What If The Media Is Caught Flatfooted About The “Barclays” Center? (The Ratner/Prokhorov Arena Named For That LIBOR Scandal Bank)

I am not saying it will happen. . . I am not saying how long we will have to wait to know if it will. . . . But it could happen. . .   And what would happen if it does?

What will happen if, after all the dutifully stenographic PR hype and hoopla promulgated by the media about how great the “Barclays” Center is, the “Barclays” Center fails?  What if, for all that media hoopla instructing the public to have positive emotions and adoring respect for the “Barclays” arena, the public actually rejects the arena and the arena goes under?

What will the press say then?  Will they say: “We saw it coming!”?

That seems almost impossible to conceive given the present hyperbolic celebrations of the arena, but given the media’s bottomless ability to rewrite history, paying attention only to whatever is the temporal fashion of the moment in reporting reality, they might very well do that.

The so-called “Barclays” Center has fans.  And it will no doubt have fans into the future, whatever that future holds.  But it's easy for the “Barclays” Center to have fans, even some local fans, and still be vastly unpopular in the neighborhood and borough it has decimated in spearheading the takeover of so much neighborhood for Forest City Ratner’s mega-monpoly.  Similarly it can have fans and still fail financially.

In the end, it is a question of how many people go to the arena, paying its high prices, ignoring its symbolism, and, similarly, how many performers consent to perform there.

Failure could look like this: Attendance is lower than what is needed to support the arena financially.  Ratner and Prokhorov, the owners, raise prices (on tickets together with all the extra hidden incidentals) to cover costs, driving attendance down further.  It becomes a vicious cycle.  Meanwhile, many performers decide not to perform at the not-so-adored arena, limiting the number of quality shows, curtailing ticket sales still more.  An increasing negative perception of the arena (and those willing to perform there) grows, resulting in more performers shunning the arena that unspeakably promotes the “Barclays” bank.

That’s why there is such a concentration on advertising now, as the arena promoters try to make a first and lasting impression that convinces potential ticket buyers and performers alike the arena is something special and good for the community that people should want to go to.  But if, and especially as, the arena fails, all of that far too desperately ubiquitous advertising we have been subjected to will also have to be cut back, subsiding and falling by the historical wayside in another cycle of decline.

What happens if the arena goes under financially?  Ratner and Prokhorov might lose ownership of the arena, which would teach them a well-deserved lesson.  It could also forestall the rest of the Ratner Atlantic Yards mega-monopoly and lead to better development practices around the city.

And, by the way, I’m staying away from the arena for a good long while.

Oh, and another by the way, you have heard that government tax-exempt bonds recently issued in New York City to support a large new sports venue are failing?:  Those were the municipal bonds ($237+ Million) issued for Yankee Stadium's vast new parking garages despite warnings from, and over the objection of, the community.

Noticing New York's Hearing Testimony Re New York City Housing Development Corporation's Subsidization of Ratner's Atlantic Yards Mega-Monopoly

(Above, a collection of government officials, present to listen to testimony, just before the HDC hearing.)

The New York City Housing Development Corporation held an important hearing today on its proposed very substantial subsidization of Forest City Ratner's Atlantic Yards mega-monopoly. Here is Noticing New York's testimony.

* * * *

July 18, 2012

New York City Housing Development Corporation
110 William Street
New York, NY 10038

Re: HDC’s proposed issuance of up to $91.96 Million in tax-exempt bonds to (plus award of accompanying additional subsidy) to fund Building 2 (461 Dean Street in Brooklyn) of Forest City Ratner’s proposed no-bid, eminent domain-abusing Atlantic Yards mega-monopoly


Dear New York City Housing Development Corporation,

The following is Noticing New York’s testimony respecting the proposed issuance of tax-exempt bonds for the above mega-monopoly.

Here are changes that should be made to the federal law under which tax-exempt bonds are permitted to be issued:

• No issuance of tax-empt bonds should be permitted for a project that has been brought about by the abuse of eminent domain. The U.S. Supreme Court’s Kelo decision is one of the most unpopular of all its recent decisions (perhaps even ranking above the Citizens United decision). A huge preponderance of the American public strong disagree with it. States around the nation have passed enactments to circumscribe its implications. Even so, there are agencies like this one who would consider using federal taxpayer subsidies to finance such abuse. And the developer-driven abuse that occurred with respect to Atlantic Yards exceeds and was not even likely to have been permitted under Kelo. Unfortunately, the court did not take up the case to rule directly on this. Even as a local matter New Yorkers do not favor such abuse. In 1967 there was an attempt to amend the New York State Constitution to permit eminent domain-abusing projects like Atlantic Yards. The voters rejected it and the New York’s Constitution was never altered to make such a change.

• No bond proceeds should be permitted to fund projects that were not subject to competitive bid. Projects which are not the subject of competitive bid waste public funds and subsidy, breed crony capitalism and destroy democracy.

• Tax-exempt bonds should not be permitted to fund government creation or building up of private monopolies. Monopolies stultify development. They are antithetical to it because true development must partake of a diverse, richly dynamic environment of interacting elements and competitive testing of the best adaptations. Monopolies suppress development opportunities. Furthermore, in the words of Jane Jacobs: “Monopolies established by cronyism and strong-arm methods, along with pervasive extortion and corruption, falsify actual costs” [shall we note they falsify benefits as well?] Enterprises “prefer eliminating competition to competing with . . prices, quality and service.” Tax-exempt bonds are supposed to be issued by “development” agencies to foster development, not suppress it. Government officials shouldn’t replace economic ecosystems with a single privileged crony.

Why should all this be law? Because if these were provisions of federal law tax-empt bonds could not be issued for this project.

These provisions are not yet specifically part of the federal law. What is part of the federal law is that before this agency issues any tax-empt bonds it has to have this hearing so that politicians and legislators, being informed, will be forced to take accountability for doing anything as ill-advised as I have just suggested should be prohibited. If stupid things are then done despite cautions received at a hearing the laws governing the issuance of tax-exempt bonds may then be changed.

I request that HDC inform all legislators and politicians receiving a record of this hearing or inquiring about it that these recommendations were made at this hearing and that HDC further inform them that it is my recommendation any changes to the federal law enacting such restrictions should include provisions making them retroactive, by which I mean that any bonds issued ignoring the principles of these recommendations will retroactively reduce the amount of available tax-empt bond cap available to New York City and New York State. If HDC is going to use its tax-empt bond cap frivolously for a bad project the just and proper result is to take that bond cap away.

Public Agencies and Government Suing Barclays. The building for which HDC is considering issuing tax-exempt bonds will share walls and infrastructure with the Ratner/Prokhorov arena now promoting the name “Barclays.” HDC likely has cause to sue Barclays Bank over its LIBOR rate manipulation scandal. Baltimore and other municipalities in the nation are already suing Barclays. The MTA, another agency involved in the financing of this same Atlantic Yards project coordinating with HDC, has publicly stated that its legal counsel is looking at the Barclays scandal and that it will vigorously pursue “all available legal actions” to protect the MTA. HDC has been unresponsive to my inquiries about whether HDC is similarly looking at suing Barclays. My understanding is that the Barclays matter is under investigation by the State Attorney General. I presume that any presentation to the HDC board about financing this project will include in-depth information about all the possible lawsuits against Barclays that may or will be brought by HDC and other agencies. I believe that the public is also entitled to an outline of what gets described to the HDC board in this regard.

Lack of a Valid Environmental Impact Statement. The Atlantic Yards project is a project for which there is no valid Environmental Impact Statement. That has been judicially determined. This is bad not just because a proper environmental review has never been done: It is bad because the reason it hasn’t been done is that a proper review was sidestepped by fraudulent subterfuge by the developer in connection with which now-chastised government officials colluded. Whether or not there is a legal nicety by which HDC may reason this building can be financed without a proper environmental review it would not be appropriate to do so.

Character of the Developer and Prospective Project Owners. HDC needs to do its “bad apples” review of whether this developer (and prospective property owner) is suitable for the special privilege of receiving HDC financing and subsidy. Forest City Ratner is at the hub of many spokes in a wheel of indictments and various forms of bad conduct. There was the Forest City Ratner Ridge Hill prosecution, Senator Kruger’s prosecution, the recent State Attorney General Investigation resulting in a settlement concerning illegal New York City lobbying activity in connection with development that should have also have included the substantially similar activities in this vein respecting Atlantic Yards. It is not necessary for there to be an indictment or conviction of a developer for an agency to conclude that a developer is an unworthy and untrustworthy recipient of agency subsidy. A pattern of bad conduct and bad behavior and unsavory colleagues is entirely sufficient. And, Forest City Ratner’s pattern of broken promises and subterfuges is also enough.

