So again I'll interpolate comments (in italics) in the discussion between Kenneth Weissenberg, partner at EisnerAmper, and MaryAnne Gilmartin, president & CEO at Forest City Ratner.
Dealing with Greenland Group
KW: Do you find it particularly challenging dealing with foreign investors? (Not just investors but venture lead partners/overseers)
MAG: That's a very good question. (Chummy!) I like to say that, with 25 Chinese nationals that are our offices in Brooklyn, we are having, in many ways, a cultural odyssey, to connect the differences in the way that we do businesses... compared to the Chinese culture. (and if things go wrong with Greenland Forest City Partners , as some other partnerships--like Skanska--these words will be prophetic) It's not always easy, but as evidenced by all of the construction, it has been extraordinarily successful (not necessarily; three buildings--B12, B13, B15 are delayed) and in some ways, it's what makes New York great. Think about it, our partner on the arena was a Russian oligarch (she uses the term non-pejoratively), and the owner of the team and the arena today is Onexim... We have a Chinese developer, a $50 billion Chinese company partnering with us on the rest of the project and, y'know, we're Brooklyn through and through. So I think it's what makes New York a great place, that people come together from across the globe and do great things together. (Or use the local partner to wrangle subsidies and tax breaks before coming in.)
KW: That's terrific. (Chummy!) You haven't used EB-5 financing in any of your projects have you? (Not a good softball question, he surely knew the answer.)
MAG: We have. In fact, we put together the largest EB-5 financing ever, at its time, when we were building the project in Brooklyn, in part because we built through in the recession, a lot of the infrastructure, and as you well know, there's no longer infrastructure financing available in our business, and EB-5 became a very very smart and affordable way to continue with all of the readying of the land. (and the buying of the land) For many years, people said the project wasn't moving forward. Even in the face of all the controversy and the lawsuits, we continued to ready the land by doing all of the infrastructure work. (Actually, they stopped for a while.) So it was really like the iceberg, it wasn't the 20% you saw above the surface, it was the 80% that was going on beneath the dirt. So we have had two major EB-5 fundraises (and the third one counts as less-than-major, at $100 million?) associated with the project, and both have been successful. One has returned each of the investors with their investment and a green card. (That's news, actually. But it also reminds us they earned no interest.)
Becoming a REIT
KW: That's terrific. (Staying chummy) Recently, financing has become tougher.. you've gone REIT, the parent company has gone REIT. Is that in part to help with the financing situation?
MAG: Another great question. (Ditto) We were a public non-REIT company for many many years. For lots of reasons, it became clear that we needed to become a REIT. We needed to be judged along a REIT peer set and we needed to basically change in many ways the approach we had to development by not using as much leverage. When the last downturn occurred, we were highly levered. We had a lot of development on our books, and we didn't have enough liquidity. So as we've come out of the recession, we've changed our model, which is now a model of collaborating and partnering with other equity investors because we know how to develop, and that's a high barriers-to-entry profession. (But aren't they sacrificing some things too?) But we also think people like to invest with developers who really know how to develop in a city like New York. So we've been able to bring in partners, which has helped, because now we're getting much less financing in each of our buildings. In the old days, we would would finance up to 70, 75% of a project's total cost, today we're calibrating closer to 50% or 60%. That's just a new way of doing business as a REIT, and a smarter way to do business if your balance sheet is healthy, because you can borrow money cheaper. So, we've been all about less leverage. So was the world has changed, and leverage has become more challenging, in many ways, it lines up nicely with our strategy generally.
MAG: Exactly. We have our eye on reducing our cost of capital, particularly our cost of equity. The lending markets are still flowing, and when you borrow $9 billion on your balance sheet a year, you have created tremendous relationships and huge confidence with lenders. We provide completion guarantees. So lenders like to do business with Forest City, because they've had a great run with us but today, we're borrowing less, we're still building and I think in that way the lenders also like it, because they have much more equity and skin in the game on the part of the developer. (So lenders like to do business the old way, until they don't, and now they like the new way?)
KW: You're developing here. What's next on the horizon?
Our vision is, right on Flatbush Ave, where today Modell's and P.C. Richard sit, which is just across the way from our beautiful arena, is to build a beautiful tower, an office tower, that can really be home to a headquarters company that wants to call Brooklyn its own headquarters. (In 2008, they were seeking an anchor tenant for "Miss Brooklyn," over the arena.)
MAG: That's what we're doing in Brooklyn. I'm an office developer, first and foremost... I would say we are going to keep trying to put a building online within the next few years, because the entitlements are under way (but not yet close to approved, given the need for Empire State Development approval, which will come only after the P.C. Richard eminent domain case is resolved), and you find an anchor tenant (not so easy) and you construct the project.
Condos vs. everything else
MAG: Elsewhere, we're looking at places like Queens, and South Bronx, even New Jersey. The opportunities exist there, because the land prices are still manageable enough where you don't need to build condos to come out. I call condominium development the great allocator of land costs. So my concern about rising land costs in Manhattan and Brooklyn is that, when a developer buys land for the pricing you see today, it forces the developer to look at certain product types in order to deliver the returns. And the most obvious product type is condominium. And it would be awfully sad if everything built in the next few years were condominium, both in Brooklyn and Manhattan.
|The contextual 550 Vanderbilt|
MAG: That's an interesting statement, (segue to sales pitch!) because what $1500 a foot gets you in Brooklyn, compared to $1500 a foot in Manhattan, is an extraordinary difference. The luxury definition in Brooklyn is not high-rise glass and steel towers, it's contextual (!?!), it's beautiful, it's more organic and it's knowing your barista down in the lobby of the building, the person that makes your coffee. ("Know your barista" was not the selling point of the Atlantic Yards Community Benefits Agreement.) We're creating a new kind of luxury in Brooklyn, with our condominium project, 550 Vanderbilt, we're about 50% sold (and were 30% sold upon official sales launch nine months ago) and the pricing is really sold, and y'know, in slow and steady fashion, we think the Brooklyn market will continue to outperform the other boroughs.
KW: You mentioned the South Bronx or Queens... Do you see the Bronx as potentially the next Brooklyn?
MAG: I think Queens first... The competitor with Queens today is Jersey City, in my view. I think those will basically be driven forward at the same general pace... Some people will prefer the gold cost of New Jersey, others will prefer Queens. I was born in Queens, I prefer Queens... You know the advantages of Queens. The views of the midtown skyline from Queens are exceptional. (By Queens she means Long Island City, and maybe Astoria, surely not the rest of the sprawling borough.) The ferry service we're putting here in Roosevelt Island is going to make access from Roosevelt Island to Long Island City to the Navy Yard to the East Side of Manhattan extraordinarily easy. So I think Queens is going to move forward in a very, very positive way, but the land pricing will probably edge up. And that'll force developers to look in other places. I think the Bronx scores very high.... It is well served by mass transit, it's proximate to all the activity in the urban core... and it's a great place; the food and the culture is now at an inflection point (which means there are new coffee shops?), which I think is the beginning of its moment.