If taxpayers subsidize a new stadium for the St. Louis Cardinals, the team promises to repay the investment by building Ballpark Village, a redevelopment project that will put condominiums, shops, restaurants, offices, a museum and 1,850 parking spaces on the land where Busch Stadium now stands.
If the team doesn't spend at least $100 million on the village, it's on the hook for huge financial penalties that will allow city and state taxpayers to get their money back, the suits say.
It's a can't-miss deal, they insist.
However, a close reading of the project agreement shows that the Cardinals could build substantially less, perhaps just a parking garage, and finish the deal without owing a dime in penalties to the government.
Because of apparent escape hatches in the agreement -- the contract that commits the city, state and St. Louis County to $200 million in stadium subsidies -- some state lawmakers are pushing for tighter guarantees.
Those proposed legislative changes are unacceptable to the Cardinals, says a lawyer for the city.
Gregory Smith, the attorney who negotiated the stadium deal on behalf of the city, says additional guarantees are unneeded: There's no way, he claims, the Cardinals can spend anything less than $100 million on Ballpark Village without paying stiff financial penalties.
"There is absolutely no possible reading of that agreement that says they can achieve final completion by building 1,800 parking spaces," Smith says. "I have pretty good credibility around this town. I don't make this crap up. If I thought there was a flaw in this agreement of this nature, I'd be so embarrassed, I'd have to reopen negotiations or something. At the end of the day, show me the loophole."
On its face, the project agreement -- the contract that says who's supposed to do what and what happens if they don't -- gives the Cards room to get out of Ballpark Village without paying a financial penalty if they can generate sufficient tax revenue from the property. Simple math and penalty-reduction clauses in the contract show that the team could get the penalty to zero by building the promised parking garage and using taxes on construction activity to decrease the penalty. However, Smith says, the federal tax code renders such clauses moot: If the Cardinals receive credits against the penalty for taxes generated in Ballpark Village, the IRS would deem stadium construction bonds taxable, which would be a deal-breaker. Rules in the tax code disallowing penalty reductions based on tax revenue are arcane and came as a surprise to him and attorneys for the team that negotiated the deal, Smith says. Nonetheless, the contract between the state, city and team still includes penalty-killing clauses that Smith insists can't be used. So, after nine months of negotiating the deal, it still boils down to one thing: Trust us.
Here's what the contract says:
Beginning in 2010, the team must pay annual penalties to the state and city if it hasn't spent $100 million on Ballpark Village. The penalties start out relatively small -- $500,000 in the first year and $1 million in the second -- but climb to $6 million a year near the end of the 26-year penalty schedule. The penalty is reduced, however, on the basis of money spent on construction in Ballpark Village -- for every $10 million spent, the annual penalty is discounted by 10 percent. According to the project agreement, the penalty is further reduced on a dollar-for-dollar basis by tax revenue generated within Ballpark Village. And the first phase of Ballpark Village is deemed complete, with no further money owed, if the Cardinals go two calendar years without paying penalties. If the team doesn't build the second half of the village, which carries an estimated price tag of $200 million, it must turn three vacant blocks over to the city. The team gets to choose the parcels.
An 1,850-space underground parking garage like the one the Cards have touted costs a minimum of $29.6 million, according to the Parking Market Research Company, based in McLean, Virginia, and Ken Chandler, an engineer with Afram Corporation in St. Louis. Chandler, who's built about 25 parking garages (including 18 in Missouri), says about half the construction budget for an underground garage goes toward labor, the other toward materials. Figuring state income taxes paid by construction workers and sales taxes on materials, construction on the parking garage alone would generate about $1.85 million in tax revenue for the state and city, considerably more than the $1.5 million penalty due in the first two years. Plus, money spent on garage construction would discount the penalty due by nearly 30 percent.
The Cards could generate additional tax revenue, and further reduce the penalty, with surface parking lots. Surface lots cost about $1,200 per space to build and generate slightly more than $60,000 in annual parking-tax revenue for every 900 cars, based on a rate of $15 per space for 81 home games. And there's plenty of space in Ballpark Village. Under the city's parking code, a 900-space parking lot consumes slightly more than 97,000 square feet, not counting driving lanes and handicap spaces. A city block measures roughly 217,000 square feet. And there would be five city blocks available in Ballpark Village, all owned by the Cardinals, once Busch Stadium is demolished.
Despite what the project agreement says, Smith says there's no chance that the Cards could pave over Busch, put up a parking lot and get out of Ballpark Village obligations faster than you can say "big yellow taxi." Smith says clauses in the agreement stating that the first half of Ballpark Village is deemed complete after two years of no penalties and less than a $100 million investment are "a bit of a drafting flaw." In the real world, he swears, it could never happen.
Smith and Cardinals lawyers who negotiated the deal originally thought they could allow a dollar-for-dollar tax credit against the annual penalty. The thinking was that the Cards, perhaps by building offices for high-paid business executives, could generate tons of tax revenue without a $100 million capital investment. But the state's bond counsel ruled that such credits -- and ensuing penalty reductions -- would violate a so-called 10 percent rule in federal tax code, which says that no more than 10 percent of the debt service on a government bond can come from a private source.
