Thursday, July 16, 2015

Forest City, having made loans to minority owners in NS&E, expects to be repaid first; $230 million in "priority return"

There's a very intriguing slide in the June 2015 investor presentation from Forest City Enterprises.

As shown below, Forest City, which owns 62% of Nets Sports & Entertainment (NS&E)--the entity that owns 20% of the Brooklyn Nets and 55% of the Barclays Center--is expecting $230 million in "priority return" from its share of those assets.

That can't mean that they're expecting only $230 million. After all, if $230 million represents 62% of the total value of those assets, they'd sell for just $371 million.

I think it refers to the situation described in the SEC filing associated with the REIT conversion:
Forest City has also made certain loans to the minority members of NS&E and such loans are required to be repaid to us prior to the minority partners of NS&E being entitled to participate in the distributable cash flow from any sale.
If so, Forest City, rather than splitting the initial revenues with the minority members of NS&E on a 62/38 ratio, will instead keep the first $230 million. That suggests that the value of the loans is $87.4 million, or 38% of that $230 million.









WHAT DOES THAT MEAN?

Definition - What does Preferred Return mean?


The preferred return or "hurdle rate" is a term used in the private equity world. It refers to the threshold return that the limited partners of a private equity fund must receive, prior to the PE firm receiving its carried interest or "carry." Usually, private equity funds are set up as general partnerships with the PE firm acting as the general partners and the investors as limited partners. The PE firm typically gets remunerated on a 20 and 20 fee structure, with the "20" referring to the percentage of the return in excess of the preferred threshold that the PE firm gets to keep.




Divestopedia explains Preferred Return

The preferred return has traditionally been set at 8 - 10%. However, with the significant increase of private equity firms competing for capital, limited partners are demanding different compensation models that either change the 2 and 20 format (sometimes reducing the management fee from 2%, the carry from 20%, or both) or alternatively increasing the preferred return threshold beyond the traditional 8 - 10%. This is particularly the case for newer, "unproven" private equity firms that don't have the track record.





















































































So if NS&E gets $371 million, that's way less than has been bandied about. After all, the arena itslef is said to be worth $1 billion, as is the team.




That would mean $550 million plus $200 million, or $750 million.




Rather, the NS&E expected revenue from the team is a little less than half the promoted revenue.











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