Hon. David A. PatersonGovernor, State of New YorkState CapitolAlbany, New York 12224

Dear Governor Paterson:

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

It appears that ESDC chose to have the JDA create the BALDC so as to avoidcreating an ESDC subsidiary, which would have required approval from thePublic Authorities Control Board (PACB) and the Comptroller to issue thearena bonds. Pub. Auth. § 51. PACB approval in this case would have beendisadvantageous for two reasons: (1) it would have required the PACB toundertake 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 exemptbonds (after December 31, a rule change will not permit tax exempt bonds tobe issued for stadiums).

However, as a local development corporation, and not an ESDC subsidiary,the BALDC cannot legally finance the arena using the convoluted financingmethods applied in this case. Of particular importance, the BALDC does nothave the authority to grant a real property tax exemption for the land thatit will lease to Arena Co., which is Forest City Ratner’s arena managementcompany. The BALDC is subject to Real Property Tax Law (RPTL) § 420-a, adifferent section than the one that applies to public authorities and theirsubsidiaries, § 412. Under § 420-a, not-for-profit property is tax exemptonly if the corporation is “organized or conducted exclusively forreligious, charitable, hospital, educational, or moral or mentalimprovement of men, women or children purposes”.

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

[1. It should be pointed out that the BALDC’s bond issue was only for thearena block, and not for the entire Atlantic Yards project, so it does notencompass the bulk of the affordable housing planned as part of thedevelopment (which could possibly be considered “charitable”).]

Additional support for the arena not having a valid tax exemption isprovided 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 thatthe 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 notautomatically satisfy the more restrictive provisions of § 420-a. InSyracuse University v. Syracuse, 92 A.D.2d 46 (4th Dept. 1983), the courtacknowledged as much by holding that the university was not entitled to afull tax exemption under § 420-a where the stadium was used for commercialevents, in addition to events connected with the university’s educationalpurposes. Moreover, there are separate exemptions in the RPTL for stadiumuses. In particular, subsection 10 of § 420-a exempts stadium facilitiesowned by educational institutions. Basic tenets of statutory constructionindicate that had the legislature intended to generally exemptnot-for-profit property used for stadiums from property taxes, it wouldhave done so. Furthermore, RPTL § 429 exempts stadiums housing both: (1) aprofessional basketball team; and (2) a major league hockey team. Not onlywill the Atlantic Yards arena be too small to support a major league hockeyteam, there is no such contractual obligation, as required under § 429.

In light of this analysis, the BALDC property is not tax exempt if used forarena purposes. Consequently, payments-in-lieu of taxes cannot be used tosecure the bonds, and they are effectively worthless. If ESDC knowinglymisrepresented the legitimacy of these bonds, this raises the spectre offraud.

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

Although ESDC has not represented the BALDC as one of its subsidiaries, theexact corporate nature of the BALDC is unclear. It is clear that the BALDCis either a subsidiary or not a subsidiary, and in either case, the bondissuance is illegal. If it is a subsidiary, the Public Authorities Lawrequired approval by the PACB as a precondition to the bond issuance. Therewas no such approval. If BALDC is not a subsidiary, it has no real propertytax exemption to back the bonds.

In the Lackawanna case, the Court of Appeals “decline[d] LCDC's invitationto read the Real Property Tax Law together with the Not-for-ProfitCorporation Law in such a manner as to establish a ‘tax loophole’ where onewould not otherwise exist”. The same logic applies here: ESDC should not bepermitted to establish a loophole to avoid PACB review where no loopholeshould exist.

ESDC’s murky and exotic financing methods vitiate the longstanding effortsof the Legislature to reform public authorities and make them moreaccountable and transparent.

On December 2, you promised “an objective and thorough review” of theAtlantic Yards project and its financing. I urge you now to keep thatpromise. You should also act immediately to halt the closing of the bondissuance scheduled for next Wednesday, and to stay the condemnationproceedings. The project should not be permitted to go forward until theserious questions raised in this letter are addressed.

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

* It should be pointed out that the BALDC 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)