Mikhail Prokhorov and Chinese Millionaire Investors, Prospective Owners. When HDC does its “bad apple” character reviews it will also have to look at the other prospective owners under the documents. That includes looking at the activities and conduct of Russian oligarch Mikhail Prokhorov and there are also nearly 500 Chinese millionaires expecting to get green cards by virtue of Ratner’s laughable manipulation of the federal EB-5 immigration program. This project has been put up as security for those Chinese millionaires. Thus they can become owners of the project without further HDC approval, or if HDC thinks it has a right to approve them first then those millionaires don’t have the security interest they believe Ratner promised them. The likelihood of such a foreclosure of the Chinese security interest is all the more likely given what may flow from Ratner’s recent loss of the environmental lawsuit: a required consideration of taking the Atlantic Yards mega-monopoly away from Ratner to break it up amongst multiple developers.

HDC Discretion To Reject This Project. The reason this hearing is being held is because the HDC board has discretion which it is supposed to exercise. That discretion should be exercised to reject this project. Approval of this project should not be treated as a forgone conclusion. If the board has any fears that it lacks discretion to turn down this project that feeling that its options have been constrained would highlight significantly the very reasons the cord with this developer should be cut.

HDC Has Already Financed a Forest City Ratner Project. Some HDC board members may reason that they cannot now turn down this project because HDC financed a Ratner project once in the past. Not so. In fact, the bad behavior developer engaged in respecting the HDC-financed building, now known as 8 Spruce Street, should be grounds for HDC to turn down this project. In two blackmailing episodes the developer engaged in behavior that should have chagrined HDC. It blackmailed the local community board for additional subsidy and it also stopped construction on the building, blackmailing the construction unions. Both of these incidents, particularly the latter, should have been considered threats to HDC as well. For HDC to proceed with an approval of this financing after that behavior would constitute HDC’s endorsement of such blackmailing techniques, techniques which are actually typical of the developer and facilitated by its continuing monopoly on development which government, including HDC, should now act to end.

Modular Construction As Broken Jobs Promise To The Unions. There is a possibility of this building’s modular construction, pushing the technological envelope. If not risky, the broken promises to the construction unions this represents are emblematic of how the Forest City Ratner dishonestly ignores commitments respecting its mega-project. Ratner was planning its double-cross of the unions even as he was sharing the stage at the arena opening with union representatives he was praising for their support. I am not arguing that the Ratner promise to the unions is one that needs to be honored. The unions when they supported this project did not look out for the interests of the community and consequently supported an out-of-scale project of very poor design that was detrimental to the community in many ways. Still this promise-breaking should be noted as part of an overall pattern of promises never intended to be kept even as they are made.

This Project Is Immoral. Financing this project is immoral. This project is immoral because tax-exempt bonds and subsidies should not be used to reward, buttress and facilitate eminent domain abuse, crony capitalism, government-sponsored monopoly building and grossly out-of-scale development. But that is not the whole of it.

HDC is comprised of government officials who are supposed to be acting as guardians of the public trust. This hearing is required with that notion in mind. Government officials cannot act to protect the public, they actually lose the ability to do so, if they don’t have bargaining power. Government officials won’t have any bargaining power unless the Ratner monopoly is broken up. The design of this project as a monopoly (and we will remember all the project design came entirely from Ratner) is intended to thwart public agency bargaining power. HDC’s approval of this project would buy into that construct of an intentionally emasculated government by furthering Ratner’s monopoly when HDC has discretion to reject it instead.

HDC should reject this project and allow it to fail. The Atlantic Yards development can and should be taken away from the developer and broken up and distributed among multiple developers. That way the public and agencies like HDC acting as guardians can have some bargaining power and influence over the project as it is developed. That way the community's better UNITY plan (which calls for multiple developers) can be implement and respected.

Assemblyman Hakeem Jeffries has described Atlantic Yards as being presented to the community as a “field of dreams” with the reality delivered being a “graveyard of broken promises.” It isn’t really important which local politician we ascribe such an insight to because they all see it. What is important is to realize that the entire mega-project is fabricated on a foundation of false promises from which Ratner blithely and routinely expects to escape accountability and there can be no reasonable expectation of enforcing delivery of any true benefits from Ratner while Ratner still has the upper hand in a monopoly situation. HDC should have learned a microcosmic version of this lesson in connection with the Spruce Street project.

Scarce Subsidy Delivered to Ratner Is Misdirected. Delivery of scarce-resource subsidy to Forest City Ratner for out-of-scale development hogs and misdirects subsidy that could and should be better used elsewhere, including smaller developers and not-for-profits with a better chance of it benefitting minority developers.

HDC needs to pay attention to the unhappy saga of abuse. None of us has amnesia about Ratner’s misdeeds and we are not about to get it.

• They say that Atlantic Yards meant development?

Well, it’s just not so. . .

And it’s so NOT just.

It meant: Tearing down new construction and valuable historic buildings the community planned to preserve, leaving vacant lots for decades, halting the economic activity construction because it was competing with Ratner in his own backyard.

• They say that Atlantic Yards meant good government? Good procedures, protections for the community, considered carefully weighed decisions. Good government?

Well, it’s just not so. . .

And it’s so NOT just.

It meant falsifying findings to declare this area was blighted. (Even Senator Schumer, a supporter of this project, said that this area, close to his home, where he bicycled, was not blighted,) This project was about illegally giving a mega-development monopoly to Bruce Ratner, over 50 acres of Brooklyn, 30 of them contiguous acres around Atlantic Yards. This was about corrupt courts and agencies rigging the delivery of a wish list of special benefits to a politically-connected developer.

• They say that Atlantic Yards meant creating an affordable housing environment?

Well, it’s just not so. . .

And it’s so NOT just.

It meant tearing down housing that was truly affordable to the neediest, luxury condos, and housing the market was providing for anyway, setting up a Ratner sink-hole to beg for housing subsidies- preventing those subsidies from being used elsewhere and where most needed, Ratner only giving back the minimum that those federal (and local) subsidies always require, not a jot or a tittle more, and it means vacant lots.

• They say that Atlantic Yards meant jobs and employment?

Well, it’s just not so. . .

And it’s so NOT just.

It meant evicting businesses that were providing jobs, fake Ratner “jobs” programs- Deceptions where people even worked for free, strung along by false hope, sidestepping the creation of jobs with cheap, possibly dangerous modular construction, fluffed-up incredibly inaccurate jobs figures, minority and community job promises not meant to be monitored.

• They say that Atlantic Yards meant public investment.

Well, it’s just not so. . .

And it’s so NOT just.

It meant a net negative loss to the public of hundreds of millions of dollars, public subsidies of $2 to $3 billion dollars, including diverted taxes that won’t be paid and will go instead to pay for things like the Ratner/Prokhorov private arena. It means property given to Ratner lying fallow and vacant and off the tax rolls.

• They say that Atlantic Yards meant providing what the community wanted and community empowerment.

Well, it’s just not so. . .

And it’s so NOT just.

It meant fake community organizations, secretly paid for by Ratner, fake community benefit agreements intended as eye-wash and diversions designed to be unenforceable. It meant a developer’s efforts to divide and bamboozle the community, to incapacitate its leadership and strip its people of their power.

I could go on. Ratner was going to create good design and green space? No, it meant super density spot-zoned for Ratner’s special benefit, an arena tightly crammed in amongst brownstones, the seizing and privatizing of public streets, sidewalks and avenues, project-design bait-and switches with (largely theoretical) “green spaces” being ditched in the process.

I could go on, and on, etc. The question is whether HDC will go on with a inexcusable endorsement of this destruction and betrayal?

Sincerely,


Michael D. D. White

PS: Video of a portion of this testimony (below) is available here on YouTube.



Note: This post was updated as of 7/19/2010 to include additional supporting hyperlinks.

State Officials Help Ratner Set Himself Up For a Much Bigger Loss

With today’s reported closing on the issuance of bonds for Forest City Ratner’s proposed basketball arena, developer/subsidy-collector Bruce Ratner has, with the assistance of overly-cooperative state officials, set himself up for a much bigger loss when that project fails to go forward, all the better to drive his firm into bankruptcy thus ensuring that taxpayers of this and other states will be protected against his predatory raids on public assets in the future. The more than half a billion in bonds were expensive to issue.

It was a desperate move on Ratner’s part. Now, if anything prevents the mega-project from going forward Ratner will be that much more in the hole. As the Preliminary Official Statement selling the bonds set forth it could be as simple as the NBA not giving Mikhail Prokhorov league approval. It needn’t be so straightforward or simple. Ratner is vulnerable to a number of significant lawsuits, pending, coming and worth reinstating. Among other things Ratner sidestepped proper use of a public agency to issue the bonds. Instead, in a jury-rigged maneuver a private 501(c)(3) not-for-profit was set up to bypass various laws and procedures. The public officials who stepped outside their prescribed roles and public duties to assist him to take these risks have already been determined in court to have been acting in bad faith to implement pretextual schemes in almost exactly the same situation in the Columbia eminent domain case.

