Dec
18

The stadium land deal penalty

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During yesterday’s somewhat heated discussion on the sketcy goings-on surrounding the land deal for the new Yankee Stadium, one of the RAB commenters asked exactly what the penalty could be for any illegal dealings. At the time, I had no idea, but I shot off an e-mail to Neil deMause who I knew would an answer.

The stadium deal guru had just finished his own Village Voice piece on the topic, and it featured an answer in the last paragraph:

So what happens if it turns out the city cooked the books? Kucinich’s subcommittee staffers say the IRS could conduct an audit; if it turns out there were “material misrepresentations” by the city, the bonds could be stripped of their tax-exempt status. (An IRS spokesperson said he’d have to get back to us on this.) And if nothing else, this should make for some fireworks when the IDA considers the Yanks’ request for $259 million in new tax-exempt bonds — now slated for a public hearing on January 15 at 10 am at 110 William Street.

So that’s that. It’s not that much of a big deal for the Yankees or the City. Someone will get slapped with a fine, and they’ll have to pony up the dough. But no one is going to cart Lonn Trost off to jail or anything drastic like that.

Categories : Yankee Stadium

32 Comments»

  1. uhhh… I haven’t read the bond indentures but if the Yanks have said that the bonds are tax exempt and they are not, they might have to buy them back and refinance them with regular bonds, which would normally be at a somewhat higher rate.

    In this environment, I’m not sure what the rate would be (or even if they could be refinanced).

    This could be a tens of millions of dollar PER YEAR hit to the Yankees.

  2. dexcente says:

    If the Yankees are prevented from using tax-free bonds, I think Kucinich, Brodsky and de Mause deserve a lion’s share of the credit. Of course, forcing the Yankees to use other means of financing will comparatively be a negative revenue event for the City and State of New York, but, boy, someone will have really shown those Yankees! Who cares what the actual effect on revenue is when you just have deep gut “feeling” that you’re doing the right thing?

    • Ed says:

      Blocking the tax free bonds would really hurt the city if it was done before the construction, but at this stage of the game it’s not going to make a difference.

      When a city issues bonds, one of the conditions they usually impose is that the construction must be done by businesses within the city, and that at least a certain % of the workers come from the city. This keeps more of the money within the city and ensures the city is collecting tax revenue from it.

      Now that the work is almost done, any demands the city has would already have been met, so they’ve received the benefits they wanted.

  3. UWS says:

    But no one is going to cart Lonn Trost off to jail or anything drastic like that.
    —-

    That’s a shame, actually.

  4. StilettoSet says:

    If it were any other team, I’d say it was one of the greatest crimes ever….but it’s the Yankees so I have mixed feelings.

  5. Cam says:

    Phew, I guess I had always thought that if this was really very serious (which I’m sure it is), that worst case would be that they would board up the new stadium and not let the yanks use it until this was settled. Thanks for the answer Ben!

  6. Brooklyn Ed says:

    Did anybody heard about Swisher paying Bruney for #33, and Bruney switching to #38?

  7. Steve S says:

    I dont understand the comment. If there are material misrepresentations made by the city, then the bonds lose their tax exempt status? Does that mean the Yankees would responsible for the cost or the city? I thought the tax exempt status was on the loan payments the city collects and that was the way they could give favorable rates to the yankees. How could the city, if they were responsible for the fraud make the Yankees pay the additional cost for losing the exemption?

    • Chris says:

      The idea is that the Yankees are getting a deal that they shouldn’t get because the city gave them special favors. If no one with the Yankees did anything illegal (and asking for tax exempt bonds isn’t necessarily illegal), then they shouldn’t owe a penalty – but they would still need to pay the higher price associated with non-tax exempt bonds because that is what they should have gotten in the first place.

    • Ed says:

      Assuming that the bonds didn’t have any special clauses to deal with this, the burden falls on whoever bought the bonds. “Tax exempt” applies to the interest paid out to the bond holders. The bond holders will now have to pay income tax on the interest received, which results in a very low return on their investment.

      If there were clauses for this in the bond deal, you’d have to be involved to know what they are.

