Friday, December 12, 2014

A prescient prediction in 2007: "outside capital sources" would come to Atlantic Yards (but who would have guessed Russia, China, immigrant investors?)

Recently I noted some unintentionally understated predictions about Atlantic Yards, such as the official observation that "Atlantic Yards will be many things to many people" or an investment analyst's statement that “I could see this project taking many forms over the years.”

Now, a groundbreaking for 535 Carlton Avenue is coming Monday, featuring not only Forest City Ratner Chairman Bruce Ratner but his new boss (so to speak) on Atlantic Yards/Pacific Park, Greenland Group Chairman and President Zhang Yuliang. Zhang, whose firm owns 70% of Atlantic Yards going forward, excluding the arena and the stalled B2 tower, ultimately works for the government of Shanghai.

So let's flash back to a piece I wrote 3/1/07, quoting affordable housing analyst David Smith regarding the predicted internal rate of return in Atlantic Yards. Forest City Ratner had already invested $230 million--less than half of the $550 million or so it ultimately invested.

"The $230 million of capital already invested is a jaw-dropping sum, especially since we are four years into the transaction and it has not closed,” Smith observed at the time. “Very few entities could put up that much capital for that long. Setting aside whether one likes or dislikes the process or the property, no one should underestimate how few sponsors could attempt it, nor how many fewer would attempt it.”

Of course, the city and state had pledged $305 million--now, some $279 million--in direct subsidies for infrastructure and other costs, and the state had agreed to override zoning and take property by eminent domain, significant boosts for the developer.

Instead of paying taxes on the arena land the developer could use payments in lieu of taxes to pay of tax-exempt arena bonds, issued at a lower rate. Other property was conveyed at a significant discount, saving Forest City tens if not hundreds of millions of dollars.

The changes over time

Smith called the lag between first outflow of capital, in 2004, to net inflow, at that point predicted in 2013, a dramatic one. “A tremendous amount is riding on expected residual value in a decade,” he said in 2007. “I cannot imagine the developer will not have tried to lay a large portion of that off on outside capital sources."

That, indeed, happened. Forest City in 2009 made a deal with Russian oligarch Mikhail Prokhorov's Onexim Group to buy 80% of the money-losing Nets--which have now seen their value skyrocket--and 45% of the arena. In 2012, it entered into a joint venture with the Arizona State Retirement System regarding the B2 tower; after the building stalled in controversy earlier this year, Forest City bought out its partner.

More recently, for an initial payment of $200 million and financing going forward, Forest City sold 70% of the project going forward--minus the arena and B2--to Greenland, forming Greenland Forest City Partners.

Now Forest City is marketing its share of the Nets and the arena.

And, most creatively, Forest City has tried to lay a large portion of capital by recruiting immigrant investors, mostly from China, to put up three rounds of cheap financing via the federally-authorized EB-5 program, in which the investors get green cards for themselves and their families in exchange for parking $500,000 in a purportedly job-creating investment.

In those three rounds--the third, I believe, has not concluded--Forest City and now Greenland Forest City Partners will have raised $228 million, $249 million, and $100 million, for a total of $577 million.

That's a lot of "outside capital sources."

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