Thursday, March 06, 2014

In SEC filing, Forest City admits Greenland is already steering some Atlantic Yards decision-making; joint venture may have to use recourse financing

It's always tough to know how much to read into boilerplate disclosures of risks in securities filings.

But Forest City Enterprises' recent annual filing with the Securities and Exchange Commission mentions some risks and possibilities not previously disclosed regarding the pending deal with Chinese government-owned Greenland Group to buy 70% of the project going forward, as well as the B2 modular tower Forest City is building on its own:
  • Greenland is already steering some decision-making during this interim period 
  • Greenland and Forest City may have to buy each other out
  • The joint venture may have to use recourse financing, which puts the assets of the project sponsor at risk
  • B2's delays are coupled with increased costs 
Permanent rail yard

The Form 10-KT annual report for the 11 Months Ended December 31, 2013, filed 2/27/14, acknowledges an "upcoming June 30, 2014 deadline to commence construction on the permanent rail yard and to post the completion guaranty for such work."

The railyard must be substantially completed by September 1, 2016, and if its not built, the MTA declare default and pursue a draw down of the firm's $86 million letter of credit, causing the loss of 3.3 million square feet of development rights for Phase II. 

That said, Forest City has twice extended the official start date, and assuming the Greenland deal goes through, should have the funds to do so.

Contract and decision-making questions

The document also notes:
There is also the potential for increased costs and further delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) the unavailability of additional needed financing, (iv) our or our partners’ inability or failure to meet required equity contributions, (v) increasing rates for financing, (vi) our inability to meet certain agreed upon deadlines for the development of the project, (vii) other potential litigation seeking to enjoin or prevent the project or litigation for which there may not be insurance coverage and (viii) our or our partners' inability to fulfill contractual obligations. In addition, as applicable contractual and other deadlines and decision points approach, we could have less time and flexibility to plan and implement our responses to these or other risks to the extent that any of them may actually arise.
(Emphases added throughout)

Note that the bolded text was not in the previous document, and likely refers to the joint venture with the Greenland Group.

The document goes on to explain:
On December 16, 2013, we entered into an agreement with Greenland Group Co. (“Greenland”), a Chinese state-owned enterprise, to create a joint venture whereby Greenland would acquire a 70% interest in the Brooklyn Atlantic Yards project (excluding the Barclays Center and B2 BKLYN, a modular apartment community currently under construction). The joint venture is subject to meeting various conditions, which include obtaining the approvals by governmental agencies in China as well as the Committee on Foreign Investment in the United States (“CFIUS”). There is no assurance that all conditions for effectuating the joint venture will be met, including obtaining such governmental approvals. We have the right to terminate the agreements by April 15, 2014 and attempt to find another partner, if certain conditions are not met, including obtaining the CFIUS approval. In addition, if all approvals are not obtained by June 16, 2014, both parties have the right to terminate. In the event the joint venture is terminated, we may be unable to find another partner for the Brooklyn Atlantic Yardsproject. Greenland also has approval rights over a certain number of decisions made during such interim period which may delay or jeopardize the development. Greenland also has the right to have up to five individuals in our offices to share in the decision making during such interim period.
(Emphases added)

So, while Forest City CEO David LaRue estimated a 90% chance the joint venture would go through, the next few months will be crucial, since Forest City can end the deal by April 15, and Greenland can by June 16, if all approvals are not obtained. 

Note that Greenland is already steering some decision-making. 

Greenland in control

The document explains that Greenland will be in control:
If and when the joint venture becomes effective, the Brooklyn Atlantic Yards project will be managed by a board composed of three representatives from Greenland and two representatives from the Company. While decisions would require a majority vote, many decisions labeled “Special Major Decisions” would require a vote by us for approval. There is the risk that many of the decisions made by the joint venture would not be in our best interests and, further, that an inability to agree on certain of the Special Major Decisions would trigger buy-sell rights and obligations between us and Greenland. The exercise of the buy-sell rights could result in our having to fund the purchase of Greenland’s interest in the entire joint venture, or in one or more individual parcels. It could also result in having our interests be purchased and the loss of ownership of the Brooklyn Atlantic Yards project or of one or more parcels thereof.
In other words, if Forest City and Greenland disagree, they may have to buy each other out.

I reported in January that a 12/13/13 Empire State Development memo outlined this board arrangement, which provided for a possible buy-out in the event of a deadlock among the members of the Board of Managers. It did not explain, however, that the buyout could go in either direction.

Non-recourse loans

The annual report reveals the joint venture may have to use recourse financing, while Forest City strongly prefers to non-recourse loans, which--to quote Wikipedia-- are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors. 

Recourse financing is less costly, but more risky, since it can put the joint venture's overall assets at risk. In this case, the financing would come from Greeland.

The document states:
Greenland also required that the joint venture have the ability to obtain recourse financing to the extent nonrecourse financing was not available at a commercially reasonable rate or only available at an interest rate which equals or exceeds 200 basis points more than available recourse financing. However, no more than $300 million of recourse financing could be outstanding at any time project-wide, including parcels under development. Such recourse financing would be available based on a loan guarantee provided solely by Greenland and Greenland would receive compensation from the joint venture for lending its credit for such recourse financing in the amount of the interest rate savings up to 300 basis points. However, to the extent a recourse loan becomes due and cannot be refinanced, we will be obligated to pay Greenland for our share of the loan on a capital call or, if we elect to have Greenland advance our share, within one year of such advance and out of available cash flow from the project.
B2 tower delays and increased costs

The recent annual report also acknowledges delays in the B2 tower:
High rise modular construction has not previously been done at the heights of B2 BKLYN. As a result, the project has encountered, and may continue to encounter, delays and increased costs in the fabrication and assembly of the modular units. If the project continues to experience such delays, we may fail to satisfy completion deadlines set forth under the lending arrangements for the project and the lenders may not be willing to extend such deadlines. Failure to meet the completion deadlines could result in a default under such lending arrangements with a resulting acceleration of the debt and foreclosure of the project, as well as reputational damage.
Last September, Forest City Ratner executive Jane Marshall acknowledged that the first modular residential tower, B2, was delayed six months until the end of 2014, as indicated in SEC filings, but suggested there were "all good reasons" for the delay, saying "we identified ways of making the modular factory work better, by purchasing different equipment."

She did not, however, acknowledge increased costs.

I wrote this week that only 45 of 930 modules had been delivered, which is well behind the planned pace. If the issue is weather, more temperate weather should make it easier for the mods to be delivered and installed to meet the end-of-2014. We'll see whether they start delivering eight mods a day.

Also, I wrote that LaRue had sounded more tentative regarding a groundbreaking this year than a local Forest City Ratner executive.

While the annual report last year mentioned the potential challenge by a plumbers' organization to the city's approval of factory work without licensed plumbers, the report this year notes that a claim was filed and dismissed, but an appeal is pending.

Comparison between 2013 and 2014 disclosures regarding B2
2013 report
2014 report

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