      • pat says:

        You cannot just change a mincipal bod from general obligation to a straight revenue bond without first refunding the bonds already purchased. They would have to call all the outstanding bonds and create a new issue.

  8. Chris says:

    What I don’t get about this whole situation is just how little money we’re actually talking about.

    Let’s assume that the Yankees sold $1B in bonds at a 5% interest rate. Assuming that they are taxed at the highest marginal rate for federal income tax (38%) then you’re talking roughly $20M per year in lost revenue for the federal government. For the state, it’s roughly $3.9M and $2M for the city. This of course assumes that the bond holder is an individual living in the city.

    I would guess (without really knowing) that the income tax on the crews building the stadium are greater than the revenue lost because the bonds are tax exempt.

    • Ed says:

      It really isn’t a lot of money, and the interest involved goes down every year. I have no idea what the term on the bonds is, so I can’t estimate the total amount.

      The federal government cares about all of this because there’s no benefit to them from the tax free bonds.

      NYC & the state want the tax free bonds. The Yankees come into this saying “We can build the stadium for $900 million if we use a New Jersey based construction company.” NYC & the state come in and say “Well, we’d prefer you to use an NYC based construction company. It’ll cost you $1 billion instead, but we’ll give you tax free bonds to lower your overall costs. Oh, make sure at least 80% of the workers are from NYC.”

      Yankees win by paying less total. NYC and NY state win by keeping the money in the NYC economy. The feds are the only ones to lose here.

      • Neil deMause says:

        Ed is correct that this is mostly a cost to the federal government: The Independent Budget Office has estimated that the city and state would lose less than $8 million total from making the bonds tax-exempt; the federal treasury would be out more than $200 million, which, to paraphrase what Everett Dirksen never said, is starting to get into real money.

        This is exactly why Congress tried to outlaw using tax-exempt bonds for private deals like stadiums back in 1986 – before that, cities were handing them out like candy, because it was no skin off their noses. The 1986 law is what the Yankees and NYC are now charged with having conspired to evade.

        And Ed is also correct in his post farther up that now that the work is done, it doesn’t matter to the city how the construction cost is financed. It’s going to be really interesting to see how the Bloomberg administration argues for advancing the Yanks more tax-exempt financing at its hearing next month: “Look at all the benefits we’ll get from the construction spending that will happen … last year … um, hey, how about that Manny Ramirez, huh?”

  9. Manimal says:

    WTF, 3 years 66 million for Man Ram

    http://sports.yahoo.com/mlb/pl.....R3imWFCLcF

  10. Januz says:

    This Yankee Stadium/ Bond issue is beating a dead horse. Where is the outrage over the following. 1: The Mets and THEIR use of BONDS 2: AIG. 3: The Banks 4: The Auto industry. 5: Teams gutting their organizations (See San Diego). 6: Wasted BILLION DOLLAR projects like The Fulton St Train Station?.
    This is just another way for Yankee haters see Lupica, Mike & Gonzalez, Juan, and people who never wanted this stadium built in the first place, to trash the team. This has been going on since Harry Frazee sold Babe Ruth to the Yankees. All the Yankee hating is not new. “Rooting For The Yankees Is Like Rooting For US Steel”, was used as an anti-Yankee phrase, and it was dusted off 40 years later, and the name “Microsoft” was substituted.
    I am a hard core fan, and I am not any more sorry about the new Stadium, or signing Sabathia and Burnett, than fans were when they bought Ruth, DiMaggio, or Jackson, down through the years. I would rather be a Yankee fan with a stadium the media hates, than to be a Cub fan, with a beautiful stadium and 100 years of futility.

    • Tony S says:

      i agree

      Tony

    • Ben K. says:

      You wanna know the answer to this? It’s because this is a Yankee blog. Our discussion on labor the other notwithstanding, this is not the place to talk about the Mets, the auto industry or the banks. Those forums exist. Go find them.

      This site is about the Yankees, good or bad, and this is the bad. That’s all there is to it.

  11. af says:

    If the bonds are declared not tax exempt, the Yankees almost certainly would be in default on the debt and would have to pay for the consequences of that default.

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