Of course Ratner should be considered a big boy who knows the risks he has taken. This should be clear because the Preliminary Offering Statement for the bonds had Ratner, rather than lawyers, provide an assessment of the litigation risks. Nevertheless, our government officials have never treated Ratner as a big boy who should be assuming his own risks. Instead, they have repeatedly stepped in with the merest of excuses to bail him out each and every time he wails about hardship. That’s because the game these public officials have been playing is finding excuses at every turn to give Ratner more subsidy. That’s why they can never disclose to the public the negative value of giving Ratner his mega-monopoly or the way that total net loss figure grows each time more subsidy is piled on.

Ratner is betting he can continue to succeed in these shenanigans despite the megadevelopment’s increasing unpopularity. What’s needed for the public good is for him to fail and we are betting he will.

Ratner and all his assisting public officials were fairly forewarned that this bond transaction should have been halted ahead of time. There should be no complaints about the pain that will be experienced by Mr. Ratner by virtue of the fact that it was so inexcusably rushed through nonetheless.

Asked About Taking a Promised Hard Look at Atlantic Yards Before Issuing Arena Bonds Does Paterson Understand AY?

(Image above from Atlantic Yards Report video of press conference.)

Governor Paterson was asked questions today about the hard look his administration said it would take at Atlantic Yards. Questions came from Norman Oder of Atlantic Yards Report (see, Saturday, December 19, 2009, Hail Mary or silver bullet: Perkins, raising questions of fraud in arena bond sale, asks Paterson to put Atlantic Yards on hold) and Noticing New York was able to ask our own question at the same brief press conference.

At a critical time the governor probably still needs to get up to speed on Atlantic Yards.

Our question to the governor and his response were as follows:

NNY: Governor, you are trying to close a budget gap and the MTA is trying to close a budget gap. You said that you will take a serious, hard look at the Atlantic Yards project. That project is perhaps $2-3 billion in public subsidies and it’s calculated by the city Independent Budget Office to be a $220 million net loss to the public, that’s the net loss not te cost. Don’t you think that perhaps taking that serious look should happen before bonds are issued for the arena?

Paterson: The bonds were issued for the arena. There are a number of projects that probably add up to tens of billions of dollars that we could take off the table if we were trying to save cash. The whole premise of these sort of public-private arrangements is to create jobs and bring revenues back into the state. So, if you take a snapshot in time it is a loss. If you take a snapshot in time funding the educational system is a loss, but the revenues that you generate from the workforce in the years to come far outweigh the investment that you make.

Note that our question relates to our criticism this week about how the MTA is wasting its resources by giving them away without bid to the Atlantic Yards mega-project. (For more analysis of the numbers see: Friday, December 18, 2009, Big Picture Questions: Does MTA Chairman Jay Walder Comprehend Atlantic Yards Link to MTA Cutbacks.)

Bonds Not Issued

The governor’s statement that the bonds have been issued is not correct. Goldman Sachs has found buyers for the bonds but the bonds are not currently scheduled to be “issued” until this Wednesday, December 23rd, and that date could be postponed if the governor and his counsel decide they need time to think about whether they should be issued at all. This is a very important distinction for the governor to understand since he had just finished answering questions from Mr. Oder about the serious likelihood that the bonds, if issued, would be illegal.

If the bonds were unwisely issued it would involve a much messier unwinding of the transaction. When he initiated his answer by stating that the bonds “were issued” for the arena the governor might have meant to communicate that an issuance might foreclose some of his options. We can’t say whether this is what he meant because he flew off before there was time for follow-up. What is important is that it is critical for the governor to act before any issuance precludes his best options.

Can the Public Snap Out of $220 Million Net Loss?

The governor’s belief that the $220 million net loss calculated by the NYC Independent Budget Office could be erased with the passage of time ignores how that net loss was calculated. The loss to the public is permanent since it was calculated with the passage of time taken into account. In fact, as we commented recently, given the loss to the public that the arena would represent if it is ever built, the next step that could readily make sense is to consider benefitting the public by immediately tearing it down.

Capital Projects to Which the Governor Should Have Been Comparing Atlantic Yards

We thought it was interesting that the governor compared Atlantic Yards to "the education system" rather than to another comparable capital spending project when he was looking for a comparable expense. It was a strange reach. There are plenty of other projects that could be built that would not be a net loss. Why not let those projects generate jobs and revenues “in the years to come” that “far outweigh the investment that you make.” In terms of possible comparisons, the real question is whether anyone can think of a project worse for the public than Atlantic Yards? We think not. We are having an open competition on this, we keep asking, and so far no one has identified even a close second for the title of worst New York boondoggle.

Questions About Whether BALDC Arena Bonds Would Be Legal

The questions being raised about whether the BALDC bonds would be legal are related to the fact that the Empire State Development Corporation (ESDC) is trying to sidestep requirements like Public Authority Review Board approval and review by the state comptroller Thomas DiNapoli. Its sidestepping involves using the ghostly “co-administered" Job Development Authority (JDA) to do something the legislature never granted authority for it or JDA to do. To this end, JDA is being asked to create still another entity, a local development corporation, the Brooklyn Arena Local Development Corporation, that would somehow be able to do what neither ESDC nor JDA have authority to do. We have previously criticized the hellbent and desperate sloppiness with which the issuance of these bonds has been pursued.

We also note how JDA barely seems to exist at all. Several days ago we called the only telephone number we could obtain for JDA, which is ESDC’s telephone number, and asked for a JDA press representative. It took some time before it was acknowledged that we had reached the right number for that purpose but they could not identify a representative. They informed us they would have to call back with that information, something which has never happened. We think there are basic questions about whether JDA is doing the essential things a corporation would need to be doing in order to truly exist and conduct business. Those questions are not easy to address without an available press representative. Further, Atlantic Yards Report did an excellent article about how there is none of the normal basic transparency you ought to expect from a New York public authority to indicate that JDA is conducting business properly. (See: Thursday, December 17, 2009, Due diligence on the BALDC leads down a rabbit hole, while other state agencies are more transparent than ESDC/JDA/BALDC.)

For more analysis of the legal questions being raised by with respect to the issuance see: Perkins Pounces on PILOT Problem, Sees "Spectre of Fraud" With Atlantic Yards Arena Bonds, 12.19.09.

No Authority to Create Local Development Corporation (Like BALDC) to Fund Arena

Having looked at JDA’s statutory authority, which is something of an unattended relic, it seems clear to us that JDA was created for entirely different purposes and programs and that JDA has no authority create an entity like BALDC for the purposes of the proposed arena bond issuance. In fact, it seems quite the opposite: such actions are proscribed. Further, it looks to us as if the actions now being undertaken are potentially likely to put some of the public officials involved, including the governor's counsel, Peter Kiernan, in some serious legal jeopardy.

JDA has the power to create local development corporations (LDCs) but only for very specific limited purposes. Under Article 14 of the Not-For-Profit Corporation, pertaining to “Special Not-for-profit Corporations” JDA is authorized to create LDCs that construct, acquire, rehabilitate and improve for use by others “industrial or manufacturing plants,” and the statute says “but not for any other purposes.” Since an arena can’t be considered an industrial or manufacturing plant, that sounds like a pretty clear instruction not to do an arena. Furthermore, the way in which the statute is written clearly recognizes that without the specific finding it includes that “public officers” (like the governor’s counsel) forming an LDC for other purposes would not be performing a governmental function consistent with their duties as public officers. Normally, there are significant problems when public officials are involved with private corporations as these LDCs are. So JDA (and public officers) can create and LDC for the purpose of promoting “industrial or manufacturing plants” but not an arena. We add this to the other legal problems identified with respect to the BALDC arena bonds.

Addendum: (Posted December 21, 2009) Here from Atlantic Yards Report coverage of this post is video of our exchange with Governor Paterson.

To Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli: Investigate and Halt Issuance of Arena Bonds

The following an open letter from Noticing New York to Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli calling for an investigation and halt to the proposed issuance of ESDC’s Brooklyn Local Development Corporation PILOT Revenue Bonds for Forest City Ratner’s proposed Nets basketball arena.

