Bond bombshell

Bruce Ratner’s sweetheart deal may be about to turn sour — thanks to the IRS.

Just in time for the final approval of Ratner’s Atlantic Yards project, the Internal Revenue Service has proposed the reform of a development-friendly tax program — a bond-financing scheme that happens to provide a funding foundation for Atlantic Yards.

The program under scrutiny is called “payments in lieu of taxes,” or PILOTs. Using PILOTs, a city can take land off the tax rolls in exchange for fixed rent-like payments — but the payments are typically less than property taxes and, in Ratner’s case, would not even end up in the city’s coffers.

If the new rule goes into effect as expected next year, developers would no longer be allowed to use federally subsidized, low-interest bonds for projects that involve PILOTs, unless the payments reflect taxes based on a property’s actual value.

The change would “better assure a reasonably close relationship between eligible PILOT payment and generally applicable taxes,” the IRS said in the regulation.

“If the proposal becomes law, it will generally raise financing costs for developers,” said George Sweeting, deputy director of the city’s Independent Budget Office.

This could hurt Ratner in two ways:

For one thing, the IRS rule change would force PILOTs to be pegged to a piece of land’s fluctuating value. But the investors who are expected to buy the bonds to underwrite Ratner’s construction don’t like such fluctuations. As a result, they’ll demand a higher return on their investment to compensate for the added risk, experts said.

Secondly, PILOT cash doesn’t flow into city coffers, but instead pays for the developer’s debt servicing or maintenance of the development — another cozy arrangement that has drawn the attention of the IRS bean-counters.

PILOTs are routinely used for public projects like hospitals. But critics — including city Comptroller Bill Thompson, who called the incentive rife with “costly flaws and misuse” — argue that when used as a development incentive, the program cheats ordinary, tax-paying citizens.

“It’s a slight of hand that allows the city to stick it to taxpayers on behalf of developers,” said Neil DeMause, author of Field of Schemes, which focuses on the massive public cost of stadium financing.

New York City’s use of the payments came under federal scrutiny after the IRS grudgingly signed off on controversial PILOT deals for new stadiums for the Yankees and Mets.

Sources told The Bond Buyer last month that the IRS felt that those stadium deals — which cost the city an estimated $216 million in tax revenue over 40 years — looked “too much like private loans.”

“Now they are trying to close the barn door that those deals went though,” said Doug Turetsky, spokesman for the city’s Independent Budget Office.

Ratner’s 16-tower, arena, residential, hotel and office space development is slated to pay PILOTS to the Empire State Development Corporation for the next 99 years in exchange for 25 years of full and partial property tax exemptions.

The deal will save Ratner up to $91 million in tax costs over 30 years, according to the IBO.

Ratner would not comment for this story, but his spokespeople have always said that the tax break will underwrite the project’s 2,250 affordable housing units.

If the IRS rule change goes though, it may inflate Ratner’s costs, but it could also lessen the chances that he will scale back the size of the 8-million-square-foot project — Brooklyn’s biggest ever — because Ratner will need to make up for the shortfall.

“The higher cost will not be good for the developer and in turn, it won’t be good for the city,” said Richard Chirls, a tax attorney who is not working with Ratner on the project.

Neither the Empire State Development Corporation, nor its city counterpart, the Economic Development Corporation, commented for this story.