June 9 (Bloomberg) -- On a May evening, soccer fans streamed down a Harrison, New Jersey, sidewalk lined with posters depicting cafes and parks that don’t exist. They were headed to the $200 million Red Bull Arena, which rises above warehouses and industrial wreckage that were to become condos for New York City commuters and transform the town.
Harrison predicted that redevelopment revenue would cover its $39 million debt to buy and clean up land under the stadium for the Major League Soccer team owned by Dietrich Mateschitz, billionaire founder of the namesake energy-drink company. Instead, most construction projects haven’t begun. The community, across the Passaic River from Newark with a per-capita income 69 percent of the state average, had its credit rating slashed and is firing police and firefighters.
“The numbers didn’t make any sense; the economics didn’t make any sense,” said George Zoffinger, who criticized the deal in 2006 as president of the New Jersey Sports & Exposition Authority, a state agency that runs sporting and entertainment complexes. “Now the taxpayers are going to pay.”
Larger communities have been stung, too: The recession undermined the finances of stadium deals in Houston and Cincinnati. Harrison, a town of 14,000, spent years wooing a soccer team, only to see its prize become a burden.
No Way Forward
The town has no “long-term solution” for its debt load, Moody’s Investors Service said in a May 20 ratings report. The company downgraded Harrison five levels to Ba3, a junk-bond rating, from Baa1, the eighth-highest investment grade.
Town officials in December had to borrow $3.1 million -- 21 percent of its municipal tax collections -- to make the debt payment on the 2006 issue, and they anticipate doing so again this December, Moody’s said.
Meanwhile, the New York Red Bulls, whose owner is No. 208 on Forbes magazine’s list of the world’s billionaires, are challenging their taxable status. The team refuses to pay a $1.4 million property levy, according to Moody’s.
To close its $6 million budget gap, Harrison plans to dismiss 17 percent of its police and 29 percent of its firefighters on July 1, according to an e-mail from Town Clerk Paul Zarbetski. Mayor Raymond McDonough is also considering selling seven parking lots.
‘It’ll Work Out’
Those involved in Harrison’s plight said thousands of condos, shops and offices would have sprung up in its 1.3 square miles were it not for the 18-month recession that ended in June 2009, the longest since the Depression.
“Maybe we were a little aggressive,” McDonough said in a telephone interview. He said he wouldn’t do anything differently. “It’ll work out in the end.”
During the 1950s and 1960s, Harrison, which is 12 miles (19 kilometers) west of Manhattan, thrived. Wire and cable maker Driver-Harris Co., Crucible Steel Co. and Otis Elevator Co. employed tens of thousands. Eventually, manufacturers moved south and overseas, leaving the landscape by the Passaic River littered by vacant brick warehouses with broken windows.
McDonough, a 62-year-old retired plumber, has been mayor 16 years. An “old woman crying” in his office that she couldn’t pay what she owed the town prompted him to look for ways to boost the tax base, he said. In 1997, Harrison designated a third of the town, including the stadium area, for redevelopment.
Gazing Upon Newark
Because of its 20-minute train ride from Wall Street, town leaders envisioned the community, which the U.S. Census says is 44 percent Hispanic or Latino, as a lower-cost home for New York City professionals. They saw how the waterfronts in Hoboken and Jersey City attracted such commuters, although Harrison’s skyline view is of the Passaic and Newark, not the Hudson River and Manhattan’s towers.
To jump-start development, officials of the town, Hudson County and the state had tried since the early 2000s to craft a stadium deal for the team, then called the MetroStars. In 2006, Harrison agreed to pay $39 million for the land, the county put in $45 million for a parking garage and the team paid $200 million for stadium construction.
Revenue from development would fund debt service, said the official statement of Harrison’s bonds, which were sold through the Hudson County Improvement Authority and backed by the town and county. The issue also carried bond insurance from MBIA, now known as National Public Finance Guarantee Corp.
Over the past month, a Hudson County Improvement Authority bond from that deal maturing in 2016 traded at an average yield of 4 percent to 4.32 percent, which compares with an average yield of 1.53 percent for top-rated five-year municipal bonds, according to data compiled by Bloomberg.
The bond offering described two ventures in particular. One, a 331-townhouse development, is about half built, said James Bruno, a lawyer who represents the Harrison Redevelopment Agency. The other hasn’t begun construction.
No feasibility study was done when the debt was sold, said Edward McManimon III, partner at bond counsel McManimon & Scotland, based in Newark.
The town forecast that developers’ payments would total $2.3 million in 2008 and increase to $11.5 million in 2011, according to Moody’s. Instead, Harrison received only $980,000 in 2009 and $1.1 million in both 2010 and 2011.
Herman Charbonneau, senior vice president at New York-based underwriter Roosevelt & Cross Inc., declined to comment on the record. The company got a fee of $354,603 for the bond issue, according to its offering statement.
Dennis Enright, principal at financial adviser NW Financial Group of Jersey City, didn’t respond to two calls for comment.
Plunking it Down
Restaurateurs and shopowners are wary of opening businesses around arenas because they don’t draw visitors every day, said Andrew Zimbalist, an economics professor at Smith College in Northampton, Massachusetts.
“If you’re talking about an area that is economically stagnant, and you simply plunk the facility there, it’s unlikely in the extreme that something will happen,” he said in a phone interview.
Harrison is the latest town to invest in sports only to find fiscal forecasts didn’t bear out. Hamilton County, Ohio, paid for stadiums for Major League Baseball’s Cincinnati Reds and the Bengals of the National Football League with a sales-tax increase. Declining collections since 2008 have taken a toll: A $33 million deficit is projected in 2013 for capital repairs, said Terry Evans, county director of operations.
The Harris County-Houston Sports Authority, which financed venues for three teams, dipped into reserves in November after the global financial crisis rocked its variable-rate debt.
In Harrison, critics such as Councilwoman Maria McCormick and property owner Steven Adler said the plan never added up. Town leaders were dazzled by promises, they said.
“You can’t imagine a quality development into being by drawing pretty pictures,” said Adler, who was paid $24 million for land the town claimed for development. “The idea you can graft that onto an industrial community is the height of pretense, arrogance and foolishness.”
Even the stadium, the one project that has come to completion, isn’t providing the revenue the town anticipated. The team argues that since the Harrison Redevelopment Agency owns the land, it shouldn’t have to pay property taxes, said Bruno, the agency’s lawyer.
“We continue to work with them to find an amicable solution,” said Erik Stover, the team’s managing director.
The Red Bulls delivered, Stover said.
“Just building and bringing the team is a huge economic impact,” he said in a stadium skybox as the crowd roared during a match against the Colorado Rapids that featured the Bulls’ marquee player, Thierry Henry.
Several fans interviewed before the game, such as Bobby Kocal from Queens, said they loved the two-level arena. Seating is close to the action, and it’s covered by a roof of translucent polycarbonate and aluminum. Average attendance for the 25,000-seat arena ranges between 16,000 and 17,000, according to Jurgen Mainka, a Red Bulls spokesman.
Harrison continues to identify with the team. Its website advertises the phone number, and drivers exiting Route 280 are greeted with a sign that welcomes them to the home of the Red Bulls.
In a month, residents may see the fallout of betting on soccer as police and firefighters leave their posts.
“It bothers me,” McDonough said. “I’ve had some sleepless nights.”
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