* * * *
December 13, 2009

Hon. Andrew M. Cuomo
Attorney General
Office of the Attorney General
of the State of New of New York
120 Broadway
New York, New York 10271-0002

Hon. Thomas P. DiNapoli
New York State Comptroller
New York State Office of the Comptroller
633 Third Avenue
New York, NY 10017


Re: New York State Public Authority Bonds Being Rushed to Market Without Proper, Adequate and Required Assessment, Disclosure and Approval of Risks (Empire State Development Corporation’s Proposed Financing of Nets Arena Via the Issuance of Its Subsidiary Corporation’s “Brooklyn Local Development Corporation PILOT Revenue Bonds, Barclay’s Center Project”)

Dear Attorney General Cuomo and Comptroller DiNapoli:

As you each have jurisdiction, capacity and, we respectfully submit, the duty to act in this area, we are writing to bring to your attention the fact that New York State public authority bonds are being rushed into the tax-exempt bond market without the required assessment, disclosure and approval of the risks associated with their issuance which in this case is substantial. The sale is being rushed to market (while a number of lawsuits are pending that ought to affect the issuance) in order to benefit Forest City Ratner hoping to meet a December 31, 2009 IRS deadline to obtain a tax-exempt status for which that private developer’s project would otherwise not qualify. (The goal is to avoid the provision of the IRS code enacted by Senator Moynihan that prohibits tax-exempt financing of private sports arenas and stadiums.) The risks being ignored in the process put the public, the state and the investors potentially buying these bonds in significant jeopardy.

We ask that you use your powers to investigate this issuance and, in the meantime, to order it halted as not being in compliance with minimum state requirements.

Here are just some of the things you need to know and about which you can readily learn more when you investigate:

1. Bonds Issued by Subsidiary Public Authority: (More than One Tranche). More than one series of bonds are being issued by the Brooklyn Arena Local Development Corp. a subsidiary public authority created by the Empire State Development Corporation as an instrument to bring this financing to market. The issuance of different series of bonds is being used in order to stratify the unacceptable risks of the transaction. The tax-exempt bonds would be paid with “PILOTS” diverting taxpayer revenues for the developer’s benefit.

2. Inadequate Assessment of Risk by the Rating Agencies. More than one series of bonds are being issued. Moody’s Investors Service and Standard & Poor’s (December 1, 2009) gave the senior bonds (i.e. the most credit worthy of the bonds being issued) respectively Baa3 and BBB-minus which means that these best-of-the-lot bonds being issued were given the very lowest investment-grade ratings possible, ratings just a notch above junk. However, the evidence is that these ratings do not reflect a proper assessment of actual risk. (Fitch did not rate these bonds.) Among other things:

a. Moody’s Cash Flow Review Mistake: Starting With 225 Annual Arena Events vs. 200. The Moody's review on the bonds was based upon a supposition that there would be 225 arena events per year while the evidence is that to assume even 200 arena events would be aggressive and inconsistent with the information that the developer itself has been able to promulgate. (There is no evidence of an independent market study or realistic recognition of the arena's competition with three or perhaps four regional arenas. - The consultant hired to do a market analysis made clear that “information provided to us by others was not audited or verified, and was assumed to be correct.” The “others” would be FCR.) When asked to address the significant 11% error in assessing the cash flow Moody’s was unable to respond.

b. Arena Completion Date Unrealistic. It is unrealistic to project that the arena will be completed by April or even June 2012, thus prolonging the duration of bond payments without any projected revenues.

c. Bonds Involve Provisions For Junior Bonds to Default: Atypical Absence of Cross-Default and Redemption. The bonds include provisions where the junior bonds can default, in which case a Russian billionaire, Mikhail Prokhorov, will be in litigation to take over the arena from the developer. The junior bonds are junk bonds quite likely to default. Mr. Prokohrov’s involvement in this transaction is as yet apparently unapproved by any public agency involved. In other words a background check and review have not been done. There is no provision for cross-default, acceleration or redemption in such an event. Given this atypical provision for a litigious transfer of the project we are at a loss to explain why the ratings for these bonds have not, accordingly, been reduced several notches. We do not believe these kinds of litigious difficulties were envisioned or similarly foreshadowed when bonds were issued for the new Yankees and Mets stadiums. The bonds for those baseball stadiums also deserve a respectively higher rating than these new proposed arena bonds given the proven track records of those teams in New York City. The New Jersey Nets have absolutely no track record. Forbes is reporting that the Nets are distributing 5200 free tickets a game, which is more than one-quarter of the house. Additionally, ratings for the Yankees and Mets stadium bonds were given before the national fiscal crisis. We understand that attendance for those teams has not been as good as was projected.

d. Risk of State Agency Non-Compliance With Public Authorities Accountability Act. One Significant risk to the transaction is that the half of the land required for the transaction (the half the developer is not attempting to take through eminent domain) will not be obtainable because of a violation of the Public Authorities Accountability Act. Despite the fact that these bonds are being issued by a state public authority and that this will pose a significant risk to any buyers of these bonds the assessment of the question of whether there was a state agency violation of this law is not being offered by state officials but by the developer. The Preliminary Offering Statement seeks to assure the buyers of the bonds with the private developer’s self-interested assessment that the developer: “believes that the MTA complied with all applicable legal requirements and expects that the [defendants] will prevail in this proceeding.” We also note that this assessment is not in the form of a legal opinion.

e. Errors in Offering Statement. The Preliminary Official Statement Being used to market the bonds contains other inconsistencies and inaccuracies that go to the question of how many arena events will be generating cash flow for the bonds and the basis for ratings. (See next section.)

In assessing the reliability of the ratings agencies we point out that in a front page story the New York Times offered this assessment of the current state of affairs: “. . for now, and for the foreseeable future, the market for ratings is sure to look uncannily similar to the one that helped usher in the crisis: three rivals, all of them paid by issuers, bestriding the market.” (See: Debt Raters Avoid Overhaul After Crisis, By David Segal, December 08, 2009.)

3. Inaccuracies in the Preliminary Official Statement (POS) relating to number of possible events in the arena.

a. Non-Profit Arena Events for Community Go Missing. The Preliminary Official Statement (POS) being used to sell the bonds says that each year NO MORE THAN TEN EVENTS (“not to exceed ten (10) events”) shall be held in the arena for the public and community groups at the FULL COST of normal events in the arena (“which access shall be on the same terms, including cost, as the Arena is generally made available to other Persons for use”). Inconsistently, the developer has already promised the public that there will be AT LEAST TEN EVENTS which will be at a LOWER COST to the public with the developer forgoing profit on the minimum ten events. (Alternately: “a minimum of 10 events would be made available for use by community groups at a reasonable cost (generally the cost of operation) with any net proceeds to the sponsor from these events to be donated to not-for-profit organizations” and “at least ten (10) events per year, at a reasonable rate, with net proceeds from such events to be used to support non-profit community organizations.”) In other words, that subtracts out a minimum of at least another ten events a year from the 220 projected profit-making events.

b. Misrepresentation on Possible Hockey Team. The POS claims that simply by retrofitting the arena with “ice-making abilities” the arena can house a NHL hockey team and thus bring it the revenue associated with that team. This representation offers absurd hope for mitigating risk because the evidence clearly shows that the arena is physically too small to include a hockey rink. This is highly material because if a hockey team plays in an arena, the team plays a minimum of 43 home games per year and as many as 55.

4. Bonds Far Riskier than Transaction Approved by the State Public Authorities Control Board (PACB). (As furnished to and consented to by the State Comptroller’s Office.) The bonds being issued are far riskier and for a very different transaction than was approved by the State Public Authorities Control Board (PACB). As required by the governing state legislation that original transaction was also sent to, commented upon and the approval determination was consented to by the State Comptroller’s Office. The new transaction which has not been approved by the PACB also lacks that statutorily required comptroller review, input and consent. The new transaction is much riskier and different from what was approved because:

a. The arena (supposed to generate income) is 20% smaller. The PACB (and the ESDC board) approved a transaction that involved the financing of an 850,000 square foot arena, not the 20% smaller 675,000 square foot arena that developer Forest City Ratner currently plans to build.

b. The arena (needing to be paid for with generated income) is substantially more costly. At the time the PACB issued an approval, the arena was projected to cost $637.2 million, only a fraction of the $1.1 billion (including infrastructure) it is currently projected to cost according to the recent disclosures of the Preliminary Offering Statement. $1.1 billion represents an increase of 73% over $637.2 million.

c. The arena is less functional. The smaller arena will be less functional. The diminished functionality means among other things that, as noted above, the arena will not (as would previously have been possible) be able to host an NHL hockey team with 43-55 arena events per year.

d. Larger Atlantic Yards financing now a decades-long option for the developer. The larger Atlantic Yards megadevelopment as part of which the arena financing was approved has also changed very substantially (and is much more undefined than ever). It is now a muti-decade option on multi-acre mega-monopoly on the part of the developer that will involve subjecting the community to years of unnecessary developer-created blight as parts of the community are torn down and once-thriving alternative development is stymied.

5. No ESDC Board Approval for Smaller Arena. Not only has the PACB not approved the far riskier and different transaction being brought to the bond market; the ESDC board members have also not acted to approve the financing of the new smaller arena that Forest City Ratner proposes to build.

