Sunday, September 20, 2015

As vote on REIT conversion approaches next month, Forest City identifies arena/Nets as part of taxable subsidiaries

Forest City Enterprises has filed with the Securities and Exchange Commission a proxy statement sent to shareholders regarding the 10/20/15 vote to reorganize the Ohio-based corporation into a Maryland corporation that will qualify as a real estate investment trust (REIT).

By reorganizing, Forest City Realty Trust will not be subject to federal corporate income taxes on distributions. As a REIT, Forest City must distribute annually at least 90% of its REIT taxable income, which will exclude any taxable real estate investment trust subsidiary (TRS) unless that TRS pays dividends to the REIT. 

Regarding the TRS

The document states:
We plan to hold certain of our assets and operations and to receive certain items of income through one or more TRSs. These assets and operations consist principally of Forest City’s (i) military housing business, (ii) land development projects at Stapleton in Denver, Colorado, and Mesa del Sol in Albuquerque, New Mexico, (iii) condominium development projects at Pacific Park Brooklyn, a mixed-use project in Brooklyn, New York, and (iv) ownership interests in Barclays Center, the arena in Brooklyn, New York, and The Brooklyn Nets. Those TRS assets and operations would continue to be subject, as applicable, to U.S. federal and state corporate income taxes. 
Note that the 20% ownership in the Nets and 55% ownership interest in the arena are up for sale, and may well be resolved either before the vote or by the end of the year. Forest City is aiming to diminish subsidiaries that are not part of the core REIT.

Changing corporate structure, from the document

BEFORE THE MERGER



THE MERGER




AFTER THE MERGER




CREATION OF OUR OPERATING PARTNERSHIP




(1) Forest City converts to a Delaware limited partnership, with the REIT as its general partner and the REIT and FCILP as limited partners. We refer to these steps as the reorganization of Forest City into a limited partnership.

AFTER THE CREATION OF OUR OPERATING PARTNERSHIP




(1) Forest City Enterprises, L.P. (the Operating Partnership) is the result of the conversion of Forest City, as the surviving company in the Merger, from an Ohio corporation to a Delaware limited partnership; following this conversion, the REIT will be the sole general partner of the Operating Partnership and also will own, directly and through its interest in FCILP, all of the outstanding limited partnership interests in the Operating Partnership. The REIT may identify one or more persons or entities who agree to acquire (through purchase or exchange) and hold limited partnership interests in the Operating Partnership following the REIT Conversion. Nevertheless, the REIT will remain the sole general partner of the Operating Partnership and the Operating Partnership and its assets will still be assets of the REIT in the consolidated financial statements of the REIT. FCILP will be a taxable real estate investment trust subsidiary of the REIT. FCILP’s only asset will be a limited partnership interest in the Operating Partnership, which will be less than 1% of the limited partnership interests in the Operating Partnership. Forest City TRS, LLC will be a TRS of the REIT and is being formed to hold the REIT’s non-real estate investment trust assets and operations, which we expect will consist primarily of our (i) military housing business, (ii) land development projects at Stapleton in Denver, Colorado, and Mesa del Sol in Albuquerque, New Mexico, (iii) condominium development projects at Pacific Park Brooklyn, a mixed-use project in Brooklyn, New York, and (iv) ownership interests in Barclays Center, the arena in Brooklyn, New York, and The Brooklyn Nets.


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