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From FCE, (boilerplate) doubt about AY timing; Nets losses prompt $13M loan

While Atlantic Yards supporters have criticized opponents for delaying the project by filing a lawsuit challenging the environmental review, it turns out that developer Forest City Ratner has much more than legal delays on its mind.

Also, while the rate of losses for the New Jersey Nets has slowed, the parent company must still offer a $13 million loan to fund the team this year.

According to the annual report issued at the end of March by parent Forest City Enterprises, other factors, including increased construction costs and the availability of tax-exempt financing, also play into potential delays. The language is required boilerplate, but it does stand in contrast to the sunny predictions, despite countervailing evidence, that the project will be completed in the promised ten years.

The annual report states:
Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic Yards, a $4.0 billion mixed-use project in downtown Brooklyn expected to feature an 850,000 square foot sports and entertainment arena for the Nets basketball team, a franchise of the NBA. The acquisition and development of Brooklyn Atlantic Yards has been formally approved by the required state governmental authorities but final documentation of the transactions are subject to the completion of negotiations with local and state governmental authorities, including negotiation of the applicable development documentation. There is also the possibility that condemnation of the land will be needed for the development and potential removal, remediation or other activities to address environmental contamination at, on, under or emanating to or from the land. There are also various lawsuits filed challenging the approval process and use of eminent domain which may not be resolved in our favor resulting in Brooklyn Atlantic Yards not being developed with the features we anticipate. There is also the potential for increased costs and delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) our inability to obtain tax exempt financing or the availability of financing generally, (iv) increasing rates for financing, and (v) other potential litigation seeking to enjoin or prevent the project for which there may not be insurance coverage. The development of Brooklyn Atlantic Yards is being done in connection with the proposed move of the Nets to the planned arena. While we are part of an ownership group that acquired the Nets on August 16, 2004, the Arena itself (and its plans) along with any movement of the team is subject to approval by the NBA. If we do not receive this approval, we may not be able to develop Brooklyn Atlantic Yards to the extent intended or at all. Even if we are able to continue with the development, we would likely not be able to do so as quickly as originally planned.
(Emphasis added)

$929K in marketing costs

An intriguing squib describes more than $900,000 in unspecified marketing costs for Atlantic Yards. (What does that encompass beyond brochures and booths at street fairs?)

The excerpt:
Operating and Interest Expenses — Operating expenses increased $21,816,000, or 5.37%, for the year ended January 31, 2007 compared to the prior year. This increase was primarily the result of:
[several items]
...Increase of $929,000 related to non-capitalizable marketing and promotion costs for Atlantic Yards in Brooklyn, New York.


AY milestones

The annual report cites the official Atlantic Yards approval:

Significant milestones occurring during 2006 included:
[several items]
...Announcing that New York's Public Authorities Control Board (PACB) unanimously approved our Atlantic Yards project, a mixed-use development in downtown Brooklyn whose main attraction is expected to be a new sports and entertainment arena for the Nets NBA basketball team and that Barclays PLC, a major global financial services provider, has signed a partnership agreement for the naming rights for the arena.


(Note: they’re referring to the fiscal year ending 1/31/07, not the calendar year, because the Barclays deal was announced in January.)

Nets losses continue, FCE's share decreases*

Regarding the Nets, Forest City owns about 21% of the team, and individuals associated with the company also own a significant chunk; Bruce Ratner is the "majority owner," according to the developer.

The losses have slowed, but they continue:
Our equity investment in the Nets incurred a pre-tax loss of $14,703,000 and $24,534,000 for the years ended January 31, 2007 and 2006, respectively, representing a decrease in expense of $9,831,000 compared to the prior year. For the period August 16, 2004 (inception) through January 31, 2005, our equity investment in the Nets incurred a pre-tax loss of $10,889,000, representing an increase in expense of $13,645,000 over the partial period of the previous year. For the years ended January 31, 2007, 2006 and 2005, we recognized approximately 17%, 31% and 38% of the net loss, respectively...

More details, and a loan:
Included in the losses for the years ended January 31, 2007, 2006 and 2005, are approximately $8,081,000, $16,213,000, and $7,750,000, respectively, of amortization, at our share, of certain assets related to the purchase of the team and our share of insurance premiums purchased on policies related to the standard indemnification required by the NBA. The remainder of the loss substantially relates to the operations of the team. The team is expected to operate at a loss in 2007 and will require additional capital to fund the loss. We have agreed to advance up to $13,000,000, in the form of a member loan, which is senior to both common and preferred equity of the partnership that owns an interest in the Nets, but subordinated to third party debt.

[*Update and correction: I originally wrote that Nets losses decreased; as noted in the comment below, it's not so much that the Nets losses have decreased, it's that Forest City's share of the losses has decreased.]

Warning on losses

Investors are warned that only a move to Brooklyn, and perhaps not even that, will bring profits to the Nets. Again, that's boilerplate, since obviously the developer expects big profits from a suite-intensive arena:
Losses Are Expected for the Nets
On August 16, 2004, we purchased a legal ownership interest in the Nets… The relocation of the Nets is, among other items, subject to various approvals by the NBA, and we cannot assure you we will receive these approvals on a timely basis or at all. If we are unable to or delayed in moving the Nets to Brooklyn, we may be unable to achieve our projected returns on the related development projects, which could result in a delay in the return of, termination of, or losses on our investment. The Nets are currently operating at a loss and are projected to continue to operate at a loss at least as long as they remain in New Jersey. Even if we are able to relocate the Nets to Brooklyn, there can be no assurance that the Nets will be profitable in the future.

Comments

  1. The Nets losses have not dropped appreciably. You are confusing the FCE losses with the Nets' losses. The FCE agreement with the Nets calls for FCE to be responsible for smaller percentages of the franchises losses...from 38% to 31% to 17%. The $13 million loan essentially covers the losses in a different way.

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