6. PACB Approval (and Comptroller Review and Consent) and Public Policy of Requiring Public Benefit: $220 Million Net Loss. While it may be argued whether the PACB and the Comptroller take into account the generation of public benefit and public policy issues when they conduct their review of proposed project financings, it should be noted that the transaction now getting underway involves no benefit to the public, whereas the transaction that was previously brought to the PACB and the Comptroller’s office for approval did. The New York City Independent Budget Office has reviewed the new arena financing transaction being brought to market and concluded that it will represent a $220 million net loss to the public ($39.5 million in direct losses and $180.5 million in opportunity losses). That is not the total cost to the public: That is the current project net loss; the project will cost much more.

7. Secret Approval of Additional $400 million in Bonds For Arena That Will Substantivally Increase Total Net Loss to the Public. On September 17th the public authorities issuing these bonds secretively and in violation of the New York State open meetings and sunshine laws approved the groundwork to issue another $400 million in tax-exempt infrastructure bonds, the proceeds of which can be turned over to the developer to reimburse it for its costs of building the arena, thus significantly boosting the net loss to the public of this transaction. Those additional bonds have also not been approved by the PACB or the comptroller. Absent a recission of these actions by the public authorities there can be no assurance that the public is not about to be saddled with these extra undisclosed costs.

8. Bonds Negative Effect on Credit of the State. Though the taxpayer-backed bonds are technically non-recourse to the state for additional funds in the event of a default, the state is still in jeopardy due to their riskiness. Though there is no state guarantee of the bonds, state public authority officials have not ruled out the possibility that the state would rescue the bonds in the event of their default. One possible backdoor method being set up to effect such rescue is the secretly approved issuance (at taxpayer expense) of the additional $400 million in bonds described in the above paragraph. Even if the state were not to rescue the bonds, the PACB was created to review and approve the issuance of all bonds, including such non-recourse or limited-recourse bonds issued by state authorities because the negative effect of default on the state and all other state issuers is recognized.

9. Public Authorities Out of Control? We believe that you each independently have authority to step in to halt these transactions and investigate them. To say that such is not the case would be to say that our public authorities are extraordinarily out of control.

It is not the purpose of this letter to criticize your fellow politicians and public officials, but it is important to note that the issuance of these bonds is being played out against an Alice-in-Wonderland denial to the public of realities, fiscal and others, by holders of public office who should be exercising their oversight to restrain the abuses in these transactions:

1. Denial of Responsibility by Mayor Bloomberg. Bloomberg has denied the financial facts of excessive subsidy for Ratner Atlantic Yards mega-monology with incredible assertions both preceding and following his actions. On Wednesday, May 20th Bloomberg publicly said that the Atlantic Yards project would receive no more subsidy. On May 29th it was revealed that a deal was in the works to give millions more, what turned out to be a package worth more than $180 million in additional no-bid subsidies to Ratner. These subsidies facilitated by the mayor (which can still be halted) are being given to Ratner via handouts from the MTA’s board, approved by the mayor’s representatives. Just this week, commenting on the MTA’s lack of funds (the $200 million shortfall in its 2009 budget), Bloomberg, as if he himself was not responsible, said: "I don't know why anybody is surprised at what is happening to the MTA," . . . "It's a piggy bank that keeps getting raided.”

2. Denial by Governor Paterson. As of last Wednesday, Governor Paterson announced that New York State, with only $3 million of cash on hand, is running out of money. He has been urging legislators to find ways to cut back on state spending and speaking about the dire cutbacks that he will be forced to make without the legislature taking action. Yet how can Governor Paterson expect legislators to take him seriously about legislative branch-controlled spending when he has refused to do anything about Atlantic Yards, which is the premier example of executive branch-controlled pork barrel spending. Upon her recent departure from the state housing finance agencies, Housing Finance Agency CEO Priscilla Almodovar commented caustically about the cronyism of housing approved by the Pataki administration. There can be no better example of such Pataki administration cronyism than its attempted no-bid award of a huge mega-monoply on Brooklyn development to Forest City Ratner.

Necessary Investigation of Eminent Domain Abuses. Finally we must also raise with you the background of eminent domain abuse by state and city officials about which the state Attorney General’s office has initiated investigations respecting conduct relating to Willets Point. The situation with respect to Willets Point involving misconduct by city officials is not an isolated incident. (We are aware of news reports that the Bloomberg administration has been resisting subpoenas from the Attorney General’s office by countering with political threats.) It is tip of a much larger iceberg. As you found, your investigation into Willets Point quickly expanded into investigating activities of the Brooklyn Downtown Partnership, which brings it very close to Atlantic Yards itself. (You should probably also be looking at Coney Island as well.)

The recent decision in the Kaur case respecting the abuse of eminent domain by Columbia University makes this clear how far the abuse of eminent domain by government officials extends. We borrow the language of lawyer, legal scholar, and eminent domain expert Gideon Kanner summarizing his assessment of what happened in Kaur:

. . . in the Kaur case, the New York Appellate Division did examine the unseemly facts underlying the decision to condemn and found them to give rise to a miasma of favoritism, conflict of interest, procedural mistreatment of the condemnees, and deliberate blighting of the area.

The cast of characters in the Kaur case (substituting Forest City Ratner for Columbia University) is virtually identical. The facts of abuse are very much the same, in some respects even worse. They need to be investigated. Senator Perkins has written a letter to Governor Paterson asking for a state moratorium on the use of eminent domain in which he offers his opinion that the “actions on the part of the ESDC are part of an insidious form of discrimination and civil rights violations that must not stand.”

We suggest that investigation needs to start now, not in six months or a year from now. We suggest that your investigation should also extend to how in the case of Atlantic Yards public officials have coordinated such abuses of eminent domain with other illegal acts such as the non-compliance of the MTA with the Public Authorities Accountability Act. The investigation should commence before New York is subjected to a wasteland such as was left in New London, Connecticut in the aftermath of the Kelo decision and before these rushed-to-market bonds default.

From this brief list of problems it should be evident that the skimping on due diligence and normal procedures in service of the private developer's deadline poses great risk to the State, the public and the potential buyers of these bonds. Once again, we believe investigation by each of your offices will find serious problems and wrongdoing in the financing process such that an immediate halt to this unapproved financing transaction is warranted.


Sincerely,


Michael D. D. White

The Craftily Negative Promise Offered For Bonds Being Sold For Nets Arena: It’s Not “Assumed” Islanders Hockey Team Is Coming to Basketball Arena

This post has been updated to include additional analysis. We first posted with all the pictures. The pictures spoke so well for themselves we wanted to get them up without delay. (Click on any image to enlarge.)

In a marketing analysis commissioned by Forest City Ratner that has been made part of the Barclays Center Arena Preliminary Official Statement prepared by Goldman Sachs to market bonds for Forest City Ratner’s Nets arena bonds it says:

For purposes of this analysis, it has not been assumed that the New York Islanders would relocate to the Barclays Center.

(See: Friday, December 04, 2009, Market analysis (commissioned by Ratner) suggests arena would have no trouble attracting events, might even host hockey.)

This we-mentioned-but-we-can't-promise language is official statement language intended to keep people off the hook legally, but it does serve to introduce a definite (positive) possibility that, “Gee, just maybe, the Islanders will relocate to the Barclay’s Center.” In fact, this sentence follows another rather silly sentence that makes it sound like it would be fairly easy for the Islanders to relocate to the basketball arena:

If built as planned, the arena would need to be retrofitted to accommodate the ice-making abilities the NHL requires for its franchises.

"Ice-making abilities the NHL requires of its franchises"? Sounds so official! And so simple! But silly: Like you wouldn't expect a hockey team to play on ice? But is it just as simple as putting in some ice as this language suggests?

We think that disguises the bigger issue of bringing in the Islanders; whether the arena is actually large enough to do so.

Fitting Examination of the Suspect Promise in the Ratner/Goldman Bond Sale Document

Would a hockey rink fit? We think schematics posted by Atlantic Yards Report today probably answer that question in the negative. Evaluate the information and images we have to offer on this score. When you’re done you may also conclude that statements put into Goldman’s Preliminary Official Statement to help market the bonds are a joke (as well as misleading).

First, let's compare. How big is a basketball court in yards? An NBA basketball court is 94 feet x 50 feet. (31.33 yards x 16.67 yards) How big is a hockey rink? More than twice as long and 70% wider. The official size of a hockey rink is 200 ft long and 85 ft wide. (It is also surrounded by "boards" made of wood or fiberglass which will be not less than 40" high, and no higher than 48" above the ice surface. “Any variations from any of the foregoing dimensions shall require official authorization by the League.”
At the outset of this post we had a composite of images from Wikipedia that shows the comparative sizes of a basketball court and a hockey rink which we repeat above.

Below is the schematic of the proposed Forest City Ratner basketball arena.
Click on the image to the right if you'd like to see the larger version of the above image made available by Atlantic Yards Report today (Monday, December 07, 2009, Comparing the Gehry arena outline/orientation with its successor, thanks to an Ellerbe Becket interior design) click on the smaller image on the side.

