Thursday, July 07, 2011

Nets financials point to 11% loan from Prokhorov, 5% (minimum) development fee to Forest City for arena

CNBC's analysis of Nets Sports and Entertainment Consolidated Financial Statements for the years ending June 30, 2010 and 2009 (embedded below) is billed as an "exclusive," but the exclusive, I believe, is the analysis, not the documents, which were made available to the Securities and Exchange Commission.

The upshot of the analysis is that the Nets' losses--even a more conservative version of those losses--could be used to back claims of NBA losses.

I look at that in another post, but first, let's just clarify some numbers that are not widely known.

Prokhorov's 11% loan

The document describes the loan between Brooklyn Arena Holding Company (ArenaHoldCo) and entities controlled by Mikhail Prokhorov (MP Entities) that filled an arena financing gap. The loan was reported back in May 2010, but not, to my knowledge, that it bore a junk-bond level interest rate of 11%:
On May 12, 2010, ArenaHoldCo entered into a loan agreement with an affiliate of the MP Entities in the amount of $75,842,086 (the “Loan”). The Loan bears interest at 11% per annum, compounded monthly and matures on June 12, 2013. Both interest and principal are due at maturity. As of June 30, 2010, accrued interest on the loan of $1,162,947 is recorded as part of the Loan from affiliate and has been capitalized to Land and Arena under construction.
A fee equal to $1,000,000 is due on the date the Loan is paid in full, or a pro-rated portion on the date of any partial repayment of the Loan, which is recorded in Accounts payable — affiliates. In the event the Loan is not paid upon maturity, the Loan converts into an equity position in Brooklyn Arena based on a stipulated formula.
So if ArenaHoldCo, which is controlled by Forest City Enterprises, does not pay Prokhorov back, his share in the arena would be converted to equity (as has been reported).

Ratner gets at least 5%

Since July 2007, when the Times reported it, we've known that Forest City Ratner would get a development fee of 5%. This document suggests the fee could be somewhat more:
Developer Agreement
On June 1, 2005, Brooklyn Arena entered into a Development Agreement with an affiliate (the “Developer”), pursuant to which the Developer will plan, develop and oversee construction of the Arena for a fee not to exceed the lesser of $7,000,000 per year or 5% of the total project cost at completion. Through June 30, 2010, $35,000,000 of development fees have been incurred and capitalized to Land and Arena under construction.
So, as I pointed out four years ago, documents prepared by Forest City Ratner and by KPMG, which indicate an Internal Rate of Return (IRR) of 7.7% on the arena and 9.6% on the rest of the project, refers just to the return on the various flows of money, not the developer's investment.

Forest City likely would earn much more, especially if it can cut costs via modular construction and continue to finagle low-cost financing from immigrant investors. 

Low-cost land loans?

Brooklyn Arena, LLC, parent of the holding company, has a piece of the land loans for the arena site. While I had thought such loans had a very high interest rate--especially the ones from Gramercy Capital--the loans for which Brooklyn Arena is responsible have just a 6% rate.

The document states:
Brooklyn Arena was a party to loan agreements for the land that was acquired in connection with the Arena and the Atlantic Yards Project. During the year ended June 30, 2010, Brooklyn Arena made a required $8,000,000 payment on the loan. Also during the year ended June 30, 2010 and in accordance with the loan agreements, the encumbrance of the Company’s land was removed and the loan from then on only encumbered the Atlantic Yards non-Arena parcels. For the year ended June 30, 2010, the Company’s share of interest, which was capitalized in Land and Arena under construction, was $292,354 and the aggregate weighted average interest rate was 6.02%.
Nets Financials 2009/2010

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