ATLANTIC YARDS ARENA BONDS APPEAR TO BE ILLEGAL--The SHADOW: Issue #54

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Atlantic Yards Arena Bonds Appear to Be Illegal
Answers Sought From Paterson Administration

Special Report from Develop Don't Destroy Brooklyn

[December 20, 2009] The $511 million triple tax-exempt bond issued by the Brooklyn Arena Local Development Corporation (BALDC) on December 15 appears to be structured and issued illegally.

State Senator Perkins (D- Harlem), Chair of the Senate Committee on Corporations, Authorities and Commissions, sent a letter to Governor Paterson on Friday explaining the legal concerns, which the Senator described as "raising the specter of fraud," and rendering the bonds "effectively worthless."

Senator Perkins said at a Saturday community meeting confronting eminent domain abuse that he spoke to the governor's counsel, Peter Kiernan, who was taking the matter seriously. He asked that the Governor halt reportedly imminent closing on Atlantic Yards project agreements. He said that if the state did not respond, legal action would be considered.

In sum the letter explains that the BALDC has no legal authority to issue PILOT (Payments in Lieu of Taxes) backed bonds because they have no legal authority to lease tax-exempt land.

The letter is reproduced below:

David A. Paterson, Governor
State of New York
State Capitol
Albany, New York 12224

Dear Governor Paterson:

On Tuesday, December 15, 2009, the Brooklyn Arena
Local Development Corporation (BALDC) sold $511
million of tax exempt bonds to help finance the Atlantic
Yards arena. BALDC is a not-for-profit corporation and
was created by the Job Development Authority under
section 1411 of the Not-For-Profit Corporation Law. The
Job Development Authority (JDA) is a mostly defunct
public authority that exists, along with the Urban
Development Corporation, as part of Empire State
Development Corporation (ESDC).

It appears that ESDC chose to have the JDA create the
BALDC so as to avoid creating an ESDC subsidiary,
which would have required approval from the Public
Authorities Control Board (PACB) and the Comptroller
to issue the arena bonds. Pub. Auth. § 51. PACB approval
in this case would have been disadvantageous for two
reasons: (1) it would have required the PACB to undertake
a substantive review of the financial merits of the bond
issue, which are questionable; and (2) it would have
delayed the bond issue, likely past the December 31
deadline set by the IRS for issuing tax exempt bonds
(after December 31, a rule change will not permit tax
exempt bonds to be issued for stadiums).

However, as a local development corporation, and not
an ESDC subsidiary, the BALDC cannot legally finance
the arena using the convoluted financing methods applied
in this case. Of particular importance, the BALDC does
not have the authority to grant a real property tax exemption
for the land that it will lease to Arena Co., which is Forest
City Ratner's arena management company. The BALDC
is subject to Real Property Tax Law (RPTL) § 420-a, a
different section than the one that applies to public
authorities and their subsidiaries, § 412. Under § 420-a,
not-for-profit property is tax exempt only if the corporation
is "organized or conducted exclusively for religious,
charitable, hospital, educational, or moral or mental
improvement of men, women or children purposes".

In June, 2009, the Court of Appeals addressed § 420-a
and its application to LDCs. The court held that land
leased by an LDC to a manufacturing company, for
economic development purposes, was not eligible for
the property tax exemption. Lackawanna LDC v. Krakowski,
12 N.Y.3d 578 (2009). Accordingly, if economic development
does not fall within § 420-a as a basis for an LDC's tax
exemption, there would seem to be little basis for the
BALDC to claim tax exempt status for the Atlantic Yards
arena land(1).

Additional support for the arena not having a valid tax
exemption is provided by two Fourth Department cases
involving stadiums. In the first, County of Erie v. Kerr,
49 A.D.2d 174 (4th Dept. 1975), the court held that the
county-owned facility was tax exempt because it served
the "public" purpose of providing entertainment facilities
for Erie County residents. However, being a "public use"
for purposes of RPTL § 406 does not automatically satisfy
the more restrictive provisions of § 420-a. In Syracuse
University v. Syracuse, 92 A.D.2d 46 (4th Dept. 1983), the
court acknowledged as much by holding that the university
was not entitled to a full tax exemption under § 420-a
where the stadium was used for commercial events, in
addition to events connected with the university's
educational purposes. Moreover, there are separate
exemptions in the RPTL for stadium uses. In particular,
subsection 10 of § 420-a exempts stadium facilities owned
by educational institutions. Basic tenets of statutory
construction indicate that had the legislature intended
to generally exempt not-for-profit property used for
stadiums from property taxes, it would have done so.
Furthermore, RPTL § 429 exempts stadiums housing
both: (1) a professional basketball team; and (2) a major
league hockey team. Not only will the Atlantic Yards arena
be too small to support a major league hockey team, there
is no such contractual obligation, as required under § 429.

In light of this analysis, the BALDC property is not tax exempt
if used for arena purposes. Consequently, payments-in-lieu
of taxes cannot be used to secure the bonds, and they are
effectively worthless. If ESDC knowingly misrepresented the
legitimacy of these bonds, this raises the spectre of fraud.

ESDC could have easily avoided this result if it had created
the BALDC as a formal subsidiary under section 12 of the
Urban Development Corporation Act, as it would then qualify
for a tax exemption under RPTL § 412. There is no reason
for using the JDA to create an independent non-subsidiary
local development corporation, except to create a loophole
and avoid review by the PACB and the New York State
Comptroller.

Although ESDC has not represented the BALDC as one
of its subsidiaries, the exact corporate nature of the BALDC
is unclear. It is clear that the BALDC is either a subsidiary
or not a subsidiary, and in either case, the bond issuance
is illegal. If it is a subsidiary, the Public Authorities Law
required approval by the PACB as a precondition to the
bond issuance. There was no such approval. If BALDC
is not a subsidiary, it has no real property tax exemption
to back the bonds.

In the Lackawanna case, the Court of Appeals "decline[d]
LCDC's invitation to read the Real Property Tax Law together
with the Not-for-Profit Corporation Law in such a manner
as to establish a ‘tax loophole' where one would not
otherwise exist". The same logic applies here: ESDC
should not be permitted to establish a loophole to avoid
PACB review where no loophole should exist.

ESDC's murky and exotic financing methods vitiate the
longstanding efforts of the Legislature to reform public
authorities and make them more accountable and transparent.

On December 2, you promised "an objective and thorough
review" of the Atlantic Yards project and its financing. I
urge you now to keep that promise. You should also act
immediately to halt the closing of the bond issuance
scheduled for next Wednesday, and to stay the
condemnation proceedings. The project should not
be permitted to go forward until the serious questions
raised in this letter are addressed.

Thank you for your attention to the very important matter.
I look forward to hearing from you at your earliest
convenience.

Sincerely,

Senator Bill Perkins
30th Senatorial District

cc:
Andrew Cuomo, Attorney General
Thomas P. DiNapoli, State Comptroller
Peter Kiernan, Counsel to the Governor

(1) It should be pointed out that the BALDC's bond issue was only for the arena block, and not for the entire Atlantic
Yards project, so it does not encompass the bulk of the affordable housing planned as part of the development
(which could possibly be considered "charitable").

[As the legal fight moves forward, your financial support is critical. Please consider and end- of-year tax-deductible contribution. Please donate to Develop Don't Destroy Brooklyn so we can all win in the courts: http://www.dddb.net/donate]




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