Below is the schematic of the proposed Forest City Ratner basketball arena with the comparative basketball court and hockey arena overlaid with the basketball court in the center.
Below is the schematic of the proposed Forest City Ratner basketball arena with the comparative basketball court and hockey arena overlaid with the hockey rink in the center.
Below is the schematic of the proposed Forest City Ratner basketball arena with alternate overlays of the comparative basketball court and hockey arena overlaid that may help to envision more clearly how much is lost in terms of seating and also, apparently, functional access to the arena.

Consistent With Previous No Hockey Assessment

Previously, Atlantic Yards Report wrote that “inside sources” said that the redesigned arena would not accommodate hockey. This received public focus and became an embarrassment for Brooklyn Borough President Marty Markowitz when he subsequently made remarks that assumed the smaller redesigned arena would still accommodate the Islanders hockey team. (See: Thursday, June 04, 2009, Guess what: the Brooklyn arena, accommodating Ratner's short-term goal, would be too small to fit in hockey and Thursday, October 08, 2009, From hoops to hockey? Markowitz, contemplating Islanders' move to Brooklyn, disregards the planned arena's limitations.)

Why Mentioning Hockey Team as Real Possibility Is Material to sale of Bonds (& Moody’s Sizable Mistake)

We doubt that resurrecting a possible promise that the Islanders could come to the arena was put into the Forest City Ratner/Goldman Sachs Preliminary Offering Statement to assuage Marty Markowitz’s embarrassment. The reason why the question of whether the Islanders could actually relocate to the arena is very material to the sale of the bonds (and to the bonds needing a new PACB approval that the state Comptroller should scrutinize) is because the cash flow projections for the arena are apparently weak because so few events can be projected to be held in the arena. There will be only a projected 200 events a year in the arena. Related to this is the fact that somehow Moody’s Investor’s Service seems to have made a sizable 11% cash flow mistake in the analysis of how many events there will be. One has to wonder how that happened. It most certainly involves the human intermediaries highlighting facts in their communications. (See: Wednesday, December 02, 2009, Ratings agency Moody's, asked why it assumes 225 events a year at the AY arena, won't discuss it.)

It could help reassure Moody’s that their mistake was perhaps less significant if hockey were actually a real possibility for the arena. National Hockey League teams play at least 82 games a year in the regular season and including playoffs they play at least 4 four more games, with 110 games being the maximum number of games played including both playoffs and the regular season. That means that if a hockey team plays in an arena, the team plays a minimum of 43 home games per year and as many as 55. But if a hockey team can’t play in the arena those numbers are big potential numbers to subtract from alongside the 200 to 224/225 events Moody’s was looking at.

Hockey, Bond Risk and Loose Ends

We previously wrote about how the fact that a hockey team apparently can’t play in the Nets basketball arena involves a material increase in risk. That was when we were writing about the sloppiness and extraordinary number of loose ends that plague the proposed issuance of these bonds. (See: Wednesday, October 28, 2009, So Many Unchecked Approval Boxes: Why Any Sensible Bond Buyer Should Probably Steer Clear of Buying Atlantic Yards Nets Arena Bonds and November 1, 2009, ESDC’s Bond Buyer Happy Talk About Restructuring and Refunding Arena Bonds.) More recently, others, like Neil deMause of Field of Schemes, have commented on how close to the financial edge this transaction is. (See: As Atlantic Yards Gets Pricier, How Much Red Ink Can Ratner Absorb? By Neil deMause in Atlantic Yards, Friday, Dec. 4 2009.)

We were writing in part about the risk to the bondholders of a transaction slapped together at the last minute but we were also writing about how that extra risk means that this is a far riskier and very different transaction from the one the Public Authorities Control Board approved. For instance, the PACB (and the ESDC board) approved a transaction that involved the financing of an 850,000 square foot arena, not the 20% smaller 675,000 square foot arena that developer Forest City Ratner currently plans to build. (See: Saturday, October 03, 2009, Did the ESDC board members know they were approving a 675,000 sf arena?) And at the time the PACB issued an approval the arena, at $637.2 million, was projected to cost only a fraction of the $1.1 billion (including infrastructure) it is now projected to cost according to the recent disclosures of the Preliminary Offering Statement.

This means that the PACB needs to be re-reviewing the transaction to consider whether it should still give its approval to a transaction that now involves such an escalated risk. Develop Don’t Destroy Brooklyn has written to the state comptroller pointing out that the comptroller has concurrent responsibilities in this area that it would be dangerous for him to shirk. (See: Paterson, Silver, Sampson Must Vote on Atlantic Yards Financing, For Immediate Release: November 19, 2009) So far the comptroller has not stepped in to alter the transaction's path toward debacle. It will be telling if nothing is done and the bonds default.

We have previously noted that fictions about the Atlantic Yards mega-project have been continually foisted on the public with a Ratner-comes-first mentality. Those fictions have been tolerated by our public officials and sometimes collaborated in by them. We have therefore wondered what kind of transaction will be foisted upon the buyers of the Ratner arena bonds. (See:Wednesday, November 25, 2009, Picturing What Could Have Been Said If Public Officials Accepted Public Comment at the Atlantic Yards Bond Approval Meeting and see also Tuesday, December 1, 2009, Unfair Substitution of Fiction For Fact in the Atlantic Yards Dialogue.)

What Is the Purpose the Craftily Negative Promise of Not "Assuming" the Islanders Hockey Team Will Come to Basketball Arena?

Why does the Forest City Ratner/Goldman Sachs Preliminary Official Statement say that bringing a hockey team to the arena is as simple as installing ice-making equipment? Is that representation true? Or is it pure hockey-sales hokum?

Looking again at the schematics, it looks as if the only possible way to get a hockey rink into the arena would be to raise the floor of the hockey rink many feet up in a bowl-shaped seating area. The good news is that would leave plenty of room for the “ice-making abilities” (equipment) underneath. But wouldn’t this also eliminate or block most of the functional access to the arena? Wouldn’t it eliminate a huge percentage of the seating in what is already very small arena? (East/West it looks like approximately 50% of the seating rows about 26 out of 52 rows of seats drawn in the Ellerbe Beckett schematic would be lost.) How possible is it really to have a second level ice floor raised so many feet above the main floor?

So, readers give us your thoughts: Was this crafty negative promise in the bond sale documents accurate information intended to carefully convey the situation as it actually is? Is the main hurdle to bringing in a hockey team truly just the practical impediment of investing in some “ice-making abilities” as represented or is this a cold-blooded snow job? Maybe this is just an easy-to-identify example of the Ratner/Goldman team trying to use every trick in their book to get these bonds sold and, if it is, what other tricks have they got in their playbook? With Moody’s apparently already having made one big mistake, it doesn’t look as if the rating agencies will be reliable assessors of risk on this one. Time will tell: We’ll see what the Ratner/Goldman team manage to get away with. Or maybe they won’t.

The Yankee’s Hoggish New Stadium Monopoly Taxes The Rest of Us

If you haven’t yet heard WNYC’s October 28, 2009 Ailsa Chang story about how the new Yankee Stadium is sucking up inside the cloister of its privately-owned walls the economic activity that once upon a time existed in the surrounding Bronx community, take seven minutes to listen to it now, without further delay. WNYC also provides a text transcription of the story at its site. (See: News: Main Street NYC Returns to 161st Street in The Bronx, by Ailsa Chang.)

Waking Up to Some Singular Facts

Develop Don’t Destroy Brooklyn dubbs this arresting story (broadcast on the evening of the World Series kick-off): “A Cautionary Tale for Local Businesses Around the Proposed Atlantic Yards Arena Site” (10.28.09). Irrespective of whether Yankee Stadium is in all ways precisely analogous to the proposed Atlantic Yards Nets arena (Atlantic Yards Report analyzes that it isn’t, see: Saturday, October 31, 2009, Would the AY arena, like the new Yankee Stadium, suck retail inside?), the situation at Yankee Stadium should wake up virtually anyone to the fact that projects sold to the public as providing “economic development” may deliver just the opposite. Why is that? In order to consider Yankee Stadium in terms of what it does and why it is important to consider it first for what it is: a monopoly.

Larger “Sports” Complexes Fewer Sports Seats

Listening to the WNYC story made us think about the stadium’s monopolistic characteristics when we described how sports arenas and stadiums in this country are becoming much bigger (three or four times the park sizes of 40 to 50 years ago) even when the number of seats in them is, if anything smaller, and that is because these sports parks are trying to capture inside their walls all the shopping and eating drinking that their patrons might be doing when they visit. Yankee Stadium is just one example. The WNYC story points out that while the new ball park has “4000 fewer seats” it has become a “mega-mall” that is in decimating competition with local merchants taking away the business that used to be theirs.

