Thursday, December 18, 2008

Indirect subsidies: how Forest City pursues more aid (and can they revise the City Funding Agreement?)

So, now we know what Forest City Enterprises CEO Chuck Ratner meant when he told investment analysts in April that "we still need more" subsidies.

I commented that such a request might generate pushback from some elected officials. It did, and since then, the hemorrhaging of city and state budgets means that direct appropriations are very unlikely.

However, as the New York Observer reminded us this week, there are more ways to skin a budget, including:
  • a delay in paying the Metropolitan Transportation Authority the $100 million (not $1 billion) it pledged to pay for the railyard
  • additional subsidies boosting the affordable housing
  • a speed-up in the city's pace to deliver the $100 million pledged
After all, if Forest City Ratner needs cash flow to pay its bills, then getting city money sooner saves borrowing costs, and avoiding paying a bill increases the value of cash on hand. Either way, it's a boost to the bottom line.

Speeding up city payments?

Regarding the city monies, the Observer reported:
About $40 million of this sum has already been paid to Forest City, and according to multiple people familiar with discussions, the city is considering speeding up the payments on the balance.

That, however, is already part of a contract, so it's not clear to me how much wiggle room there might be. According to Section 3.02 of the City Funding Agreement, the New York City Economic Development Corporation (NYCEDC) will disburse the city funding in five installments.

For the first $40 million, the developer had to prepare an itemization of "Eligible State Project Costs" of not less than $15 million payable by the Empire State Development Corporation pursuant to the State Funding Agreement.

For a second disbursement, worth $15 million in city funds, Forest City would have to itemize another $25 million in "Eligible State Project Costs."

Spending requirement

For a third disbursement, of $30 million in city funds, things would get more complicated--and potentially challenging.

According to the contract, Forest City would have to not only itemize another $15 million in "Eligible State Project Costs," reaching a total of not less than $55 million from the ESDC, it would also have to have "a reputable independent certified public accountant selected by Developer and reasonably satisfactory to NYCEDC" certify that the developer had paid or incurred total project costs of not less than $100 million during the "Second Contribution Period."

In other words, Forest City Ratner would have to be spending its own money on an ongoing bases, and previous land purchases, for example, would not count.

For a fourth disbursement, worth $10 million in city funds, Forest City would have to itemize another $30 million in "Eligible State Project Costs."

For the fifth and final disbursement, worth $5 million in city funds, Forest City would have to itemize not less than $15 million in "Eligible State Project Costs" and would have to have an accountant certify that the developer had paid or incurred total project costs of not less than $100 million during the "Third Contribution Period."

"Eligible State Project Costs," by the way, are defined in the State Funding Agreement as "the aggregate Hard Costs and Soft Costs incurred or paid for by Developer or its Affiliates for the design and construction of the Infrastructure."

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