Monday, January 31, 2011

Gramercy Recognition Agreement emerges, with hint that immigrant investor funds would mainly be used to pay off FCR's land loan

There are two Atlantic Yards Recognition Agreements after all, both of which allow those loaning money to developer Forest City Ratner to gain development rights for part of the Atlantic Yards site, and also allow the minimum square footage of Phase 1 to be delayed.

And the earlier Recognition Agreement, which is the second to be released, offers hints that the money sought from immigrant investors, subject of the later Recognition Agreement, would be used mainly to pay off Forest City Ratner's land loan, not to build a new railyard, as the developer has said.

Background

As I wrote 12/16/10, the Recognition Agreement that the Empire State Development Corporation (ESDC) signed last October allowed potential immigrant investors development rights to part of the future Atlantic Yards site. And a previous Recognition Agreement did something very similar.

That latter agreement, embedded below and dated December 2009, allows at least 2.25 years of additional time, to February 2012, to reset the clock should FCR default on its obligation to Gramercy Warehouse Funding, which "holds a leasehold mortgage on certain Project parcels."

That would mean at least a 14-year deadline for Phase 1, rather than 12 years. The second Recognition Agreement offers a seven-year extension, meaning a 19-year deadline.

The loan at issue

The Gramercy mortgage, the balance of which was $153.9 million when the Recognition Agreement was signed in December 2009, expires in February 2012.

FCR seeks $249 million from immigrant investors via the New York City Regional Center under the EB-5 program--green cards for purportedly job-creating investments.

FCR executive MaryAnne Gilmartin told the Wall Street Journal that the money would be used for a railyard, but could be used, in part to pay off that land loan.

Given that some 60 percent of the $249 million could be used for the loan, my bet is that's the priority. After all, the railyard doesn't have to be completed until 2016.

That suggests that the developer how has a 13-month window of opportunity to get a no-interest (or low-interest) loan from the immigrant investors to repay Gramercy.

The Gramercy agreement

The Gramercy Recognition Agreement has three parties: Gramercy Warehouse Funding, a subsidiary of Gramercy Capital; the AYDC Interim Developer (aka Forest City Ratner); and the ESDC.

It involves an unspecified portion of the Phase 1 Properties, including those on the Arena Block (but excluding the arena) and on Block 1129, the southeast block in the project site, which includes construction staging and interim surface parking.

Which properties? Likely some if not all of the ones in the second recognition agreement (in graphic at right): three parcels on the arena block, and four on Block 1129.

The value of the mortgage

How much does FCR owe Gramercy? There are several numbers to consider.

The Times reported 2/13/09 that the loan was worth $177 million, but a portion would be paid off:
Forest City will sign an agreement soon as today in which the company will make a $15 million payment immediately, as well as additional large payments in the future, in return for a two-year extension.
In March 2009, parent Forest City Enterprise cited a $161.9 million refinancing on the loan, which implies that the $15 million payment had gone through, lowering the sum from $177 million.

According to the Recognition Agreement, FCR apparently got an additional year for an extension--to 2012, not 2011. According to p. 4 of the document, the stated maturity date, after all extension options in favor of the developer, is 2/11/12.

Again, according to p. 4, the outstanding principal balance as of December 2009 was $153.9 million. If so, then Forest City Ratner seems not to have made many "additional large payments" to diminish the $161.9 million total.

Hence the pressure on the developer to raise cheap capital in China.

The Mortgage Spreader Agreements

The numbers get a bit more complicated when you look at Exhibit B (right), which explains the components of the Certified Mortgage.

The original loan was apparently $152.8 million.

An additional Mortgage Spreader Agreement apparently added about $37.4 million.

That totaled some $190.2 million.

While the document is not explicit, it seems that payments by Forest City Ratner reduced that sum to
$153.9 million.

Gramercy obligations

According to the document, the extension available in Article IV applies only to Gramercy, as Mortgagee, or any Successor Leasehold Owner who takes over after a foreclosure.

The interim lease can be extended, "as necessary" for Gramercy to foreclose on the mortgage and "for a Successor Leasehold Owner to make satisfactory arrangements with a Permitted Developer to perform Developer's Obligations"... provided that Mortgage "is acting diligently, in good faith and in a commercially reasonable manner."

Gramercy as Mortgagee, is not required to build the subway entrance, rebuilt Carlton Avenue Bridge, develop "Additional Affordable Housing Units," fund "the Existing Parks Investment" (as far as I know, money for the Dean Street Playground), develop the Arena, platform, upgraded railyard, or affordable housing on Site 5.

Successor Leasehold Owners may apply for generally available financing for affordable housing.

Reset date: Feb. 2012 or later

As with the deal with immigrant investors, there's a reset date, in which the new developer would have 12 years--FCR's outside date--to complete a minimum square footage in the towers of Phase 1.

That reset date would begin no earlier than February 2012, which is when the loan is due, but likely would take much longer, given the time it would take to find a new permitted Developer to develop the properties.

Minimum square footage

As with the other Recognition Agreement, the developers would be required to build a minimum of 1.3 million gross square feet (gsf) in Phase 1, if Site 5 (currently home to P.C. Richard and Modell's) is not included, or 1.5 million gsf if Site 5 is included.

If a Development Lease has been severed--because a building is under construction--the calculation gets more complicated. The requirement will be reduced by the gross square footage of each project building substantially completed, and will be further reduced by a percentage.

The calculations, in Section 5.2(d) and then Appendix C of the document below, are confusing, to say the least.

This document, as a whole, is an example of a quote from former chairman of the Civil Aeronautics Board, Alfred E. Kahn, who famously said, “If you can’t explain what you’re doing in plain English, you’re probably doing something wrong.”

Liquidated damages

If Gramercy or successors fail to substantially complete the Phase 1 improvements, then they would have to pay $7.5 million on the Mortgagee Outside Completion Date, which is 12 years after the payment reset date.

Then for the next four years, $7.5 million would be due each year. Each payment would extend the term of interim leases one year.

This does not affect the obligation of the Developer under the Interim Leases and Development Agreement. Nor are there offsets or credits, according to section 5.4 or the Recognition Agreement.

This suggests the ESDC might collect damages twice.

Allocation of obligations

Exhibit C (left; click to enlarge) allocates obligations between the part of the site currently included in the Interim Leases--the Mortgaged Leasehold Estate--and the Remainder Project Site.

There's a confusing error on the page.

The project requires no less than 2250 Project Site Affordable Housing Units. However, the requirement of 1305 such units on the Remainder Project Site--Phase 2--is, at least according to the document, diminished by any of the affordable units in the Mortgaged Leasehold Estate, or Phase 1.

That doesn't make sense. Indeed, ESDC spokeswoman Elizabeth Mitchell said, in response to my query, that it was a mistake:

There is in fact a typo on Exhibit C, because it was certainly not the intention to diminish the number of affordable housing units required. The third row of the third column should read “1,305 Project Site Affordable Housing Units in excess of Project Site Affordable Housing Units constructed on the Mortgaged Leasehold Estate”. The Development Agreement clearly outlines the obligation that the developer has to construct 2,250 affordable housing units. The Recognition Agreement speaks to the responsibility of Gramercy if a default were to occur. Therefore, column 2 is the information that is relevant to this document. This typo that you point out in Exhibit C does not alter the obligations of Gramercy or Forest City Ratner. We do appreciate you pointing out this error, and we will be certain to make the correction in all future agreements.

Note that Exhibit C can be revised depending on how Project Requirements are reallocated to new Development Leases. Indeed, the various documents regarding Atlantic Yards are likely to go through multiple revisions.

Gramercy Recognition Agreement with ESDC

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