Friday, May 15, 2009

Forest City warns SEC of potential new delays, new costs, and failure to meet (tax-exempt bond?) deadlines

On April 2 I pointed out that Forest City Enterprises, in its Form 10-K filed with the Securities and Exchange Corporation (SEC), acknowledged additional potential for increased costs and delays, for the first time warning of potential "inability to retain the current land acquisition financing" and "loss of arena sponsorships and related revenues." Forest City also warns about the possibility of failing to meet required equity contributions.

A new Prospectus filed Wednesday in association with the issuance of 40 million new shares adds several new warnings. I've bolded the new or changed text.

Disclosure of risks

In the “We are Subject to Real Estate Development Risks” risk factor in our Annual Report on Form 10-K we disclosed risks associated with our Brooklyn Atlantic Yards project. The following updates that risk factor to provide additional information.

Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic Yards, an approximately $4.0 billion long-term mixed-use project in downtown Brooklyn expected to feature a state of the art 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 is subject to the completion of negotiations with local and state governmental authorities, including negotiation of the applicable development documentation and public subsidies. Pre-construction activities have commenced for the potential removal, remediation or other activities to address environmental contamination at, on, under or emanating to or from the land.


For the first time, Forest City acknowledges that cost is a changing target.

New deadlines

There is also one lawsuit pending challenging the use of eminent domain which may not be resolved in our favor resulting in Brooklyn Atlantic Yards not being developed at all or not being developed with the features we anticipate. As a result of the foregoing, this project has experienced delays and may continue to experience further delays. There is also the potential for increased costs and further 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, or our inability to retain the current land acquisition financing, (iv) our or our partners’ inability or failure to meet required equity contributions, (v) increasing rates for financings, (vi) loss of arena sponsorships and related revenues, (vii) our inability to meet certain agreed upon deadlines for the development of the project and (viii) other potential litigation seeking to enjoin or prevent the project or litigation 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.

This likely relates to the December 31 deadline for getting tax-exempt financing.

Delays and payback

If any of the foregoing risks were to occur we may: (i) not be able to develop Brooklyn Atlantic Yards to the extent intended or at all resulting in a potential write off of our investment, (ii) be required to repay the City and/or State of New York amounts previously advanced under public subsidies, plus penalties if applicable, (iii) be in default of our non-recourse mortgages on the project, and (iv) be required to restore the rail yards that previously existed on the land. The costs associated with those events could be significant and could have a material adverse effect on our business, cash flows and results of operations. Even if we are able to continue with the development, or a portion thereof, we would likely not be able to do so as quickly as originally planned, would be likely to incur additional costs and may need to write-off a portion of the development.

1 comment:

  1. With regard to the potential "loss of sponsorships", i suspect this new language was added to forest city's official documents because of the december renegotiation of the barclays naming rights deal.

    The renegotiation probably included not only a major reduction in the size of the deal, but also an easing of the escape clause so that barclays can back out of the contract without incurring major penalties.

    Of course, we can't know any of this for sure due to the tremendous secrecy surrounding the deal.

    If the renegotiation was favorable for ratner, i'm sure his p.r. department would be trumpeting that news loud and far.

    Barclays is laying off thousands of employees in the u.k. and is not in the best financial condition, so i wouldn't be at all surprised to see them walk away from the naming rights deal.

    On the bright side for barclays, it's stock price has rebounded far more than that of forest city since the september crash.

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