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Forest City sells 49% stake in two New York rental buildings, Beekman and 80 DeKalb, at apparent discount to raise cash

To lower debt payments, Forest City Enterprises is selling nearly half of two New York rental properties developed by subordinate Forest City Ratner, keeping 51% ownership. Similarly, the company sold nearly half of New York area retail properties in March to raise cash.

The press release at bottom, which is distilled in The Real Deal, Forest City restructures financing at 8 Spruce, DKLB BKLN, provides the developer's preferred angle:
Forest City Enterprises and National Real Estate Advisors [NREA] announced agreements to restructure the financing at 8 Spruce Street, the Frank Gehry-designed 76-story rental tower in Lower Manhattan and at DKLB BKLN the luxury tower in Fort Greene, Brooklyn, saving the companies hundreds of millions of dollars in debt payments.
Crain's Cleveland Business also distilled the press release.

But there's a trade-off: while Forest City may save hundreds of millions in debt, it sold stakes in both buildings for what seem to be discounts. (I suspect I'm missing some elements of the financial deal, but the raw math is still worth a look.)

In the press release, Forest City CEO David LaRue hinted that times are still tough: "Finally, by extending the bank credit facilities, it allows additional time for economic conditions and rents to further improve before refinancing is necessary."

8 Spruce Street

The price tag for 8 Spruce Street, aka Beekman Tower, is $876 million. If NREA is increasing its stake in the building to 49 percent from 30 percent by "converting $110 million in mezzanine debt into equity," it's paying $110 million for 19 percent of the project.

But 19% of $876 million is $166.4 million. So it looks like NREA got a discount.

DKLB BKLN

At DKLB BKLN, also known as 80 DeKalb Avenue, "NEBF's $30 million mezzanine loan will be converted into a 49 percent equity stake."

Presumably that equity is associated with some $50 million in debt--bank financing is now $104 million, with Forest City owing $53 million--but it most likely is a discount.

After all, mezzanine debt is generally high-risk debt, so lenders must be compensated with either high interest rates or good chunks of equity.

The press release
Forest City and National Real Estate Advisors Announce Recapitalization and Modified Financing for 8 Spruce Street and DKLB BKLN Properties in New York
CLEVELAND, July 5, 2011 /PRNewswire/ -- Forest City Enterprises, Inc. (NYSE: FCEA and FCEB) and National Real Estate Advisors (NREA) today announced recapitalizations and modified credit facilities for 8 Spruce Street, a 903-unit apartment high-rise in lower Manhattan, and DKLB BKLN, a 365-unit apartment building in Brooklyn.  These transactions result in significant debt reduction for the properties and for Forest City.

For 8 Spruce Street, NREA, on behalf of the National Electrical Benefit Fund (NEBF), which was already a 30 percent equity investor in the project, will convert its $110 million of mezzanine debt to equity, increasing its equity ownership to 49 percent.  Forest City has also secured a modification of the property's existing non-recourse financing with a six-bank group led by Eurohypo. Under the modification, the bank credit facility will be reduced from $605 million to $539 million. In addition, the maturity of the credit facility has been extended through July 1, 2016.  Taken together, these changes reduce total debt on the property from $715 million to $539 million and Forest City's pro-rata share of the debt from approximately $500 million to $275 million.

For DKLB BKLN, NREA will convert NEBF'S existing $30 million mezzanine debt to a 49 percent equity stake in the property. Concurrently, the property's bank financing, through Wells Fargo and Helaba Landesbank Hessen-Thuringen, will be reduced from $117 million to $104 million with the maturity extended two years from closing.   These changes reduce total debt on the property from $147 million to $104 million and Forest City's pro-rata share of the debt from $147 million to $53 million.
Subsidiaries of Forest City retain 51 percent ownership of both properties.  NEBF is transferring its 49 percent interest in both properties to the INDURE commingled real estate investment fund managed by NREA.

"This creative and very positive series of transactions demonstrates the tremendous value created in the development of these two properties by our New York team during some of the toughest market conditions in memory," said David J. LaRue, Forest City president and chief executive officer. "In addition, it has significant benefits for Forest City.  First, it has a substantial, positive impact on our pro-rata corporate debt metrics, in keeping with our focus on strengthening our balance sheet. It also meaningfully reduces total debt on these high-quality properties. Finally, by extending the bank credit facilities, it allows additional time for economic conditions and rents to further improve before refinancing is necessary. I congratulate NREA, our lenders, and our New York office, which was led by Andy Silberfein and Matt Messinger in structuring and negotiating this series of transactions."
Jeffrey Kanne, President and CEO of NREA, said "The extremely hard work and deep experience required to complete these transactions aptly represent Forest City's outstanding abilities.  Forest City brought these extraordinary projects through some of the most challenging times our industry has ever known.  Throughout it all they demonstrated the utmost integrity.  We are very pleased to be Forest City's partner."
About the Properties
8 Spruce Street (formerly Beekman), designed by renowned architect Frank Gehry and developed by Forest City, is already a landmark in lower Manhattan and is the tallest residential building in the Western hemisphere at 76 stories and 867 feet. The base of the building includes a pre-K through 8th grade public school and an ambulatory care center for New York Downtown Hospital. The building's 903 market-rate apartment units occupy floors seven and higher. Leasing of units on the lower floors began on February 18, 2011, and as of June 27, more than 270 units had been leased.
DKLB BKLN (formerly 80 DeKalb Avenue), a 36-floor apartment building in the vibrant Fort Greene neighborhood of Brooklyn, was developed by Forest City and began leasing in November 2009. The property, which includes 73 affordable units and 292 market-rate units, is currently in excess of 99 percent occupied.
About NREA and NEBF
NREA is a third-party real estate investment management and advisory firm which is wholly-owned by NEBF, a multi-billion dollar, multi-employer, defined benefit pension plan that provides retirement and related benefits to employees in the electrical construction Industry.
About Forest City
Forest City Enterprises, Inc. is a NYSE-listed national real estate company with $11.5 billion in total assets. The Company is principally engaged in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. For more information, visit www.forestcity.net.

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