Saturday, December 21, 2013

"Forest City provides additional information" on Greenland deal: $200M payment, cost psf $180-$220

So, why exactly did Forest City Enterprises announce on Monday, 12/16/13 that they had a "definitive" agreement with Greenland Group for the Atlantic Yards joint venture, but wait until yesterday to issue another press release with more specific information?

Well, that let them stress the positive earlier in the week, a progress of a deal that includes the right to build 15 additional towers (but not the Barclays Center or the under-construction B2). And perhaps--I speculate--some journalists are trying to figure out the numbers, so Forest City got ahead of them.

Greenland's cash payment is $200 million, for 70% of a project on which Forest City and partners have invested $545 million in equity. That might suggest that the value of the total current investment, based on expected costs and revenues going forward, is only about $286 million.

But I'll trust others to do more sophisticated financial accounting, since we don't know, for example, what the expected return would be and how that has been adjusted.

Forest City predicted "a non-cash impairment in the range of $250 million to $350 million." If they put in $545 million and are getting $200 million, that suggests a $345 million difference. But impairment also involves depreciation and other adjustments.

Cost psf

"Based on the 6.4 million square feet of remaining entitlements in both phases," according to the press release, "the total anticipated costs yield an expected average cost per square foot of approximately $180-$220 per square foot, prior to vertical development."

That cost would be amortized over the entire project, including the office tower long on hold but designated for the area now operating as a temporary plaza.

That number seems high, from one perspective. As the Commercial Observer reported 10/1/13:
The deal’s price per buildable square foot of $173 is a significant sign of the area’s emergence as a central business district, according to the broker of the sale. “From a development perspective, I believe it’s the highest price per buildable square foot paid in Downtown Brooklyn,” Sean Kelly, managing director at CPEX, told The Commercial Observer.
Then again, they have a lot of development rights. And the price of land is much, much cheaper than Manhattan, according to prices described by The Real Deal.

Future returns

It looks like Forest City has taken a paper loss on its investment, so far, but we don't have a full picture of future returns, expenses, development fees, and tax treatment.

Forest City's CEO David LaRue said, "We believe this joint venture enhances Forest City's ability to both fulfill our commitments to the community and create value over time by achieving an appropriate, risk-adjusted return on our invested capital."

In other words, in the long run, they still expect to do well. Consider, for example, that Forest City Ratner Chairman Bruce Ratner told Engineering News-Record that "his plan is to sell turnkey modular high-rises to other developers and landowners."

The press release
Forest City provides additional information on pending Atlantic Yards joint venture with Greenland Group
CLEVELAND, Dec. 20, 2013 /PRNewswire/ -- Forest City Enterprises, Inc., (NYSE: FCEA and FCEB) today provided additional information on its pending joint venture with Shanghai-based Greenland Group for the development of Atlantic Yards, a 22-acre residential and commercial real estate project in Brooklyn. The two companies announced the signing of a definitive agreement earlier this week for the joint venture, which is expected to close in mid-2014.
(Logo: http://photos.prnewswire.com/prnh/20080515/FRSTCTYLOGO )
Under the terms of the definitive agreement, Greenland Group will make a capital contribution at closing of approximately $200 million to acquire a 70 percent equity interest in the project, excluding Barclays Center and B2, the first residential building. Going forward, both companies will invest and share development risk in proportion to their respective ownership stakes on the entire remaining project, including infrastructure costs and vertical construction for both Phase 1 and Phase 2.
Total estimated site acquisition costs, net of the potential impairment disclosed in Forest City's third-quarter earnings release and filings, are expected to be approximately $1.3 billion. In addition to costs incurred to date, these include projected costs to complete the MTA permanent rail yard, construction costs for the platform above the yard, acquisition of additional land and air rights, as well as other anticipated costs, excluding vertical development.
Based on the 6.4 million square feet of remaining entitlements in both phases, the total anticipated costs yield an expected average cost per square foot of approximately $180-$220 per square foot, prior to vertical development. That cost will be allocated across the project based on the relative sales value of the mix of rental apartments, condos, retail or office components for each future building.
"Greenland's commitment to Atlantic Yards, including their initial capital contribution, the assumption of a 70 percent share of all future costs, as well as additional capital resources, will serve to accelerate vertical development going forward," said David J. LaRue, Forest City Enterprises president and chief executive officer. "Our joint venture with Greenland will bring another strong real estate partner to this unique and transformational project for Brooklyn. We believe this joint venture enhances Forest City's ability to both fulfill our commitments to the community and create value over time by achieving an appropriate, risk-adjusted return on our invested capital."
MaryAnne Gilmartin, president and chief executive officer of Forest City Ratner Companies, the New York-based subsidiary of Forest City Enterprises, said, "The development program for Atlantic Yards includes 2,250 units of affordable housing and eight acres of open space, as well as more than 4,100 units of market-rate rentals and/or luxury condos, all in one of the strongest markets in the country. We are confident that Brooklyn's continued strong demand for rental housing and condos, along with steady growth in rents and sales prices, will drive strong future returns for the project."

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