Friday, October 11, 2013

Forest City Ratner to sell 70% stake in Atlantic Yards to Chinese government-owned developer; largest such deal with Chinese backing

First, a Russian billionaire whose path to wealth was launched during the shady days of post-Soviet privatization bought 80% of the Nets and 45% of the Barclays Center operating company.

Now, after Forest City Ratner got one tower started, a government-owned property developer from China, Greenland Holdings Group, is buying 70% of the remaining 15 towers in the Atlantic Yards project, the largest commercial real estate deal ever for a Chinese company in the United States.

And the latter seems a solid deal for developer Forest City Ratner, since it will continue to gain development fees and manage the project, hedging its risks. It likely can accelerate construction, thus responding to widespread criticism for the slow delivery of promised affordable housing.

In both cases, the bottom line is: after Forest City did the heavy lifting to get subsidies, tax breaks, and regulatory approval, gaining what they call in the real estate development business "entitlement," Atlantic Yards became a pure investment opportunity, and global capital knows no boundaries, neither ethical nor geographic.

And that means public assistance from New Yorkers is helping the Chinese government earn profits.

SEIS lag

So Forest City managed to extend the planned project deadline from ten years to 25 years, and now can say it's building faster.

This new deal hints at a reason why Empire State Development, the state agency overseeing Atlantic Yards, has lagged on producing a court-ordered Supplemental Environmental Impact Statement: a new partner could help change the analysis.

Enthusiastic official quotes & EB-5 circularity

Consider such enthusiastic official quotes from the press release at bottom, first from I Fei Chang, President and CEO of Greenland US: "It would be a privilege for Greenland US to join this regional development project which will have such a positive impact on the economy and the 'brand' of Brooklyn."

Do you think they're maybe trying to make money?

New York City Mayor Mike Bloomberg said, "This investment would allow us to move forward with one of the most ambitious affordable housing programs in our City's history." Or, to be more clear, to help Forest City offload the risk.

Bloomberg has previously helped market Atlantic Yards to Chinese investors under the EB-5 program.

In fact, the new deal sets up the curiously circular concept: the Chinese government will now likely reap profits from Atlantic Yards, and in doing so--by proceeding with the project buildout--help deliver green cards to immigrant Chinese investors who've invested in the purportedly job-creating EB-5 project.

The reason I say "purportedly" is that the immigrant investor loan replaced--in full or in the main--higher cost capital and does less to create jobs than to simply lower Forest City's debt load. The jobs are "created" thanks to an economist's analysis.

Marketing surfaces in August

Forest City in August began marketing the project, as the New York Post reported then:
The investment, which is being pitched by CBRE to such targets as pension funds and sovereign wealth funds, will likely be structured over five years in several phases of equity as it comes time to develop more of the buildings, according to a story in Real Estate Alert, which first reported on the matter.
The WSJ scoop

The Wall Street Journal reports, in Chinese Builder Charges Into Brooklyn: Developer Greenland Takes a Majority Stake in a High-Profile Atlantic Yards Apartment Project:
State-owned property developer Greenland Holdings Group of China agreed to buy a majority stake in a 15-tower apartment project in Brooklyn, N.Y., that would rank as the largest commercial-real-estate development in the U.S. ever to get major backing directly from a Chinese company.
Located in the Atlantic Yards site that includes the Barclays Center arena, the project is expected to cost nearly $4 billion, including debt. The deal could be announced as soon as Friday.
Terms of the tentative deal call for Greenland to buy a 70% stake from Forest City Ratner Cos., which began the project and would continue to manage the development. The purchase price isn't being disclosed, but Forest City has invested $500 million in the 22-acre project so far—and it has committed to additional spending on land and infrastructure set to total hundreds of millions of dollars.
In addition to the apartment towers, the project includes one office building and retail space. If the deal is approved, Shanghai-based Greenland would provide 70% of the money needed to finish the project, excluding any debt that is taken on for the construction.
Forest City spoke to the Journal, in advance of the press release (below):
"I'm thrilled," MaryAnne Gilmartin, Forest City's chief executive, said in an interview Thursday. "We think we can learn from them and they can learn from us."
Zhang Yuliang, Greenland's chairman, said in an emailed statement that the company is "very excited" about the potential partnership. "Atlantic Yards is about more than Brooklyn and New York, as important as this development is for the city," he said. "It is about how we build sustainable, well-designed housing to meet the needs of diverse groups of people."
The deal, a "memorandum of understanding," was signed last week, Ms. Gilmartin said. But it isn't final, she said, because it needs extensive negotiations over details and approvals from Chinese regulators. It also may need to be reviewed by the Committee on Foreign Investment in the United States, which reviews proposed foreign purchases, according to Forest City.
Oct. 2 signing

Bloomberg News offered some clarity on timing:
Greenland signed a memorandum of understanding on Oct. 2 with Forest City Ratner Cos. LLC to develop the Atlantic Yards Apartment Project in Brooklyn, the Chinese company said in an e-mailed statement today. Greenland will take a 70 percent stake in the development, anchored by the Barclays Center, home of the National Basketball Association’s Brooklyn Nets. It is the biggest deal of its kind by a Chinese developer in the U.S., Greenland said.
“The trend for Chinese developers to continue to invest in the property market abroad will depend on the returns they get in the first batch of such investments,” Frank Chen, Shanghai-based head of China research at property broker CBRE Group Inc., said by phone. “The biggest challenge they face is not knowing the foreign markets well, so it’s wise to work with local partners.”
What about EB-5?

None of the coverage I've seen mentioned the first Chinese foray into Atlantic Yards, in which immigrant investors supplied $228 million in low-interest financing as part of a purportedly job-creating investment under the federal government's questionable EB-5 program, and in exchange get green cards for themselves and their families.

