Tuesday, September 02, 2014

The main investor behind Atlantic Yards B2 is Arizona State Retirement System; did they evaluate the risk for new modular tower?

The dueling lawsuits filed today by the developer and building of the Atlantic Yards B2 modular tower name Skanska USA Building, Inc., and Atlantic Yards B2 Owner, LLC as reciprocal plaintiffs and defendants.

And while Atlantic Yards B2 Owner is represented and managed by Forest City Ratner, the building will be owned mostly by the Arizona State Retirement System (ASRS), which must be experiencing some consternation and perhaps some questions over whether the risk was fully evaluated.

The ASRS is investing approximately $300 million with Forest City Enterprises, representing 75% of a $400 million investment fund. As noted in a 12/21/12 Forest City press release:
Forest City Enterprises, Inc. (NYSE: FCEA and FCEB) and the Arizona State Retirement System (ASRS) today announced the creation of a strategic capital partnership and a $400 million equity fund that will invest in multifamily development projects primarily in five core markets: New York City, Washington, D.C., Boston,Los Angeles, and San Francisco.

Funding for the venture will be 75 percent from ASRS and 25 percent from Forest City. The company estimates that more than two-thirds of its equity contribution to the fund is already represented by entitled development opportunities on its balance sheet. Equity from the fund will be paired with conventional project financing for an estimated aggregate development investment of approximately $800 million to $1 billion. Forest City will serve as fund manager.
B2 is one of the first two buildings being built by the new investment fund. (The entity is known as the FC Cactus Residential Development Fund.)

High hopes for returns

The ASRS had high hopes for the project, according to the slide dated 11/18/13 from an Asset Class Review of Inflation Linked Assets, including real estate.
From this ASRS document
As noted in the document, there's high demand in the Brooklyn market, and this site is well located in relation to transportation, shopping, and entertainment.

ASRS also negotiated favorable terms, with the expectation of an "unlevered going in yield of 6%"--real estate finance jargon I hope to clarify--compared with the 4.7% yield "for the next investor." (Is that the deal for Greenland to build the rest of Atlantic Yards?)

Perhaps the yield was higher because of the risk. By the time of this slide, the ASRS should have known that milestones in the modular project were not being met. Modules were supposed to have be erected starting in August 2013, but that process had not yet begun.

Did they evaluate the risk? Or just not discuss it?

B2 had to have been a calculated risk for ASRS, because it was planned to be the tallest tower in the world built modularly, not merely the replication of a tower type that has been built hundreds of times in New York. That risk goes unmentioned in the slide.

Presumably they did evaluate it, but for now it's impossible to say how much. There's almost no discussion in publicly available materials on the ASRS web site about the tower, except for the above slide.

So it'll be interesting to learn when ASRS got any reports on the delays in construction, whether they're adjusting their return expectations, and how much they evaluated the risk in the first place.

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