Friday, September 06, 2013

SEC filing hints that Forest City's trying to renegotiate obligation to start permanent railyard by end of 2013

Forest City Ratner, known for renegotiating settled deals with state agencies, may be trying another such renegotiation--delaying an (already delayed) obligation to start building, by 12/31/13, a permanent railyard to store and service Long Island Rail Road trains.

That's my reading of the language in a document filed yesterday by parent Forest City Enterprises with the Securities and Exchange Commission. The 10-Q document, excerpted at bottom, raised the possibility of reaching "an alternative agreement" with the Metropolitan Transportation Authority (MTA), as opposed to either starting the permanent railyard or losing the $86 million letter of credit.

If Forest City were to not reach "an alternative agreement," according to the document, the firm would not only lose $86 million, it would lose the right to develop six towers on the railyard, which also require an expensive deck.

(Forest City's statement says the company would lose the right to develop seven buildings--presumably a withdrawal from the project would preclude building a tower just east of Sixth Avenue between Dean and Pacific Streets.)

Note that, while the Empire State Development Corporation always defined Atlantic Yards Phase 1 as the arena block and Phase 2 as sites east of Sixth Avenue, Forest City, for business purposes, has redefined Phase 1 as the arena block plus four towers on the southeast block, currently used as a surface parking lot.

Temporary and permanent railyard

The western third of the Vanderbilt Yard, now occupied by the northern half of the Barclays Center arena, was earlier used to store and service the trains. Forest City built a temporary yard in the central third of the railyard.

The temporary yard, as described in a 2/24/05 MTA letter, was to reduce storage capacity from 72 to 42 cars. (I'm assuming that's the current capacity, but have not seen that confirmed.)

The original plan was to have a permanent railyard with nine tracks and capacity for 76 cars. However, in 2009, Forest City persuaded the MTA to renegotiate not only payment of its $100 million obligation, but also reduced the permanent yard to seven tracks--albeit with significantly modernized facilities--with capacity for 56 cars.

Previous renegotiation on timing

Forest City was actually supposed to begin the permanent railyard 6/30/12, as indicated in an MTA Staff Summary dated 6/22/09, when the railyard deal was renegotiated.

However, the official start date was been moved back 18 months to 12/31/13, with terms disclosed to the MTA board members in June 2012.

The Wall Street Journal reported at the time:
Forest City spokesman Joseph DePlasco said the yard will still be completed on time. The developer has already built a portion of the yard, he said, and other related work will continue.MTA spokesman Adam Lisberg said the developer has agreed to do $10 million of additional work in the interim, and the LIRR is using a temporary rail yard meanwhile."From our perspective, very little is changing here," Mr. Lisberg said.
"I don't have an official reason why they asked, but it's sort of immaterial to us, because we don't need it [finished] until 2019," Lisberg told me at the time. 

The new railyard is needed to facilitate East Side Access: service to Grand Central Station, with Atlantic Avenue to Jamaica trains as a shuttle service. Until last year, the MTA had been predicting 2016 as the start date; hence the requirement, in the 2009 revision of the Vanderbilt Yard deal, for the railyard to be finished by 2016.

But East Side Access is delayed, and the new goal is 2019. "We did not put forward a new time estimate until last month, but had backed off earlier ones," Lisberg said last year.

As I wrote in June 2012, if the railyard is not needed until 2019, that gives opportunity for Forest City to further revise the deal.

Lisberg noted that the additional $10 million letter of credit protects the MTA, so if Forest City backs out, the agency would get a letter of credit worth $96 million to construct the new railyard, and have the opportunity to sell new development rights. 

That additional $10 million, however, was not mentioned in Forest City's SEC filing.

Language now vs. six months ago

According to the Form 10-Q document Forest City Enterprises filed yesterday with the Securities and Exchange Commission:
We are in the process of developing Brooklyn Atlantic Yards, which is comprised of two phases. Phase I is comprised of the Arena and eight buildings totaling approximately 3.4 million square feet. Phase II consists of seven buildings totaling approximately 3.3 million square feet.
Substantial additional costs for railyard and infrastructure improvements will be required to proceed with Phase II. There is an upcoming December 31, 2013 deadline to commence construction on the Permanent Railyard and to post the completion guaranty for such work. If we choose to begin construction on the Permanent Railyard by December 31, 2013, it must be substantially complete by September 30, 2016. We have previously provided an $86,000,000 letter of credit to the Metropolitan Transit Authority ("MTA") as collateral for such future work related to the construction of the Permanent Railyard. In order to construct the aforementioned seven buildings in Phase II, we will be required to construct a platform over the new Permanent Railyard. Alternatively, if we choose not to commence construction on the Permanent Railyard by December 31, 2013, and we do not reach an alternative agreement with the MTA, the MTA may assert that we are in default of various MTA project agreements and pursue a draw down of our $86,000,000 letter of credit. A default under the MTA agreements would also result in our loss of approximately 3.3 million square feet of development rights for Phase II resulting in a significant charge related to abandonment of this development opportunity.
(Emphasis added)

That language was not in the FCE annual report 10-K filed 3/28/13 with the Securities and Exchange Commission, which covered much the same ground:
Phase I of Brooklyn Atlantic Yards  is comprised of eight buildings totaling approximately 3.4 million square feet—four buildings on the Arena Block (adjacent to the Barclays Center ) and four buildings on Block 1129. Phase II consists of seven buildings totaling approximately 3.3 million square feet—three buildings on Block 1120, three buildings on Block 1121 and one building on Block 1128....
A substantial amount of additional costs for railyard and infrastructure improvements will be required to proceed with Phase II of Brooklyn Atlantic Yards. More specifically, there is an upcoming December 31, 2013 deadline to commence construction on the Permanent Railyard and to post the completion guaranty for such work. If we choose to begin construction on the Permanent Railyard by December 31, 2013, it must be substantially completed by September 30, 2016. We have previously provided an $86 million letter of credit to the Metropolitan Transit Authority ("MTA") as collateral for such future work related to the construction of the Permanent Railyard. In order to construct the aforementioned eight [sic] buildings in Phase II, we will be required to construct a platform over the new Permanent Railyard.
Alternatively, if we do not commence construction on the Permanent Railyard by December 31, 2013, we will be in default of various MTA project agreements and the MTA will have the ability to draw down our $86 million letter of credit. We would also lose approximately 3.3 million square feet of development rights for Phase II of Brooklyn Atlantic Yards.

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