The $700 million of bonds to finance a professional basketball arena at the Atlantic Yards project in Brooklyn could be sold and the proceeds placed into escrow as legal challenges to the project are resolved, an official at the Empire State Development Corp. said yesterday.

“The expectation is that they can be issued,” said Frances Walton, chief financial officer of the ESDC. “It wouldn’t be the first time that bonds have been issued with those types of legal challenges.”

Developer Forest City Ratner Cos. needs to market the bonds before the end of the year or lose the right for them to be sold as tax-exempt bonds. However, the project faces four lawsuits and opponents said yesterday that more may be on the way. 

The Brooklyn Arena Local Development Corp., an ESDC subsidiary, would issue the bonds on behalf of Forest City Ratner, which is seeking to build an arena for the National Basketball Association’s Nets. The bonds would be backed by payments in lieu of taxes but the Internal Revenue Service no longer permits this kind of PILOT bond financing for sports facilities. The Atlantic Yards project, however, was approved before the IRS rules change and it was grandfathered in, provided the bonds are sold by the end of 2009. The arena is one part of a mixed-use development, primarily composed of apartment towers.

The structure and the timing of the bonds are still in flux, Walton said.

Typically an issuer would structure an escrow bond “short term with the expectation that it would be coming out of escrow to be restructured. That’s one of the possibilities they are looking at,” Walton said. “But they’re also looking at the structure with an early call ...  if something changes, if the court ruling went against you, you’d just refund the bonds. Those are the two different approaches.”

Forest City Ratner spokesman Joe DePlasco declined to comment on the deal.

The parties have begun talking to rating agencies about the deal, Walton said. An analyst at a credit rating agency yesterday confirmed that discussions had begun.

The project still faces lawsuits over the state’s use of eminent domain to seize private property on behalf of the developer. The New York State Court of Appeals, the state’s highest court, heard arguments earlier this month in that case, brought by property owners and tenants who would be forced to sell their property or be evicted if the project moves forward.

Daniel Goldstein, one of the plaintiffs, said he expects the court to rule on the case in late November. Earlier this month, four state lawmakers, a transit advocacy group, and a coalition of local groups opposed to the project, called Develop Don’t Destroy Brooklyn, filed a suit against the Metropolitan Transportation Authority seeking to annul an agreement to sell the developer the development rights to the Vanderbilt Rail Yards over which a large portion of the project would be built.

 The suit alleges that the MTA violated the state’s Public Authorities Accountability Act because it did not get a new appraisal on the land when it modified an agreement to sell it for less than market value. Forest City Ratner originally agreed to pay $100 million for the development rights and agreed to make $250 million of improvements to the rail yards. Under the revised agreement, the company agreed to pay $20 million up front and then $80 million at net-present value in installments over 19 years and scaled back the improvements. Other suits concern the environmental review processes for the project.

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