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 Novel way to raise funds on table Jon Schmitz,Post-Gazette Staff Writer This is the 14th in a series of articles taking a closer look at ''Plan B,'' the financing mechanism proposed by Pittsburgh and Allegheny County officials to pay for new baseball and football stadiums and the expansion of the David L. Lawrence Convention Center. Today's installment is about a plan to raise $45 million toward the project costs by selling portions of the new baseball and football stadiums to private investors. Q. Any part of Plan B that involves someone else's money sounds good. Tell me about it. A. OK, you asked for it. Remember the failed plan in 1986 to sell city-owned Three Rivers Stadium to a secret group of New York investors? They were going to pay cash up front and use the stadium for big tax write-offs. But the IRS put the kibosh on the deal. Well, this new plan -- called Pittsburgh Investment Capital -- is similar, but smaller. We're not selling the whole stadium. Just bits and pieces. A consortium of private companies would put up $45 million to buy certain furnishings, fixtures and equipment in the new baseball and football stadiums. The stadium operators (probably the teams) would pay an annual fee to the consortium to lease the equipment back. Because the private investors would own the equipment, they also would benefit from tax write-offs for depreciation. Companies can claim losses on their tax returns stemming from the depreciation of their assets -- buildings and equipment. The rules are complicated, but the effect is that depreciation offsets a company's income and therefore lowers its tax burden. So, in exchange for $45 million, the companies get annual lease fees from the teams and a smaller tax bill. Q. When I'm at the ballpark, would I, like, have to get some corporation's permission to use the bathroom? A. No. By leasing back whatever is sold, the teams would retain total operational control at the stadiums. Q. Who came up with the idea for selling stadium parts? A. Allegheny County's stadium consultant, Marc Ganis of Sportscorp Ltd. in Chicago, proposed it. County Commissioner Bob Cranmer, who wants to increase private investment in Plan B, has embraced it. Q. What in the stadiums would be sold? A. Stuff that comes under the heading of ''furniture, fixtures and equipment,'' which could include scoreboards, lounge box furniture, appliances, concessions equipment -- basically anything in the stadiums that is replaceable rather than permanent. Q. Who would buy it? A. City and county officials hope to attract a group of civic-minded local companies to go together on the $45 million investment. Q. Why ''civic-minded''? A. Because, frankly, this ain't a great investment. For putting down $45 million, the investors would get annual lease fees equal to 4 percent of their investment, plus depreciation benefits that would be substantial in the first three to seven years but would disappear after that. At the end of the deal, 25 or 30 years out, they would get their original $45 million back. By then, $45 million will barely cover the cost of large fries. So, putting civic virtue aside, it's not much better than sticking the $45 million in a passbook savings account. To confirm this, we ran the numbers past a leading expert on municipal and ballpark finance, Sam Katz of EnterSport Capital Advisors in Bala Cynwyd. He calculated that the deal, with depreciation benefits factored in, would yield an average annual return of about 6.77 percent over a term of 25 years. ''Is it a good investment? No. Is it a good civic investment? It might be,'' he said. Q. Where would the money come from to pay back the investors? A. Ganis said it probably would come from a percentage of Pirates and Steelers ticket revenue. The percentage would be high enough to pay the investors 4 percent per year on their investment, while leaving a surplus that would be set aside and used to repay the $45 million principal at the end. Q. So, to boil it down, this is a blend of team and corporate money. This piece of the deal costs taxpayers nil. A. Well, not to be picky about it, but those tax write-offs that the private investors take are an indirect contribution by taxpayers. Look at it this way -- if the companies weren't involved in the deal, they would be paying more in taxes. Q. Have the teams agreed to this? A. Not yet. It is one of many items under negotiation. Q. Are companies lined up out the Courthouse doors to get in on this? A. Not yet. City and county officials are preparing a list of targeted firms who will be asked to attend presentations, learn all about Pittsburgh Investment Capital, and pony up. Q. What if they don't? A. The city and county will have to find $45 million somewhere else. That is a drawback of the plan. If it doesn't wash, there will be a large funding gap to fill. But many of the numbers in Plan B are elastic. So if this doesn't work, Plan B doesn't necessarily fall apart. Q. Has this type of financing been done elsewhere? A. No. This would be the first time this was used in a pro sports venue, according to Ganis. Q. OK, so it's both experimental and marginal. Why are we bothering with it? A. Because it is a much cheaper way to raise $45 million. At current interest rates, it would cost about $3.5 million per year to borrow the money using conventional methods. With the sale-leaseback plan, the cost is $1.8 million per year plus whatever is fed into the surplus account to pay back the principal. Q. Then why not do the whole project with this type of financing? A. You couldn't. The IRS allows accelerated depreciation of furniture, fixtures and equipment, but not the stadiums themselves. So the short-term tax benefits that make this deal tick are somewhat limited. Q. You mentioned that the IRS nixed the 1986 stadium plan. Will the ''revenooers'' gum this one up, too? A. According to Ganis, this plan conforms with current tax regulations. But before it would go forward, tax attorneys for all the parties would have to agree.
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