tax Code for subsidy ($30,725.80 to $38,406.00 for a family of 4)- There may be nothing to prevent Ratner from taking most of his applicants from near the top of this $7,680 range (It’s not prevented by the agreement.) After that, there is a telltale jump or skip of income bands which the ACORN MOU specifies shall be served. One would think that the next group of home renters most deserving of subsidy would be in the immediately adjacent 51-59% AMI income range, but they are skipped. Why? Because by jumping up to 60% AMI as the next qualifying band of incomes (with a ceiling income for the band of $76,812.00) Ratner jumps up to a group where the rents he can procure will be much closer to market. In fact, one thing that has yet to be determined is whether, given the size of units and the incomes and rents permitted under the agreement these units will not be veritable market rate units. In today’s terms families of 4 will qualify if they earn annual incomes at or below $76,812.00, $107,536.80 or $122,899.20 and their monthly rents may respectively be $1,536.24, $2,304.36 and $2,880.45. There is nothing in the MOU to prevent Ratner from taking only the highest income families in these higher income bands (and there may also be some self-selection to this end). Those monthly rents may not do badly in the neighborhood toward procuring market rate one bedroom, two bedroom or three bedroom apartments. Don’t know about this? Go ahead and check with a broker or the New York Times.

∙ Did ACORN negotiate any terms by which Ratner and his companies must put aside or segregate any funds anywhere so that it is assured that somehow, someway there are extra moneys undeniably committed to public benefit? The Columbia University West Harlem community benefits agreement is not very good, but it does have such a provision that millions of dollars will be so set aside. Not so, the Lewis/ACORN agreement.

∙ Does the ACORN/Lewis MOU say that if Ratner’s project grows or if Ratner produces more residential units than what the agreement defines as the “Residential Project”(4,500 units) that Ratner must provide more “public benefit?” No, not at all, even though it actually happened just days after ACORN/Lewis MOU was signed. But the agreement is being interpreted to say that if the project is ever down-sized then Ratner owes nothing to Lewis, ACORN or the community. It is being interpreted to say he owes nothing but the scorched earth he has threatened to leave. But until that day of reckoning, he will have bought the contractual support (and enforced secret-keeping) of Ms. Lewis and ACORN. He will have had it from May 17, 2005, through today (June 20, 2008) until that day of reckoning.

What does this all add up to? Nothing. Nothing in the middle and nothing on either side of it. In the middle there is the telltale missing income eligibility band. On one side of the telltale missing income eligibility band are the classic low income units, a thin band representing just the minimum of what would otherwise be required from Ratner by the federal tax code requirements of the 80/20 programs. These are “ice-in-the-winter” units which would be required without any ACORN MOU. On the other side of the telltale disappeared band are the “middle income” qua veritable market rate units, with rents and qualifying incomes so high the market could provide them anyway. (It is possible Ratner may apply for additional subsidy in connection with them- Would he ask for an additional hundred million?) So on each side of the nothingness of the telltale spectrally missing band, there is essentially nothing!

It is astonishing that Assembly Speaker Sheldon Silver, Mayor Michael Bloomberg, Governor George Pataki, Borough President Marty Markowitz, and Speaker of the City Council Christine Quinn all used Lewis’ and ACORN’s sloppy and abject capitulations to Ratner’s pursuit of profit as political cover to give Ratner’s megadevelopment approvals.

Not only is the Lewis/ACORN agreement the most scant nothing possible while obligating Lewis and ACORN to support that nothing or anything that is a scintilla more, we must also now be on guard that Ratner and his contractually conscripted Lewis will follow provisions of the MOU/CBA to override even the basic requirements of the existing available housing programs by pursuing “necessary modifications”to them- (To wit: “Project Developer and ACORN will work together to secure NECESSARY MODIFICATIONS TO EXISTING AFFORDABLE HOUSING PROGRAMS AND POLICIES in order to accomplish the” Ratner/ACORN program and “ACORN (with the participation of other Coalition members as appropriate) will appear with the Project Developer before government agencies, community organizations and the media as part of a coordinated effort to realize and advance” . . the Ratner/ACORN program.) For instance, we must be on guard that subsidizing housing agencies will not be gravely misguided by the cover of the MOU’s minimized standards or the eyewash of the higher income, higher rent “middle income units” to excuse the future Ratner-built housing from even the typical minimum requirements for 80/20 housing programs in New York.

REALLY BEAN COUNTING?

In the documentary about Atlantic Yards, “Brooklyn Matters,” Bertha Lewis extols her acumen in negotiating the community benefits agreement, saying, “They had their bean counters and we had our bean counters”- but Bertha Lewis obviously doesn’t know beans about counting beans. She negotiated nothing. There is virtually no standard by which the developer is obligated to give the public anything. Conversely, there are no checks on what he is entitled to under the agreement.

The Bible tells the story of the selling of a birthright (for lentil bean soup) in a moment of weakness and selling with it the right to lead. Should the right to responsibly and credibly participate in community affairs be sold for so little? It is vital and important, as many are pointing out, that New York City prioritize its resources by investing in crucial infrastructure. Too bad that Ms. Lewis isn’t at liberty to impart this wisdom and argue with full and convincing logic that resources should not be diverted to unproductively bloat Ratner’s clearly undeserved subsidies.

Michael D. D. White
Noticing New York