Tuesday, June 30, 2009

Read the fine print: Investment analysts in bed with Forest City look positively on post-dealmaking Forest City

A New York Observer piece yesterday, headlined Analysts: New Atlantic Yards Deal A 'Significant Positive' for Forest City Ratner, brought highly unsurprising news.

From the report by investment firm Keefe, Bruyette & Woods (KBW):
While many of the details have not been completely outlined publicly, we believe staging a takedown of the land and paying for the air rights portion starting in 2012 is a significant positive for Forest City. While the stretched-out takedown and payments will require a higher total outlay (implied 6.5% annual interest rate) over the 19-year period starting in 2012, this reduces current cash outlays in 2009 and near term. In addition, this means that Forest City's takedown of the additional parcels (or air rights) will be more closely matched with vertical development of stages of the project."

What's ironic

I suspect analysts Sheila McGrath and Bill Carrier have absorbed some Forest City Ratner talking points:
The irony at this juncture is that the opposition is citing the delays in the project and a change of architect that should be considered as a negative to vote against Forest City and the project. If this project had not been tied up in litigation for years by the opposition, the MTA would have closed on the land for an upfront payment of $100 million several years ago, and affordable housing would already have been under construction. The litigation has increased the cost of the project and dragged timing of closing into one of the deepest recessions in decades and certainly a most difficult financing environment.

It wasn't litigation that increased the cost of the Frank Gehry arena 50% in less than a year-and-a-half. More likely it was the need for security improvements.

Despite the analysts' claims about "irony," the chief irony goes unmentioned: the State Funding Agreement signed in September 2007--well before the economic downturn--gave Forest City Ratner 12 years to build Phase 1 (after the delivery of property) and no deadline for Phase 2. Nor has there been any documentation that money would've been available for affordable housing on the schedule promised.

Who does KBW work for?

Consider analyst McGrath's concern for the public interest, when she chortled with approval when learning that FCR's Beekman Tower would, in the words of Forest City Enterprises executive Bob O'Brien, take advantage of "the beauty of the Liberty Bonds, tax-exempt rates and all market-rate units."

The report also states:
KBW either expects to receive or intends to seek compensation for investment banking services from Forest City Enterprises Inc. during the next three months. During the past 12 months, KBW acted as a manager or co-manager in an offering of equity securities of Forest City Enterprises Inc.

That's not an unusual entanglement for an investment firm, but it also gives reason to think KBW isn't inclined to be tough on Forest City.

Total sponsorships: $500 million?

The Observer notes:
Also noteworthy in the report was a statement that the arena now has $100 million in sponsorship commitments beyond the naming rights, which Barclays Bank previously agreed to purchase for $400 million over 20 years.

While it is significant that the arena has an additional $100 million, can we sure the Barclays deal remains unchanged? Surely the loss of Frank Gehry's participation, and the switch from an arena promised to be iconic to one promised to be a copy was not greeted with unalloyed joy.

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