Tuesday, April 01, 2008

Forest City disclosures: AY delayed, risky, depends on more subsidies

Forest City Enterprises, parent of Forest City Ratner, has issued its FY 2007 financial results, and the accompanying press release and Form 10-K report to the Securities and Exchange Commission offer some important clues about the progress and future of Atlantic Yards, namely:
  • There's no real timeline for the arena, since the developer no longer predicts an opening date
  • More public subsidies likely will be sought for the project to come to fruition
  • The developer is more strongly emphasizing the risks to the project
That said, Forest City isn't exactly coming clean about the stall reported on the front page of the New York Times on March 21. But a close reading offers clues.

Subtle changes in the press releases

While a press release last year lauded "significant progress" with Atlantic Yards and suggested that the arena would open in 2009, a press release this year eschews such enthusiasm and offers no opening date. (I think the likely best-case scenario is 2011.)

The press release yesterday stated that Forest City "now" controls--last year it was "owns or controls"--more than 85 percent of the land, without acknowledging that the figure hadn't changed.

From the 3/31/08 press release (all emphases below are added):
Beyond the development pipeline are four early-stage, mixed-use projects - Mesa del Sol, Atlantic Yards, Waterfront and The Yards - that reached significant development milestones during 2007.... In addition to continuing to prevail in court decisions related to Atlantic Yards in Brooklyn, as previously mentioned, the Company is also moving ahead with site work, including demolition, infrastructure upgrades and construction of the temporary rail yard. Forest City now controls more than 85 percent of the land necessary for the project, which includes up to 6.5 million square feet of developable land on a 22-acre site.

(Note that, while the project is supposed to be 8 million square feet, the developer says the figure of 6.5 million square feet does not include the arena or Site 5; still, the project likely has shrunk somewhat, with the trimming of the flagship Miss Brooklyn tower.)

From the 3/27/07 press release announcing FY 2006 results:
Not yet included in the above pipeline are two large mixed-use projects on which Forest City made significant progress during 2006. Atlantic Yards in Brooklyn gained unanimous approval from the State of New York's Public Authorities Control Board, and the Company now owns or controls approximately 85 percent of the land necessary for the development. In addition, Barclays PLC, a U.K.-based global financial services provider, signed a 20-year naming rights agreement for the proposed 850,000-square-foot, Frank Gehry-designed arena that will be the centerpiece of the project. The arena, which is expected to become home to the NBA's Nets, in which Forest City is an investor, is anticipated to open in time for the 2009-2010 NBA season. In addition to Barclays Center, Atlantic Yards is expected to include new urban retail, office buildings, apartments, and parks and open space.

Looking at the 10-K forms

Compared to last year's 10-K, this year's document explicitly mentions the project's dependence on public subsidies that are subject to "negotiation." It additionally states that "condemnation" of some land has proceeded to achieve environmental remediation, though no eminent domain has actually been pursued; the term may have been used in a more colloquially.

Finally, it emphasizes the variety of risks that could affect the project, not (as in 2006) simply the risk that the National Basketball Association would not give the Nets approval to move.

From the 2007 10-K:
We are in the process of developing Brooklyn Atlantic Yards, a long-term $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 and public subsidies. Condemnation of some of the land has commenced for the 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 or public subsidies, (iv) increasing rates for financings, 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. The arena itself (and its plans) along with any movement of the team is subject to approval by the NBA, which we may not receive. If any of the foregoing risks were to occur, 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.

Last year's 10-K also emphasized that Forest City Enterprises is part of the ownership group that acquired the Nets; this year's document omits that language.

From the 2006 10-K:
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.

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