Posted by John Vrooman on Saturday, May 23, 2015 in National Football League.

Interview with LA Times.

Basically I’m looking for experts in stadium financing, municipal finance, investment banking, etc., to talk with about the big banks get out of these deals, how they design them, why teams use them and what it means for the cities/states/taxpayers that are often party to these deals as well.

Goldman Sachs is simply providing an investment banking service for the clubs and the public entities that are seeking to attract the professional sports clubs. As a result the investment banker is seeking the most economically efficient and politically expedient to advance the best interest of the sports franchise and the often misguided interest of local government.

The taxpaying public is usually omitted from the process because of the economic failure of monopoly sports leagues extorting stadium concessions, and the political failure of small suburban governments competing with one other over public subsidy of sports venues.

Consider the complexities of the recent public private deal for the 49ers Levis Stadium in Santa Clara as brokered by Goldman Sachs.  As reported in the SF Chronicle the deal between the monopoly take it or leave it 49ers and the easily manipulated local government of Santa Clara.

Goldman Sachs job is to use, if not disguise every public funding tax shelter and loophole to the financial advantage of the  quasi-public sports franchise. Unfortunately due to the law of conservation of risk, the tax burden is passed through a quasi-public sports authority to be borne by the general taxpaying public.

49ers deal in Santa Clara.

The function of GS in this deal was to find the optimal combination financial terms for the 49ers and the city of Santa Clara.  Notice how Santa Clara’s overtly public share does not change from  $114 million but that $230 million of the 49ers share is shifted to the quasi-public Stadium Authority.

In one respect the Stadium Authority’s $312 million personal seat license (PSL) share is properly treated as part of the 49ers’ contribution because PSL are equivalent to the present value of a foregone season ticket discount. (A non-discounted $1000 season ticket is financially equivalent to a $500 a season ticket with a $5000 PSL. The $5000 PSL is roughly the present value of the $500 discount over 20 years).

Unfortunately for the general taxpaying public the PSL revenues are not taxable in this because they are issued by a quasi-public stadium authority. This is also true for all of the sponsorships and other team revenues funneled through the tax sheltered stadium authority. This is the contribution of the investment bankers at Goldman Sachs.

So the purpose of GS in this ostensibly private stadium deal is to legally navigate the fine edges all of the tax shelters and loopholes that exist in the Internal Revenue Code. Below is another example of money for nothing made available by tax avoidance and manipulation available through the IRC.

This scheme will probably be used in all of the proposed stadium deals in SoCal, and Goldman Sachs  is very well schooled in finding the legal edge of using tax-exempt municipal bonds in private stadium finance.

Municipal government bonds that are considered “private activity bonds” under section 141 of the Internal Revenue Code cannot qualify for tax-exempt muni status. Under Section 141 of the Code a bond issue is a private activity if either (1) the private loan financing test is met, or (2) the private business test is met.

The private loan financing test is met if 5 percent of the proceeds are used to finance loans for private business. The private business tests are met if more than 10 percent of the proceeds are used in a private business, and more than 10 percent of the debt service on the bonds is derived from property used in a private business.

If the local government retains ownership of the stadium property and then leases the property and the stadium to the sports team then the property is exempt from local property taxation. The private sports club would then make rent payments approximately equal to the forgone taxes that are not considered private use interest payments, but rather payments in lieu of paying taxes (pilots).

As a result the stadium bond issue would avoid the intent of Section 141 and qualify as tax exempt when it was in effect designed for private use.

The interest cost savings from tax-exempt bond financing is considerable, but due to the law of conservation of tax liability it is then passed on to the general taxpayer.

For example, NYC issued about $1.313 billion in tax exempt bonds for the New Yankee Stadium that the Yankees will retire with payments in lieu of taxes (pilots) of about $76 million per year. (4 percent over 30 years). Over the life of the bonds the interest cost savings for the Bombers could be as much as $500 million, which is unfortunately then passed on to general taxpayers.

The New England Patriots are making Pilots of $2 million per season (reportedly 50 percent less than forgone taxes) to Foxboro MA and the New York Jets and Giants are making Pilots of about $7.2 million to East Rutherford NJ.