The bond counsel's opinion came late in the negotiating game, and even today Smith acknowledges that the logic is byzantine. How can the 10 percent rule on stadium debt disallow penalty reductions based on taxes from private enterprise in the village? "Believe me, I raised this issue," Smith says. "I said, 'How ridiculous is that?' It's Ballpark Village. It's [tax-based penalty reductions are] not even on the project for which the bonds are issued." Smith and Cardinals lawyers lost the argument, and so the parties added a clause to the contract: The state's bond counsel will decide whether the Cardinals will be allowed to reduce penalties on the basis of tax revenue from Ballpark Village. The final decision will come when the bonds are issued.
The tax code can be squishy and subject to myriad interpretations. "You don't deal with bond counsel like I do on a regular basis -- ever try nailing Jell-O to a wall?" Smith quips. But on this point, bond counsel is solid, at least for now. "There's a possibility they will get some kind of credit for tax payments," Smith says. "The most credit they're ever going to be able to get is some calculation south of 10 percent of the bond payment [of $11.2 million per year]. Bond counsel has taken a pretty firm position that until they're convinced otherwise, they are not going to permit provisions in the agreement that allow for an offset for taxes."
Smith says bond counsel has decided that naming-rights revenue set aside for the state and city precludes the possibility that the Cards could use taxes generated from Ballpark Village to reduce or eliminate penalties. In essence, Smith says, naming-rights revenue, private money that the government can't touch until 2012, supersedes tax credits applied against Ballpark Village penalties in 2010 and 2011. But Smith can't explain exactly how. "You are really into a very complex type of analysis," he says. "I wouldn't try to do this without the advice of bond counsel."
Fair enough. David Queen, the state's bond counsel, says he never talks to the press. O. Kirby Colson III, bond counsel for the Cardinals, also declined an interview request. Roger Davis, a San Francisco bond lawyer whom St. Louis Comptroller Darlene Green has used as an advisor on the deal, did not return a phone call, nor did team owner William O. DeWitt Jr., a Cincinnati investor who's made a fortune on complicated business deals [Bruce Rushton, "The Midas Touch," Feb. 7, 2001].
The team, through its spokesman Richard Callow, issued a written statement after the Riverfront Times e-mailed questions about the deal: "Your questions ask the Cardinals to answer whether or not its public partners left gaps in the project agreement. We don't think it's our place to answer that. The Cardinals made a number of concessions that no other business has made to the state of Missouri or the city of St. Louis."
There is, of course, an easy way to remove any doubt: If tax-based penalty killers that could give the Cardinals an escape hatch are moot, take those provisions out of the contract. But that hasn't happened. It doesn't help appearances that the contract defines Ballpark Village as "one or more [emphasis added] of the following facilities," followed by a list that includes retail space, offices, residential units, a museum and, of course, a parking garage. It doesn't help that the Cards don't have to put up a penny in real money for their $6.25 million share of street improvements for the stadium and the village, which would require the creation of six city blocks -- under the contract, a letter of credit will suffice. And it certainly doesn't help that the Cardinals and the city street department in a November meeting decided that the city will not require a detailed traffic study for the project because it isn't expected to significantly increase traffic in the area.
Assurances from lawyers and lobbyists haven't convinced state legislators, who remain skeptical that the Cardinals will shell out $100 million for Ballpark Village.
The House version of the stadium bill requires that the Cardinals pay a huge price in 2011 if they haven't completed five of the six Ballpark Village elements described in the project agreement. You don't need a bond lawyer to understand the bill.
Taking language straight from exhibits attached to the contract, the House bill puts the Cards on the hook for 400 residential units, 470,000 square feet of office space, 110,000 square feet of retail development, a 16,000-square-foot museum, a 1,850-space parking garage and a 94,000-square foot "entertainment attraction" such as an aquarium.
If any two of those elements aren't finished by 2010, the Cards owe the state $150 million. Due immediately. No ifs, ands or buts.
Representative Richard Byrd (R-Kirkwood), who sponsored the amendment that holds the team to its promises, says he hasn't crunched the numbers on a parking garage but the contract leaves doubt about the Cardinals' intentions and what the team could legally be forced to do.
"There were quite a few credits they could take against the penalties, and I did not feel that the project agreement was an absolute guarantee that the Ballpark Village would be built," says Byrd, a commercial-law attorney who has read the fine print. Byrd has heard arguments that the 10 percent rule would prohibit the Cards from escaping their village obligations, but he remains unconvinced. "I just didn't want to have to deal with any of these gray areas," he says. "I wanted an absolute guarantee."
Smith says the Cards could live with the Senate version, which says the team "may" build a parking garage and "shall" build at least one of the other parts of Ballpark Village. But the House bill is a deal-killer. "I don't believe that the Cardinals will agree to it," Smith says. "I believe that because I represent the city of St. Louis. We started out as aggressively as possible on this issue, and where we wound up is what I believe the Cardinals will agree to, and no more."
The Cards need flexibility, and the final redevelopment plan will come after the team gets its stadium subsidy, Smith says. "What we're really after is what's marketable and what makes sense and what is developable."
Amen, says Byrd, who notes that his amendment does provide flexibility. The Cards don't have to build all six of the components, he says.
Byrd insists he isn't trying to kill the project or force the Cards to pay multimillion-dollar fines to the government.
"I don't want the penalties to ever kick in," Byrd says. "I want the village built."