We are not sure about the above reported figure of “4000" fewer seats: The reduction seams to be even greater. The Yankees’ own site says the reduction was 4,561, from 56,886 to 52,325, but the latter of those two figures (52,325) is only good if you oxymoronically include 1,886 standing room “seats.” Going by the figures in Wikipedia the reduction was 7,459, a reduction from 57,545 to 50,086 and Field of Schemes estimated that the it was about a 14% reduction in real seat terms. (See: February 26, 2009, Yanks exec: Yes, we have no seats.)

Cartel Behavior

No matter. A reduction of supply to boost prices is a characteristic of cartels. The Times reported that the Mets cut back the number of seats in their ballpark by 25% in order to stoke demand (See: Fewer Seats and More Sellouts Were Mets’ Priorities, by Richard Sandomir, March 27, 2009.) The new Mets Citifield stadium has 42,000 seats, far fewer than their average fan attendance in recent years (51,165, in 2008). That same article reports the seats in the new Yankee Stadium are below the “team’s 2008 attendance average of 53,069.”

Learning Not To Share

The more important point, however, is how the new Yankee Stadium contains a much bigger mall full of national chain stores, and that it doesn’t share its patrons with the surrounding neighborhood. In fact, transit facilities in the area have been redesigned to facilitate this lack of sharing. The WNYC story includes an interview quote from Stanford University economist Roger Noll who it says “has looked at every stadium built in the last 20 years” to conclude they don’t give “a real, substantive boost to neighborhood businesses” which often actually end up “doing a lot worse.” Says Noll: “The whole point of a modern athletic facility – whether it’s an arena for hockey and basketball or a stadium for football or baseball – is to get all of the money to be spent inside the stadium.” There is juicy stuff here, so listen to the WNYC story about how the stadium has vacuumed up much of what was the community’s economic activity into their private walls where they will be paying rent to the new stadium’s owner.

Grabbing Some Commodified Culture

The beginning of this October we attended an afternoon session at a Kingsbourough College conference on Brooklyn development that focused on Atlantic Yards. One of the presentations was by Stuart Schrader of the CUNY Graduate Center. It dealt, in big picture terms, with Atlantic Yards as an effort to seize and monopolize the culture of what is Brooklyn. Mr. Schrader’s paper is not yet available but he directed us to another paper that he said had influenced him, The Art of Rent: Globalization, Monopoly and the Commodification of Culture,
by David Harvey (08.27.06). The overall point of all this is that although we tend to think in terms of monopolies as being with respect to certain industries and commodities, the interest in capturing a monopoly can extend to being an exclusive conduit for virtually anything, even culture.

One can probably detect from the term “monopoly rent” and thinking about the concept of “surplus rent” and the modern day use of the more recently-coined term “rent-seeking” that there is a bit of classical dialectic underlying these concerns that hearkens all the way back to Marx, but it is hard not to be conscious of the urge that Forest City Ratner and others have to appropriate native culture such as Brooklyn’s unto themselves. As we once previously quoted Norman Oder of Atlantic Yards Report writing about the Ratner organization’s use of the image of the Brooklyn Bridge “which happens to be closer to the Brooklyn Paper's longtime DUMBO offices, rather than the generic MetroTech office park” . . . “Forest City Ratner has not been shy about appropriating Brooklyn Bridge iconography in advertising.”

The tragedy is that, to the extent that monopolistic takeovers of culture succeed, what almost invariably ensues is its replacement with something less authentic and more generic and cookie-cutter like the aforementioned MetroTech.

Putting the “Mega” with the “Monopoly”

We wanted to mention Mr. Schrader ‘s presentation but we have probably gone too far afield in doing so because it is unnecessary to get into esoteric concepts about the monopolization of culture in order discuss the many monopolistic characteristics in which Atlantic Yards is throughly steeped. So much so that these days we find that we are nearly as apt to routinely refer to the Atlantic Yards project simply as a `mega-monopoly’ as we are to refer to it as a `megadevelopment.’

Layers Upon Layers of Monopoly

Mega-monopoly probably describes Atlantic Yards better than any other single word given that:

• The gestating seed of Atlantic Yards was a big league sports franchise. These franchises are exempt from antitrust rules and if you search the Atlantic Yards Report site you will find a lot of discussion of their monopolistic nature by economists and other experts. (You will also find a lot of our own comments about Atlantic Yards as a monopoly.)

• Atlantic Yards’ birth was midwifed by another monopolistic expedient, the award of the project to Forest City Ratner on a no-bid basis, which was essential to preclude any possible competition.

• Its succor and the basic sinew of its composition is the eminent domain abuse that chases away all other competitors and transforms what was the competitors’ into Forest City Ratner’s.

• Atlantic Yards has been further coddled by government agencies that have lavished on it additional hundreds of millions of dollars from the taxpayers on a no-bid basis, given its extraordinarily valuable naming rights and exempted it (and these many gifts) from the requirements of appraisal and bids under the Public Authorities Accountability Act.

Maturing Into a Tax Base Problem

Take away any one of the above special monopolistic favors, for instance by subjecting Atlantic Yards to the requirement of a fair bid, or by take away its privilege to abuse eminent domain, and the project fails, it withers unwholesomely on the vine quite as it deserves.

On the other hand, allowed to mature, the mega-monopoly becomes something rather monstrous that drains the resources of the community at large. Here is something important that the WNYC report on Yankee Stadium neglected to mention. The community economic activity in the Bronx that existed before the new Yankee Stadium was built was all increasing the value of local property paying property taxes. It was all contributing to the city’s tax base. But Yankee Stadium is tax-exempt (courtesy of political deals present and past). It doesn’t pay property taxes. That means that when all that local economic activity was sucked up within the sealed walls of the stadium the activity that was on the tax rolls helping everyone in the city, metamorphosed into payments that now only line the pockets of the private owners of Yankee Stadium.

No Taxes? Another Special Benefit Among Too Many to Mention

The privilege not to pay taxes! That’s one more of those special benefit that keeps projects like Yankee Stadium and Atlantic Yards alive. When it comes to Atlantic Yards the list is so long, it is hard to remember all the special benefits. For instance, shouldn’t we mention the zoning override that will selectively apportion an extraordinary amount of extra density on the Ratner property as opposed to other property tax-paying owners in the borough?

Are Taxes Intercepted and Redirected Back for the Private Benefit of Those “Tendering” Them Truly Taxes?

Now it’s time to get a little bit technical because Yankee Stadium’s monopolistic removal of pre-existing economic activity from the tax rolls provides a marvelous opportunity for us to elucidate upon an important, sometimes debated point. Sometimes people say that Yankee Stadium is not off the tax rolls. And sometimes the same people say that Yankee Stadium is not financed with the city taxpayer’s money. (The same applies to the proposed Atlantic Yards Nets arena because the same R-TIFC-PILOT" agreement scheme- pronounced "Artifice-PILOT"– or "Return Total Intercepted For Costs-Payment In Lieu Of Taxes"-- that was used to finance Yankee Stadium is proposed to be used for the arena.) We think that these people are wrong and are trying to promote ideas that are mutually self contradictory. We admit that there are areas with certain shades of grey which we will get to in a moment, but in the end they are not so important.

Basics Before Nuances

Before we get into the nuances, let us review the basics. The owners of Yankee Stadium pay “theoretical” real property taxes (sometimes called “synthetic” property taxes in the community of lawyers financing these deals just so that nobody confuses them with the real thing). The reason the taxes are only theoretical is because the government never gets them; they never go into the public coffers. Instead they are intercepted and used to pay the personal obligations of the Yankee Stadium owners, most importantly the bonds that were issued to finance the Stadium.

We have been quoted as explaining it this way:

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," said Michael D. D. White, a former vice president and top lawyer for the state finance authorities.

(See: Your 'Net' Loss, $2b in Taxes to Ratner, By Rich Calder, April 14, 2008.)

So basically, if you want to think of the Yankee Stadium as being on the tax rolls you have to think of it as being publicly financed with taxpayers’ money because all the taxpayers’ intercepted money goes to the privately owned sports team. Conversely, if you want to think of the stadium as being privately financed then don’t think of it as being on the tax rolls. You can’t have it both ways- - Something we’ll come back to in a moment. One more thing: This neat little bit of legerdemain is the basis upon which the interest on Yankee Stadium bonds was theoretically made tax-exempt which constitutes a whole other raid on the city, state and federal taxpayers. (We’ll get back to that too.)

We described this in more detail with respect to Atlantic Yards (shortly before the official numbers increased a lot) in this Huffington Post article we authored: More Money for the Very Rich: An Unsporting Pursuit? March 17, 2008. Just recently the same subject was visited with a similar explanation by Daniel Goldstein in this Huffington Post article: Wrong Way PILOTs Would Crash into Atlantic Yards, November 3, 2009.

