Peter Honig is pursuing his Masters degree in Sports Business Management at New York University and is currently the Manager of Corporate Partnerships for the Staten Island Yankees. He is a native New Yorker and is especially thankful to be living in a Yankee Universe.

Previous Columns: Baseball Bacchanalia Arbitration 101 The Stadium Game Continues Naming Rights--What if? Complete list

Nearly three years ago, the Yankees and Mets received the green light to initiate construction on their new massive stadium projects. Before final approval was granted, both teams faced lengthy negotiations with the city, state and federal governments over how to best finance these projects. The New York Economic Development Corporation ultimately won a historic and controversial financing deal that paved the way for both new stadiums. The financing allowed the teams to use tax-exempt bonds for the purpose of stadium construction and infrastructure development in the surrounding areas.

There was great opposition to this deal and many officials questioned its legality by referencing the Tax Reform Act of 1986, which had been designed to prohibit the use of tax-exempt bonds for the use of sports facilities. However, the law did allow tax-exempt bonds to be used for facilities with a public purpose, so long as the bonds are paid off with tax dollars. In a plan that earned "Bond Buyer's 2006 Deal of the Year Award", the Yankees gained a special ruling allowing payments-in-lieu-of taxes (PILOTs) to be considered the legal equivalent of taxes for the purpose of servicing the bond debt and providing the Yankees with tax-free bonds.

The teams, in essence found a loop hole in the law which allowed the use of tax exempt bonds and absolved them from paying both property taxes and high interest rates on taxable bonds. As a result, both teams effectively saved hundreds of millions of dollars on construction over the life of the agreement at the expense of the city, state and federal governments.

Shortly thereafter, the IRS and treasury faced serious questions from Congress over the teams' circumvention of the Tax Reform Act. The IRS ruled that the deal was not technically illegal and that in order to prevent this type of deal from being used in the future, the laws would have to be changed. Therefore, the IRS issued a proposal which would further tighten the rules that governed the use of tax exempt bonds by private businesses.

Fast forward to early June 2008 and word passed that the Yankees would need to raise an additional $350M (in addition to the roughly $950M already raised) to complete their construction project. This amount was expected to be raised again through tax-exempt bonds but the new government regulations may have eliminated this financing option moving forward. "The proposed I.R.S regulation has removed an important tool for a number of key important economic development projects, including the Yankees and Nets stadiums," said Seth W. Pinsky, president of the city's Economic Development Corporation. "We are working with the state in Washington to receive relief from the I.R.S. regulation." If the Yankees are prohibited from utilizing tax-exempt financing, the construction costs will skyrocket immediately. While the team has issued some thinly veiled, albeit disingenuous threats that they will be unable to complete the stadium without tax-exempt financing, they remain optimistic that they will be granted a reprieve from these new government regulations.

This optimism is certainly not shared by Bruce Ratner, owner of the New Jersey Nets. His plans to move to Brooklyn and begin construction on a new arena have been temporarily put on hold. The economic conditions have clearly changed, and the projected cost of arena construction has risen from $640M in 2006 to nearly $1B now. Without the use of tax-exempt financing, this ambitious project may be permanently shelved.

That tax reform act of 1986 was designed to ensure that tax-exempt financing apply only to facility development with a public purpose such as hospitals and schools. The intent was to help spur economic development, reduce the costs of construction and eliminate many of the tax shelters that companies previously enjoyed. Many however, argue that sports franchises are important public entities and should be afforded the same type of tax savings on construction that many public facilities enjoy. Additionally, stadium construction projects are often the center of larger urban redevelopment plans in many cities. Whatever side of the debate one supports, the simple fact remains that if these new IRS regulations are signed into law, the cost for stadium construction will increase substantially as will the difficulty in getting financing plans approved.

Talk this over on the lovemyteam.com message board >>

Write to Peter Honig If you'd like a response to your email, please be sure to include your email address or other contact information