Such EB-5 investors hold mortgages on development rights for at least one and likely several Atlantic Yards towers. Now it seems more likely they'll get their money back and not have to exercise those development rights.

The new investment does raise the question: was the Chinese market to invest in Atlantic Yards as a whole in any way softened up by the previous EB-5 marketing effort?

"When expanding abroad, go to a place where you have a competitive edge. We favor places where there are Chinese investors, migrants, tourists and students, which would secure the project's sales and operations," Zhang Yuliang, chairman of Greenland Group, said in a 7/26/13 Wall Street Journal article about the firm's investment in an unrelated Los Angeles project.

Or was it the debut of the Barclays Center and the huge ensuing publicity? Or was it the (apparently) functional modular plan?

The press release

The official press release, from Forest City:
Forest City and Greenland Group Sign Memorandum of Understanding to Form Joint Venture for Atlantic Yards in Brooklyn
CLEVELAND, BROOKLYN, N.Y. and SHANGHAI, Oct. 11, 2013 /PRNewswire/ -- Brooklyn-based Forest City Ratner Companies, LLC ("FCRC"), the New York-based subsidiary of Forest City Enterprises, Inc. (NYSE: FCEA and FCEB), and Shanghai-based Greenland Group Co. announced today that their affiliates have signed a non-binding memorandum of understanding for a proposed joint venture to develop Atlantic Yards, a 22-acre residential and commercial real estate project in Brooklyn. The joint venture would cover both phase one and phase two of the project -- excluding Barclays Center and the first housing tower, B2 -- including infrastructure, a platform and residential units. The agreement is subject to negotiation and necessary regulatory approvals.
Under the proposed joint venture, Greenland Group would acquire 70 percent of the project, co-develop the project with FCRC, and share in the entire project costs going forward at the same percentage interest. FCRC would manage the day-to-day activities on behalf of the joint venture, which would develop the project consistent with the approved master plan.
Bruce C. Ratner, Executive Chairman of FCRC said, "We are delighted to have an opportunity to create a strong development and investment partnership with Greenland Group. We look forward to working together to bring the housing and other amenities of Atlantic Yards to fruition. Most importantly, this partnership would allow us to deliver the 6,400 units of housing, including 2,250 units of affordable housing, to market more expeditiously, which is important for Brooklyn and the entire city."
Zhang Yuliang, Chairman and President of Greenland Group, said "Greenland is proud of its reputation at home and globally and we look forward to working in Brooklyn with Forest City. Brooklyn has become an international brand because it symbolizes how the old and the new can exist together, creating a dynamic environment for people to live and work. Forest City has played a key role in revitalizing Brooklyn and other communities across the country, and we are very excited by the potential to partner with them and be part of this development."
Mr. Zhang added, "Atlantic Yards is about more than Brooklyn and New York, as important as this development is for the City. It is about how we build sustainable, well-designed housing to meet the needs of diverse groups of people. If we can do that in New York, we can do that elsewhere. That is at the very foundation of what Greenland Group is about."
Atlantic Yards would be Greenland Group's second project in the United States. In July, Greenland Group purchased a 275,450-square-foot site in downtown Los Angeles and plans to build a hotel and residential units. The Shanghai based developer is the number one multiple-function real estate developer in China, with projects in more than 70 cities in 25 provinces in China. Greenland Group is respected in particular for developing well designed, high-rise buildings that are part of large urban complexes built around transit and high-speed rail. Four of their buildings are among the ten tallest buildings in the world.
In 2012, Greenland Group ranked 359th among Fortune Magazine's list of the Top 500 global enterprises, 73rd among Top 500 Chinese companies, and number one among Chinese real estate enterprises. It achieved revenues of $36.6 billion and a total profit of approximately $2 billion in 2012.
New York City Mayor Michael R. Bloomberg said, "This investment would allow us to move forward with one of the most ambitious affordable housing programs in our City's history. I am thrilled that this global company sees in New York an opportunity to invest and contribute to the future of our City, an investment that would create housing for thousands of people of diverse backgrounds and means."
David LaRue, President and CEO of Forest City Enterprises, Inc., the parent company of FCRC, said, "We join our New York team in welcoming Greenland Group, and we applaud their interest in working with us on this project. New York has long attracted business from around the globe, but we are particularly proud that Greenland has decided to pursue a partnership with us in Brooklyn in a project that includes a significant component of affordable housing."
MaryAnne Gilmartin, President and CEO of FCRC, said, "Brooklyn is internationally recognized for its creativity in all areas including innovative businesses, the arts and sports. Greenland Group has shown a remarkable vision by understanding the need to maintain a wide diversity of people in the borough, something that is possible only through affordable, mixed-use housing. We are thrilled to move to the next step in creating a partnership with them as we set out to complete Atlantic Yards. They have shown repeatedly that they are innovative, design focused and understand infrastructure and vertical construction, values that we share at Forest City."
I Fei Chang, President and CEO of Greenland US, said, "It is always the Greenland Group's vision to 'create a better life' by building quality projects, undertaking social responsibility, and fostering economic growth in local communities. It would be a privilege for Greenland US to join this regional development project which will have such a positive impact on the economy and the 'brand' of Brooklyn. Greenland US continues to look for strategic partners and investments in key US markets."
About Greenland Group
Established in 1992, the Shanghai-based Greenland Group has formed a diversified industrial structure with a focus on energy, finance, and real estate. Greenland Group is involved in construction projects in more than 70 cities and provinces in China as well as in Korea, Australia and the United States, among others.
About Forest City
Forest City Enterprises, Inc. is an NYSE-listed national real estate company with $10.7 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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