Bloomberg Leads the Stadium Bond Duplicity

Who are those who would try to have it both ways? Mayor Michael Bloomberg for one, someone who was no doubt just trying to confuse the voters since he surely ought to know better. We took Mr. Bloomberg to task on this in: Stadium Finance: Mayor, Professing to Know Numbers, Should Know He Can’t Have It Both Ways (Unless He’s Keeping Two Sets of Books) (Monday, December 15, 2008) For another article where we took the mayor further to task about Yankee Stadium bonds, getting into other objections about them, see: Another Lulu: Revisiting the Yankee and Mets Stadium Scams (Tuesday, January 13, 2009).

Acknowledging Some Difficult Nuances

Now for some nuances, and then we will get to why the way that Yankee Stadium is taking economic activity from neighboring properties off the tax rolls relates to these nuances.

We are about to set forth some distinctions that are difficult to discern and understand. We will do so for the purpose of acknowledging a different point of view even though we don’t exactly agree with it. We warn you that the level of sophistication involved in these distinctions might be a bit daunting but if you bear with us we think we will be able to describe then to you.

It might help to begin with an event that dramatizes a point.

City Parks Commissioner Benepe, Toes the Mayor’s Line on Yankees’ Bonds
(above: City Parks Commissioner Adrian Benepe at Brooklyn Bridge Park meeting.)

We had an elucidating exchange about the Yankee Stadium bonds with New York City Parks Commissioner Adrian Benepe when the subject came up at a January meeting where plans for the Brooklyn Bridge Park were being presented. Mr. Benepe was there to provide figures to put into perspective the perceived high cost of that park. During the question and answer session one member of the audience who had concerns about the luxury development planned for the park brought up Yankee Stadium (also mentioning the similar Mets stadium) as an example of Bloomberg’s propensity for giveaways to his wealthy and connected friends. Mr. Benepe responded, like a good commissioner, apparently taking a page from Bloomberg (see our above link about Bloomberg’s statements the month before). Benepe wound up saying exactly those things that we said we disagree with:

Just to correct the record. The city isn’t paying for either stadium. Both the teams are paying for the stadiums. The city is paying some related costs around the stadium. The billion dollars is being paid for by the Yankees, . . the $800 million being paid for by the Yankees . .

Someone in the audience, perhaps the original questioner, interrupted to say the “The bonds, the bonds.” Mr. Benepe continued:

Yeah and they’re paying back the bonds. They have to pay them all back.

At this point it was our turn to interrupt to correct Mr. Benepe and we called out that the bonds were being paid with city real estate taxes and that he was wrong. Mr. Benepe, before he decided that silence was the better part of valor, said:

They don’t pay property taxes, haven’t paid them before.

The Yankees Don’t Pay Real Property Taxes and Weren’t Paying Them Before

After the question and answer session concluded we spoke with Mr. Benepe, telling him that while we disagreed with him and consider that the Yankee Stadium bonds are being paid with intercepted taxpayer money (just as the city has certified to the IRS), we understood his point about the Yankees just not paying taxes at all. There is an argument that people like Mr. Benepe apparently subscribe to that it should be accepted as a forgone conclusion that the Yankees just don’t pay taxes, or at least that there will be a lot of taxes from which we can expect that society will automatically excuse them. We don’t agree in such a forgone conclusion and that conclusion is somewhat at odds with the theory that entitles Yankee Stadium bonds to any possible tax exemption. But, if one makes it a forgone conclusion that the Yankees are entitled not to pay taxes then the “taxes” that they don’t pay and use instead to pay off their own private bonds can be viewed by people like Mr. Benepe and Mayor Bloomberg as a kind of magic found money that wouldn’t otherwise exist.

Not That Simple: Some Complications

Additional Real Taxes At Least Someone Else Might Have Paid

Stop! It’s not that simple. Complication number one: It may be easy to conceptualize that since the Yankees were not paying taxes on their old stadium that maybe at least that same amount, the amount they were already not paying, should be regarded as an amount it would be impertinent for timid public officials to request them to pay later on. But what about any taxes beyond that? Say for instance, when that tax exemption is expiring or when a new stadium on new land increases the value of what the Yankees own and should be taxed? (We are coming back to this in a minute.)

And what if such a change in status is displacing another possible thing of taxpaying value? In the case of the proposed Atlantic Yards Nets arena, the arena which won’t pay taxes is to be built on a central Brooklyn site above subway stations, a site that would certainly otherwise be occupied by a taxpaying commercial property such as an office building or housing. Yankee Stadium arguably didn’t replace another possible taxpaying commercial property: What it did replace, rather sadly, was the community’s parks. (The city has so far been slow to construct even the inadequate replacement amenities that are supposed to compensate the public.- A responsibility that is partly Mr. Benepe’s.)

Additional Really Truly Completely Fake “Synthetic” Taxes

Finally, one more complication: Beyond the taxes that the Yankees wouldn’t pay because they `traditionally’ don’t, and beyond the taxes that the Yankees perhaps should pay and don’t as a result of the convoluted R-TIFC PILOT financing scheme, there are some additional theoretical “synthetic” taxes that would never ever be paid by the Yankees or anyone else under any circumstances because the taxes are entirely a fiction meant to sucker the IRS into considering the Yankee’s bonds tax-exempt. These additional theoretical “synthetic” taxes were created by the New York City Finance Department by artificially inflating the assessed value of the stadium to an absolutely unrealistic figure. (See: Sunday, April 12, 2009, Bloomberg Update: Fire and Ice (Part II) and also Sunday, April 19, 2009, Keeping up with Bloomberg and Friends: Stark New Scandals and Is it True WSJ Readers Don’t Commit Murder?) (We told you this was complicated.) So to the extent that these “taxes” never in fact existed or could even possibly have existed and were just created as a fiction to swindle the IRS they, are indeed, more magic found money. Though these fake taxes don’t actually divert real property taxes even though they do cost city, state and federal taxpayers money in the end.*

(* How intercepted real estate taxes should be categorized, affects a precise calculation of subsidy that big projects like these are receiving, for instance the $2-3 billion in subsidy that we calculated is going to Atlantic Yards. To the extent that one admits that a portion of the tax payments theoretically intercepted are simply fictional shams meant to fleece the IRS, then it is appropriate to somewhat reduce the total subsidy figure. Similarly, the Benepe argument with which we disagree would be that the total subsidy figure should be further reduced by disregarding the amount of subsidies the Yankees have already been routinely pocketing.)

Declaring the Yankee Stadium Bonds Taxable

What about the fact that the Yankee Stadium bonds are not actually entitled to be tax-exempt because of this last illegal ruse? (See: Saturday, November 8, 2008, Does Questionable Assertion of Attorney-client Privilege Point to Yankee Stadium Bond Taxability?) We still think that irrespective of whatever activity there has been by bond lawyers skulking about in Washington, D.C. in their efforts to persuade the IRS not to declare the Yankee Stadium bonds taxable as a result of this abuse, the IRS should finally get around to lowering the boom and declaring the Yankee Stadium bonds taxable. New York City officials went too far: The IRS should let them know that. The IRS needs to send a message and dismiss the lobbying.

In Chart Form

The forgoing seemed complicated enough so we thought it might be worthwhile to put it in chart form. So here it is (click to enlarge):

But, With WNYC’s Insight, Let’s Add One Important Thing to the Chart

We thought we had all the bases covered with above chart. That was until we heard the WNYC story and we realized that we had never thought about the way that the new Yankee Stadium/Mall would absorb the local taxpaying economic activity into the shelter of its tax exempt walls. It occurred to us that this needed to be added to our chart of the taxes not being paid. Below then is the revised chart of the taxes the Yankees are not paying (click to enlarge).

As the addition to the above chart observes, the mall-ifcation of the new stadium has created new off-the-tax-rolls shopping mall property. It means that taxpaying economic activity that once involved many local merchants outside the stadium has been simultaneously monopolized and converted into property that is off the tax rolls. Further, because the in-stadium shops are off the tax rolls they are more likely to out-compete the taxpaying mom and pop enterprises that will still try to exist in the community. Commissioner Benepe may have been correct in pointing out that the Yankees had a tradition of not paying taxes on their old stadium but now with the regime going into effect at their new stadium the Yankees are starting a new tradition of not paying taxes on a whole lot more than what they never paid taxes on before. In other words, this is an example of how Bloomberg’s “economic development” projects are anything but.

As we said at the beginning of this article, if you haven’t yet heard WNYC’s October 28, 2009 Ailsa Chang story about how the new Yankee Stadium is sucking up the economic activity that once upon a time existed in the surrounding Bronx community take seven minutes to listen to it now, without further delay. We hope these additional insights about the monopolistic characteristics of the development government officials are fostering helps to further inform your listening.